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What’s Cooking in Online Food Delivery?

Following the announcement of two industry shake-ups, J.P. Morgan Research explores what the online food economy will deliver next.

Updated: July 8, 2020

In less than one month, the online food delivery industry has seen two acquisition announcements across key market players. A few days ago, it was announced that Uber will acquire Postmates for approximately $2.65B in an all-stock transaction. And just a few weeks prior, news broke that Europe’s leading food delivery platform, Just Eat Takeaway.com, based in Amsterdam, will acquire Chicago-based Grubhub in a lock-up that will create the largest food delivery player in developed markets, according to J.P. Morgan Research.

Here, we explore the growth drivers in this industry and the impact of consolidation – all against the backdrop of COVID-19.

More Options on the Menu

While it may be hard to remember a time without the ability to order a meal at the click of a button to eat in the comfort of your own home, many of the food delivery service companies on your mobile phone did not exist a decade ago.

Around the early 2000’s saw the beginning of an industry that would evolve to become engrained in the daily lives of consumers looking for increasing convenience and variety. During this time, initial market entrants included Waiter.com, Seamless, Just Eat, Grubhub, Takeaway.com, among others, many of which started out as food aggregators that allowed customers to scan different menus and place orders through a restaurant’s website. Delivery logistics were coordinated by the individual restaurant.

The arrival of smartphones ushered in a surge of new players across the globe at the beginning of the next decade: Deliveroo, Delivery Hero, DoorDash, Caviar, Uber Eats, Ele.me, iFood, Swiggy, Meituan Dianping, Rappi and more. With the rise of smartphone penetration and customer appetite for ordering and delivering within the same platform, business models evolved to offer an end-to-end experience. “Initially, there were several different players and very quickly, every country saw the emergence of one or two heroes that captured market share,” says Marcus Diebel, European Media & Internet Equity Research Analyst.

Estimated U.S. Market Share of Food Delivery Operators

Group 9 Created with Sketch. Others 2% Uber Eats 22% DoorDash 45% Grubhub 23% Postmates 8% Source: Second Measure *As of May 2020

The U.S. is one of the most competitive markets globally, with four main players competing for market share: DoorDash, Grubhub, Uber Eats and Postmates. “There is competition throughout every part of the process,” says Doug Anmuth, Head of U.S. Internet Equity Research. “Customers have to choose between promotions from different operators. While some restaurants prefer exclusivity with one platform, others choose to be present across several. Drivers operate for multiple companies. When you look at these pieces together, fewer market players would create a more rational space as the focus shifts to profitability.” In a low-margin industry, M&A has been one strategy to attain market share gains.

Anmuth expects the Uber-Postmates acquisition to generate a number of synergies for Uber Eats. For example, consolidation across complementary locations (e.g., Los Angeles, Orange County, Phoenix and San Diego), and an expanded restaurant line-up that includes local favorites such as L.A.’s sushi standout, Sugarfish. Additionally, Postmates’ batching and chaining capabilities will help drive further delivery enhancements for Uber Eats. Postmates maintains more than 10M active customers, with 30% of orders placed through Unlimited, the company’s membership service. “We believe Uber should be able to leverage greater scale and operating efficiencies to gain market share in online food delivery, as well as in adjacent opportunities such as grocery and essentials delivery, accelerating Eats’ path to profitability,” says Anmuth.

Just Eat Takeaway.com

Group 14 Created with Sketch. 2021 estimated revenues by country Germany 17% UK 27% Netherlands 7% ANZ 4% Other 18% Canada 27% Source: J.P. Morgan estimates, Brazil not included *excludes GrubHub

In May, reports surfaced that Uber was in talks to acquire Grubhub, but ultimately it was announced on June 11 that Just Eat Takeaway.com will acquire Grubhub through an all-stock merger valuing Grubhub at $7.3B. The lock-up would create the largest food delivery player in the developed markets, with presence in four important locations: U.K., Germany, the Netherlands and the U.S. “We are surprised by this move given the competitive environment in the U.S. and limited immediate revenue and cost synergies,” says Diebel. “In our view, the U.S. market needs first of all further consolidation by reducing the number of food delivery operators from four to two.” The recently announced Uber-Postmates deal will help achieve this.

Key Ingredients:
Customer Loyalty, Technology and Volume

“The increasing penetration of e-Commerce has accelerated the rise of the online food delivery industry,” says Anmuth. “The more restaurants that join the marketplace, the more of a network effect it creates and that has pulled adoption forward the past four years.” Anmuth also notes that this dynamic has become even more pronounced in recent months, with many more restaurants signing up as a result of COVID-19.

This network effect has even drawn in most publicly-listed restaurant chains with globally recognized brands. This includes places like Starbucks, where orders tend to be much smaller and delivery fees comprise a large portion of the total cost. Food delivery operators are generally seen as providing incremental sales to restaurants versus in-store dining or drive-through service. “Since this incremental transaction is well above break-even, most restaurants are willing to accept a lower margin selling through delivery platforms, as opposed to having customers visit the restaurant themselves,” says John Ivankoe, Restaurant Equity Research Analyst. He notes that two major exceptions are Olive Garden and Texas Roadhouse, which decided not to offer small-order delivery to customers – only occasional larger-scale catering orders.

U.S. Monthly Active Users of Food Delivery Players

Group 6 Created with Sketch. F eb -1 7 May-17 Aug-17 Nov-17 F eb - 18 M ay- 18 A u g- 18 N ov- 18 F eb -1 9 May-19 Aug-19 Nov-19 F eb - 20 0 20 40 60 80 100 120 1 4 0 160 Postmates Grubhub Uber Eats DoorDash Source: Apptopia

The weak economics of the industry continues to be a challenge in reaching profitability. “When you look at the food delivery space overall, it has seen a lot of top line momentum, but the bottom line has always been in question,” says Diebel. Attracting customers, who aren’t typically loyal to any one operator, is a particularly expensive aspect of the business model. High marketing spend on customer incentives, promotions and vouchers for delivery fees make it difficult for companies to expand margins, particularly in the U.S. with four players all spending large sums to attract and retain customers.

Group 21 Created with Sketch. The increasing penetration of e-Commerce has accelerated the rise of the online food delivery industry. The more restaurants that join the marketplace, the more of a network effect it creates and that has pulled adoption forward the past four years. Doug Anmuth Head of U.S. Internet Equity Research at J.P. Morgan

In some markets, consolidation can help to effectively “switch off” marketing spend. For example, in 2019 Dutch online food operator Takeaway.com acquired Berlin-based competitor Delivery Hero’s German assets. The deal doubled the scale of Takeaway.com’s existing operations, reaffirming its top position in the region. In addition to reduced operating expenses, the deal significantly decreased marketing spend.

Diebel notes that volume is what makes the economics of consolidation come together, and achieving higher volume is largely driven by better technology. Food delivery players tend to consider themselves as technology companies rather than logistics companies, but Diebel argues the two are interconnected. “Sophisticated technology will enable them to control the entire chain, and that’s why this industry has staying power,” he says. For example, enabling a driver to arrive at the moment a pizza leaves the oven speeds up the process and means hotter food for the customer.

He notes that “daily delivery” – where it’s cheaper to order than cook – could become the norm, but it will depend on whether online food operators can slash delivery fees, which plays a critical role in attracting customers. “This would not only be good for acquiring market share but would also improve affordability for customers. If affordability goes up, then volume will go up and this is the path to profitability,” says Diebel. “This is a winner take most industry – not because you have more restaurants on the platform, but because you have the right restaurants. If operators can create an established network with efficient delivery logistics, this will be the key growth engine for the industry.”

Uber is in a unique position compared to its peers, with the scale advantages of its Rides and Eats businesses that are built on the same tech stack. Uber Eats grossed ~$14B of bookings in 2019, only four years after launching the Uber Eats app. Last year, Uber restructured its app to combine both businesses, enabling customers to view options and interact with them in one environment. It also launched a suite of subscription products, such as monthly passes and rewards, to build customer loyalty in an effort to achieve higher engagement and frequency of orders. “We believe the ability for Rides and Eats to work together to acquire and retain customers will prove to be a competitive advantage,” says Anmuth. “We expect that Uber’s push to bring all services within one app will help cross-promote Eats and other services to Rides’ customers, and vice-versa, amplifying the overall platform effect.”

Group 21 Created with Sketch. When you look at the food delivery space overall, it has seen a lot of top line momentum, but the bottom line has always been in question. Marcus Diebel European Media & Internet Equity Research Analyst at J.P. Morgan

COVID-19 Increases Appetite for Food Delivery

According to Diebel, penetration and frequency are the biggest growth drivers in the industry. He notes online penetration is between 5-30% in most markets. “While some limitations exist, I keep a strong view that the overall growth opportunity is significant,” he adds. For example, Delivery Hero is in 40 countries and growing revenues at 100%, up from 80% last year. “In every single country, we are seeing that core customers order more each year,” he adds.

Group 17 Created with Sketch. Meal Delivery - Monthly Sales 350 300 250 200 150 100 50 2018 20 1 9 2020 M a y 2 0 20 sha r e of sales Indexed U.S. Sales* Uber E a ts 2 2% P ostm a tes 8 % Door D ash 4 5 % Other 2% Grubhub 2 3% *Indexed to meal delivery Jan. 2018 sales (=100) Source: Second Measure’s Data Points blog Does not include purchases made with Uber Cash. Some sales indistinguishable from Uber rides, especially in May-August 2019. Amazon Restaurnts (prior to Jun ’19 closure) Caviar (prior to Oct ’19 acquisition) Waitr 400

However, this growth has negatively impacted many restaurants. “Initially, takeout was viewed as a nice add-on, but take rates and other fees have caused many establishments to suffer,” says Diebel. While the right location used to be a competitive advantage, it’s now about the reviews. “Restaurants are less competitive with each other on these platforms,” says Diebel. “A restaurant is either the most affordable or has the best quality food. Most places are somewhere in-between and this wide middle range suffers.”

At first, many restaurant chains maintained exclusivity agreements with one food delivery operator in exchange for lower fees. Restaurants had already started moving away from exclusivity in favor of multiple partnerships to attract more customers and COVID-19 has accelerated the shift. “The trend is moving one way – toward less exclusivity,” says Ivankoe. “Restaurants have seen their delivery partners essentially compete against them by adding competitor brands, often featuring the ‘newest partner’ most prominently within the app.”

The impact on restaurants has been magnified by COVID-19, with an expanded customer base of people trying food delivery platforms for the first time as a result of stay-at-home guidance. Without dine-in service, new restaurants have also signed up to the platforms to help generate revenue amidst strong delivery demand. “The food delivery category is seeing a secular shift that we believe will prove sustainable post crisis,” says Anmuth. Diebel also expects continued benefits in the third and fourth quarters as economies reopen. “Customer acquisition used to be the biggest hurdle,” says Diebel. “While growth will slow as lockdown measures ease, we believe there will still be high demand for the long-term.”

Driving Toward the Future

Online food delivery platforms are eyeing other last mile opportunities as their next growth driver, such as online groceries and essential goods. According to Anmuth, online penetration for grocery delivery is at an extremely low level – approximately 2-3% – and many food delivery operators are exploring last mile opportunities as a way to build upon their established network. Recently, regulators approved Uber’s purchase of Cornershop, a grocery delivery service that serves the Latin America market and is based in Santiago, Chile. “With the acquisition of Cornershop, Uber has further diversified its core offerings, and we see online grocery delivery as a natural extension of the Eats business that can leverage the existing network of customers and drivers,” says Anmuth.

Business-to-business could be another strong growth area, and Diebel envisions a future where offices remove cafeterias entirely and offer employees a discount on every online food order. This strategy could be more cost efficient for both companies and employees, who would also benefit from the number of available choices. “We are also seeing private equity moving into this space and standing up restaurants solely to optimize food for delivery,” says Diebel. “Offering different types of cuisine, from the same establishment, will be incredibly powerful because different family members can select their preference and it arrives in one order.”

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