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Daily Intelligence Briefing

Wednesday, July 8, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Food Delivery Deals Spur Consolidation as Drive for Profitability Accelerates

Summary: Uber Eats and other large firms in the rapidly-growing food delivery industry are looking to exit the era of price wars and relentless promotions by buying out the competition. The company’s acquisition of Postmates made headlines this week, following Just Eat’s recent announcement of a merger with Grubhub. Not only will M&A activity boost the pricing power of these courier platforms, it can also provide a foothold in densely-packed urban markets where some firms remain underrepresented. Though the road to positive cash flow remains rocky, COVID-19 has lit a fire under stocks in the sector and re-ignited investor interest.

Related Stocks: Uber Technologies, Inc. (UBER), Grubhub Inc. (GRUB),
Waitr Holdings Inc. (WTRH), Just Eat N.V. (TKAYF)

Amid a surge driven by nationwide lockdowns and restaurant closures, the global online food industry is now worth $111.32 billion, according to a report by Business Wire. Looking forward, the market is predicted to grow and reach $154.34 billion in 2023 (a CAGR of 11.51%).

While pulling in huge streams of revenue remains no issue, profitability does remain a major concern for the budding food delivery space.

Last November, MRP noted that Uber’s food-delivery arm known as Uber Eats lost about $1.2 billion in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing 12-month period ended Sept. 30. Gross bookings revenue, and EBITDA “came in shy of our initial expectations, raising questions around the longer-term path to Eats profitability at this point,” wrote Evercore ISI analyst Benjamin Black, cited by MarketWatch. He conceded that there’s “limited visibility into when trends should inflect positively” for Eats.

By contrast, food delivery has been one of the bright spots for Uber over the last few months — whose ride hailing business has plummeted in the wake of COVID-19.  Though the pandemic-induced increase in demand helped Uber Eats bookings more than double, they still recorded a $313 million adjusted EBITDA loss in the first quarter of this year.

Last summer, Cowen estimated that Uber was losing $3.36 on every order, but they projected that loss to shrink to $0.46 per order by 2024. With those forecasts certainly thrown into limbo by now, a timetable for profitability is even more obscure.

To scale up and demand more pricing power, Uber has spent much of 2020 looking for a big acquisition in the food delivery business and, this week, they found it. After a failed bid to acquire Grubhub earlier in the year, Uber instead purchased food-delivery service Postmates for $2.65 billion in stock. The deal brings together the fourth-largest US food delivery service with Uber Eats, which trails only DoorDash in market share, according to Second Measure and Edison Trends. CEO Dara Khosrowshahi said some 30% of Postmates’ orders come from subscribers, a reliable customer segment Uber aims to expand with its own subscription service.

In May, more than a quarter of Americans reported ordering from order from Grubhub, Doordash, and Uber Eats (including its subsidiaries like Seamless and Eat24). DoorDash took a huge piece of the US market with 44%, but Uber came in third with 22% share of May sales. The combination of Uber’s UberEats food-delivery app with Postmates will increase their market share to 37% of the food delivery business.

The companies said Uber intends to keep the Postmates app running separately, “supported by a more efficient, combined merchant and delivery network.”

Europe’s Just Eat NV had the same idea. That firm and Grubhub are now headed toward a $7 billion tie-up announced last month. Interestingly, Just Eat is itself a child of an $11.1 billion merger of the UK’s Just Eat and Netherlands-based Just eat is going to use Grubhub to make its own foray into the American market, where Grubhub controls about 17% of sales.

Investors should keep in mind that, while the market share of food delivery services are pretty spread out on a national level, one individual service tends to monopolize local markets. For example, maps from the Wall Street Journal show that Postmates dominates a number of key neighborhoods in Los Angeles (a city where Uber Eats was noticeably lacking a serious presence). Postmates is also noticeably powerful throughout New York City, with its main competitor being Grubhub.  Though Brooklyn is a Postmates stronghold, its northern neighbor, Queens, is solid Grubhub turf.

Effectively, M&A also helps larger companies (who can afford it) to buy their way into major footholds in urban centers that they haven’t been able to penetrate on their own.

These acquisitions not only give the larger firms with growing subscription bases more power over the prices they charge, but it also prepares them for a future where some major disruption allows the business they’re in to finally make sense.

As Forbes points out, venture capitalists and other investors keep putting money into these money-losing businesses because they foresee a longer-term change in the environment: exactly the same as with Uber’s ride sharing business. For a long time, Uber — and Lyft, and many others like them — have lost money transporting us from one side of the city to the other, waiting for the main cost factor of those trips, the driver, to disappear from the equation. The autonomous vehicle, for instance could make 70% of the operating costs of a taxi service disappear with stroke of a pen one day. This same kind of technological discontinuity could flip the economics of food delivery on its head as well.

With that said, the time horizon for budding business in robo-cars remains extended. Currently, smaller scale delivery bots that travel on the sidewalk remain a more feasible option for food delivery in the near-term, but even that model has its limits since order sizes must be compact, constraining potential profit margins.

Though the current fixed cost and fee structure involved with food delivery make it an unprofitable business in the short term, continued growth in the business should continue driving fresh funding to the industry. However, uncertainty and speculation around the aforementioned technological developments that the future of these delivery services remain contingent on still poses a serious risk for investors.


In the meantime, large firms like Uber, Just Eat, and others are likely to continue making acquisitions of smaller players in delivery and robotics.

Food Delivery Stock Charts

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