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The third-party delivery shakeup begins

The Just Eat-Grubhub deal highlights the challenges in the U.S. market, in terms of profitability and consolidation, says RB’s The Bottom Line.
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Bottom line

On Wednesday, the European delivery company Just Eat Takeaway.com agreed to buy Grubhub in an all-stock deal valued at $7.3 billion.

In so doing, it began what could be a major trend toward consolidation in a business that has grown both in size and in the number of question marks surrounding its future in recent years. Many of those question marks came from Grubhub itself.

“It’s interesting, because we’re in such a continual state of flux in this space,” said Melissa Wilson, principal with Technomic, a sister company of Restaurant Business. “Delivery is poised to continue to grow given the pandemic and the slow reopening of the dine-in business. But delivery companies are not in a position to raise commissions, or to raise delivery fees.”

“The typical strategic approaches you think about to improve revenue and profitability aren’t necessarily at play right now.”

Grubhub has been a popular subject of consolidation rumors and discussions for months, since the company in October painted a rather distressing picture of the delivery business in a letter to shareholders—a letter that sent the company’s shares plunging.

The delivery business is growing, but also has struggled to generate profits—in part because the logistics of providing delivery are challenging. The largest players, including DoorDash, Uber Eats and Postmates, have also been pushing price competition to generate market share. That has made profitability matters worse.

As such, it has been widely speculated that the industry is in need of consolidation.

That speculation has intensified this year, when reports emerged that Grubhub was considering a sale. The pandemic starting in March calmed those reports for a while, as delivery sales in the restaurant business soared, but they returned more recently as Grubhub began talking with Uber about a potential deal.

An Uber-Grubhub deal may well have been undone by antitrust concerns, according to press reports. Last month, several U.S. senators urged the Federal Trade Commission and the Department of Justice to “monitor the negotiations relating to Uber’s potential acquisition of Grubhub.”

“Consumers should be able to look forward to a future in which online food delivery is more efficient, more innovative, and less expensive,” the senators wrote.

One reason for some of the skepticism on a major merger involving U.S. delivery players has been the views of many independent restaurants, whose complaints about third-party delivery practices have intensified since the beginning of the pandemic.

“Assuming Just Eat did its due diligence, they know they paid billions for Grubhub’s horrible reputation among restaurant owners in New York City and around the nation,” Andrew Rigie, executive director of the NYC Hospitality Alliance, said in a statement. “Grubhub’s new corporate owners now have a responsibility to change the company’s predatory practices and improve relationships with restaurants.”

New York City is a major, profitable market for Grubhub and is a reason Just Eat targeted the company. Rigie’s quote suggests the new owners will have some work to do once the deal is complete.

“It matters where you are and Grubhub has a very, very significant position in New York that is very profitable,” Jitse Groen, founder and CEO of Just Eat Takeaway, said on a conference call with investors on Thursday, according to a transcript on the financial services site Sentieo. “That is far more important to Grub than being very large in Arizona.”

The challenges of getting past antitrust concerns helped lead Grubhub to merge with Just Eat, which will provide the company with the financial wherewithal to handle money-losing markets better. The combined company will be the largest delivery player in the world outside of the very delivery friendly China.

“Obviously we’re interested in [Arizona] as well, “Groen added. “It just means that we can sustain for quite a long time a level of competition with irrational players,” meaning players where the company loses money.

Ultimately, the merger could still push more consolidation in the U.S. among different delivery players, as companies like Uber Eats and DoorDash look to smaller competitors to help erase losses.

That could also open up markets for online ordering that could help these companies generate the profits that don’t come from the logistics side of delivery.

“Yes, there might be future consolidation in the U.S.,” Groen said. “Regardless of whether that’s possible or not, that is likely to happen.”

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