Dutch online ordering and delivery company Just Eat acquired Grubhub for $7.3B in an all share deal. Here are the pros and cons and we think about them.
Pricing
A merger offers merchants a chance at potentially more favorable pricing due to the scale created by the two entities. Both Just Eat and Grubhub were losing lots of money on marketing expenditure in an attempt to acquire merchants, drivers, and consumer for their relatively commoditized offerings. Grubhub’s CEO Matt Maloney even mentioned this when earnings were lower than expected in Q3 last year.
The short answer seems to be, “it’s basically the customers’ fault.” Maloney and DeWitt said customers were becoming more “promiscuous,” easily flipping between delivery services based upon their meal choices. Data analytics firm Second Measure had already noticed the lack of loyalty consumers were exhibiting, saying a review of anonymized credit card data indicated about one-fourth of all food delivery customers used more than one service when ordering in the third quarter.
https://www.fool.com/investing/2019/11/03/customer-promiscuity-drives-grubhubs-earnings-into.aspx
A merger could mean a pullback on these expenditures, potentially flowing through to the rates paid by merchants… But then you’re going to hear the word monopoly thrown around, and this could mean that merchant pricing gets worse despite core business economics of a larger entity getting better. It’s like Global Payments’ acquisition of TSYS: people got fired due to “synergies” yet every TSYS statement we’ve seen has been padded with bogus fees to deliver the “revenue synergies” Global Payments management brags about.
Had Uber bought Grubhub the combined entity could have upwards of 70% of 3PD (third party delivery) market share, making it difficult for other players to compete over time. And Uber, who would have owned Grubhub, had perhaps tipped its hand at its idea of “fairness”: Uber already has their own co-branded credit card but it literally comes with the most expensive payment fees of any credit cards on the market at a full 4% effective rate for restaurants. We don’t know enough about Just Eat to say if their tach would be much different.
But Uber’s credit card also helps Uber grab more customer data, which gets us to our next point.
More Data
Just Eat now gets unified data across both providers, making it arguably the largest repository of consumer spend data in the restaurant industry. Maybe Olo or APT (bought by Mastercard in 2015) is in close second, or maybe they’re not even on the same playing field. It’s hard to know for sure, but it puts Just Eat in a position to build new tools from data.
Which is why the silver lining for merchants could be that Grubhub / Just Eat more rapidly launches higher quality solutions for merchants. Look, the economics of delivery suck, and they will continue to suck until we get to autonomous vehicles or there’s a business model shift that occurs where Grubhub et al recoup their delivery fees indirectly. Here’s a quick example to show what we mean.
Let’s say Grubhub earns $100 in monthly revenue for providing delivery for a single restaurant location. Let’s assume $50 of that goes towards marketing, another $40 goes toward paying out the driver, and $20 goes to building and maintaining Grubhub’s applications. So on $100 of monthly revenue Grubhub is losing $10.
Now let’s say that Grubhub creates a new product: restaurant analytics. It costs Grubhub $10 a month to make and support this product, and only $5 to sell because Grubhub already has an existing relationship with the restaurant. Grubhub charges the restaurant $100 a month for restaurant analytics.
Now Grubhub is earning $200 in monthly revenue and their costs are a combined $125, netting Grubhub a $75 monthly profit for every restaurant using both services. Grubhub can leave their delivery economics unchanged yet still make money because they have indirectly shifted revenues to another source. And given the unprofitable nature of delivery this is all but guaranteed to happen, and overreaching legislation which seeks to cap what Grubhub can charge will only expedite these investment.
Then there are the “unintended” consequences of fee-capping legislation. While legislators think their laws will lower costs, it will do one of two things in reality:
- More immediately push costs unto consumers since 3PD will be limited in what they can directly and overtly charge the restaurant** (read the asterisk commentary below)
- Expedite 3PD investment and eventual migration to owning the entire food production and delivery stack via ghost kitchens
The negative consequence of Grubhub effectively doubling its data repository is that it now has more statistical confidence in verticalizing into ghost kitchens. With COVID-19 as mighty a tailwind as one could possibly expect to encounter, Grubhub need only examine its more complete data set to determine where, how, and when to start its ghost kitchen empire. If you believe the make-believe pandemic – which will highly likely prove to be no more lethal than a few years of influenza – will alter consumer eating patterns materially over the next decade, then the ghost kitchen model will become a commercial focus for many 3PDs. And of course, this cannibalizes the restaurants Uber pretends to support.
POS Loses Again
Lastly we should touch on this point that we’ve been belaboring for far too long. 3PDs, via their data and distribution, are the biggest threats to brick and mortar ecosystems. These companies have the scale and IQ to upend the market in material ways. Some of those ways might be better for merchants, frankly, but many ways will often be worse (see ghost kitchen).
POS companies are at the center of these conversations because they maintain the item level data needed to make the entire flywheel spin. But if they won’t bother making the right moves now, they won’t have anything left to fight for by the time they wake up.
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