The Dilemma for Grubhub and Delivery Company Acquisitions in General

There’s been no shortage of speculation on the eventual equilibrium for the restaurant delivery industry. With nobody making any money, and consumers demanding more and more convenience, you have a strong pull on one end and a rather flaccid argument on the other. The armchair analysts would say that consolidation will fix the problem, as the economics are distorted mostly due to marketing largesse putting downward pressure on pricing in an attempt to acquire market share at any cost.

Meh, maybe.

Here are a few thoughts that make transactions in delivery rather difficult.

First, the economics revolve around a 30% merchant fee. We don’t see any way to move off this point until we have autonomous transportation. The cost of last-mile delivery has always been expensive, and it killed every venture-funded prior attempt we can think of. It’s only getting more expensive too as states start classifying contractors (i.e. the delivery drivers) as employees. The only companies to have pulled off last mile delivery profitably do massive volume. FedEx delivered 33 million packages globally on Cyber Monday 2019. UberEats does around 500,000 deliveries per day if you assume a $10 average order. That difference is a few orders of magnitude.

This brings us to the second point, which is that maybe Uber needs to get consumers to foot the bill. According to Cowen, every UberEats order loses $3.36; they don’t even forecast UberEats will be profitable on a per-order basis in 2024. It’s hard to know if Cowen baked up a full 30% fee in here, but it feels like consumers are going to have to pay for this convenience. But what’s the real value add? Unlike FedEx, where consumers are shipping important documents halfway across the country in 24 hours, UberEats is just grabbing a meal halfway across the neighborhood. Is a consumer really going to pay $3.36 for that $10 burger and fries to be delivered? Probably not when the economy tightens, or when the millennial must leave their parents’ houses.

Third, there’s way too much account overlap. McDonalds was exclusive with UberEats until it wasn’t. We expect more of this behavior as brands realize the delivery services are commoditized. The problem then becomes valuation: any suitor must be really careful in how they ascribe value to the revenue from a potential acquisition. If both companies are juicing marketing to acquire the same merchant and prop up consumer spending, what happens when the dust settles? Can you really give the target company a market rate revenue multiple? Customer accounts are intangible assets, and in this case they’d be written off completely. All the money spent on customer acquisition is a sunk cost when a potential acquirer calls your customer their customer already.

It’s this last point that is a killer for DoorDash and Postmates. In the private markets they’re being treated like royalty. In the public markets it’s going to come down to economic reality. Investors aren’t ready to cope with the idea that their shares might be worth half of what they thought they were once you right-size the math.

Things will get pretty desperate, we expect. For instance, Uber undoubtedly wanted cash for their UberEats India business but settled for shares in Zomato to unload it; what were their alternatives for business unit losing that much money with no sight to profitability? The hope for any of these businesses is moving into other parts of the merchant stack, which we think they will most likely do very successfully given that POS companies are making it so easy for them, but it’s going to take a bit of time.

The bottom will need to fall out of the market before there are any transactions. Prices are just too inflated and there’s still too much business model risk for anyone to feel comfortable splashing tens of billions of dollars. Especially given that nobody has any EBITDA – that would be a huge equity check to write.