It’s not a great time to sell a food delivery company.
Just ask Just Eat Takeaway, which is reportedly trying to offload Grubhub for just a fraction of the $7.3 billion it paid for it a year ago.
Or shareholders of Finland-based Wolt, which became part of DoorDash this week in an all-stock deal. Their shares were worth $206 in November when the transaction was announced, but have shrunk by a third in the five months since.
Looking back, it seems obvious that those initial values were too high. Delivery companies spent most of the pandemic growing at rates no one could have imagined and that were impossible to sustain. Now they’re coming back down to earth to face slowing demand, rising inflation and an impending recession, all of which are scaring off investors.
Food delivery was bound to have problems when Americans got back to their pre-pandemic lifestyles. More people are visiting restaurants in person again or picking up orders themselves rather than paying the premium for delivery. Big restaurant tech supplier Toast reported that on-premise sales on its platform were up 46% year over year in the first quarter, while off-premise sales were down 7%.
That dynamic has been evident in delivery companies’ top lines for some time now. After months of double- or triple-digit gains, DoorDash and Uber Eats’ growth has been decelerating for a year. Some of their remaining gains have come at Grubhub’s expense: Its sales and order volumes fell 5% in the first quarter, just as JET announced it was exploring a sale.
But it’s the providers’ bottom lines that may be hurting their value the most. DoorDash, for instance, has continued to grow share and drive revenue to a surprising degree. But it’s still losing money. It posted a net loss of $167 million in the first quarter, down more than 50% year over year. Executives insist restaurant delivery is profitable, and that the company has chosen to reinvest those profits to grow. Investors aren’t buying it: DoorDash’s stock has lost more than half of its value over the past year.
“Delivery has been surprisingly strong as we come out of the worst of the pandemic with continued sequential growth,” wrote BTIG analyst Jake Fuller in a recent note on DoorDash. “But investors remain wary with concern around driver supply (seemingly misplaced concern) and the ramp in profitability being muted by ongoing investment.”
Delivery has always been an expensive proposition for everyone involved. A whole mess of factors—the war in Ukraine, rising costs for gas and labor, a looming recession—are making the unit economics even more difficult.
It’s worth mentioning that these issues aren’t unique to food delivery. The Nasdaq Composite, which includes many of the biggest tech companies, is down more than 23% this year. A wave of layoffs has swept through the sector in recent months.
“There’s just a huge sucking noise right now in the tech industry because all the capital that’s been fueling the industry’s growth has now been sucked out and moved to safer assets,” said Raj Suri, CEO of tech supplier Presto, in a recent interview.
Given all that, it’s perhaps no surprise that JET has struggled to find a buyer for Grubhub, even after slashing its asking price to as little as $1.26 billion, according to The Times (UK).
But I’m still a little surprised. Grubhub may be in third place in the U.S. delivery market, but it’s still massive. It has a strong presence in some major markets, including New York City. It has accomplished the notoriously difficult job of scaling a delivery business. It may not be profitable, but neither are its biggest competitors. A new owner might be able to make hay with it at, especially at a bargain price.
Even Cat Rock Capital, the JET shareholder that had been leading calls for the company to sell Grubhub, thinks the Chicago-based delivery company is being undervalued.
“The market is undoubtedly wrong to attribute negative value to Grubhub, which has $10 billion of GMV, over 300,000 restaurant partners, coverage of over 4,000 US cities, and a same-day logistics network that delivers 68% of its orders,” it wrote in an October letter.
It suggested that a company like Amazon or Walmart should buy it to compete with DoorDash and Uber Eats. “A partial or complete Grubhub sale to Amazon Whole Foods at any valuation would significantly improve the consumer proposition for both companies and dramatically increase competition in the U.S. online food delivery market,” it wrote. Emphasis theirs.