24/09/2020

Tough competition makes consolidation a really attractive idea.

The Wall Street Journal reported yesterday that food-delivery service Grubhub could be up for sale. Whether or not that sale comes to fruition, it highlights that Grubhub and its competitors are struggling to compete over who brings you food from restaurants.
Grubhub has seen its market share decline to about 30 percent of US sales in November, down from more than half just two years earlier, according to data from credit card measurement company Second Measure. Meanwhile, venture capital-backed startups like DoorDash have moved into the lead, with 37 percent of US sales. Uber Eats, Postmates, and a handful of smaller competitors are also duking it out in cities and towns across America.
Heres that same chart another way, where you can more easily see Grubhubs decline over time:
Food delivery is a low-margin business, which makes money from charging customers delivery and other service fees, and from revenue shares with restaurants. And to sign up some bigger restaurant chains, food delivery services have had to lower their commissions. Those margins are further tightened as food-delivery companies seek to beat out their competition by lowering their fees for customers and offering expensive promotions. These discounts, however, arent necessarily locking in customers, but rather encouraging customers to shop around. Its a similar situation to ride-hailing, where customers are not loyal.
We believe online diners are becoming more promiscuous, Grubhubs CEO wrote in a shareholder letter in October. For years, we saw in our data that a Grubhub diner was extremely loyal to our platform. However, our newer diners are increasingly coming to us already having ordered on a competing online platform, and our existing diners are increasingly ordering from multiple platforms.
The food-delivery business is also notoriously expensive and difficult to scale nationally, as you can see from the varied market share city to city. Scaling includes a resource-intensive process of signing up restaurant partners as well as drivers in each city.
Drivers have also been a source of consternation for food-delivery services like DoorDash, which has been accused of skimming drivers tips. Each food delivery service has different policies, so depending on which company buys which, drivers earnings could be affected.
Amazon shut down its US food delivery business in June after struggling to gain major market share. The Journal story said Uber wants to move out of cities where it isnt the No. 1 or No. 2 player.
The result of all this competition? Big losses.
According to the Information, Uber Eats was losing nearly $1 for every $1 it generated in net revenue, after subtracting payments it makes to drivers in the first three quarters of 2019, or three times worse compared to the same period in 2018. Uber had been trumpeting Eats as a potential growth engine, but that no longer seems to be the case. DoorDash is expected to lose $450 million for 2019. Postmates posted a $75 million operating loss in 2017 (the latest data available), which Recode previously reported. And Grubhub, the only profitable company of the bunch, has had to reduce its earnings expectations.
DoorDash and Postmates have both considered going public or joining up with bigger companies. Any consolidation would be welcomed by the industry, though perhaps not by customers, who are currently enjoying the major discounts that result from the competition among these companies.
Grubhubs shareholders seem to like the idea of consolidation. Its stock is up about 14 percent after the Wall Street Journal report.