Press reports this week indicating that online food delivery operation GrubHub (GRUB) was exploring strategic alternatives, including a possible sale or merger, jump-started the stock but now the company is refuting the sale process part of the equation. Regardless of which route they prefer, this sector is in dire need of a structural realignment and I suspect we will see that transpire this year.
For the food delivery companies, the business model is just really, really difficult. There is no way that a restaurant and a third party delivery service can both make reasonably good margins if I want a burger, fries, and shake delivered to my house in an hour or less. GRUB does a lot of business in high density urban areas like New York, where delivery routes are more efficient than in the suburbs, but still the company barely makes any money. EBITDA per order between 2014 and 2018 averaged anywhere from $1.01 to $1.18 depending on the year. Imagine the volume you must do to build that into anything worthwhile. No wonder investors have soured on the stock:
It’s just as bad for consumers trying to navigate the ordering process with so many competitors popping up to embrace this horrible business model. Here in Seattle, my wife and I have food delivered relatively frequently and in a big city like this we have DoorDash, GrubHub, Postmates, and Uber Eats to choose from (we had Bite Squad at one point too, before they were absorbed by Waitr and left our local market). It is a huge pain to scroll through 4 apps to figure out what restaurant you want, the fee structures between them differ, and places switch from one service to another all the time. There just isn’t room for more than 1 or 2 players in this space, assuming they can figure out how to make it work financially.
So what should GrubHub do now, as the first mover and only pure play public company that is getting pounded by the newer entrants? David Faber on CNBC this morning nailed the answer to this question; they should merge with Uber Eats.
Uber is bleeding cash but the ride sharing business is actually profitable in mature markets, whereas the food delivery business is losing a few bucks on every order. If you merge Uber Eats into GrubHub you have a stronger, clear #1 player in the space that remains a public company and can try and figure this business out. It would probably force further consolidation (why not have Postmates and DoorDash merge instead of both pursue an IPO?) which benefits everyone.
And it does something else (which for those of us who recently bottom-fished Uber because it looks like a cheap stock would be wonderful) by ridding Uber of the cash-sucking food delivery division. Uber shareholders would get stock in the newly formed GrubHub/Uber Eats company and Uber stock itself would likely rise materially as they easily push up their profitability timetable by a year or more. It just makes sense to separate these two business models, as one is likely to be very profitable at scale (ride sharing) and one is far more uncertain (food delivery).
Uber stock has already rallied from the sub-$28 price I jumped in, so maybe I am getting a little greedy, but a deal like this probably sends the stock into the 40’s and perhaps to the IPO price of $45. And it just makes sense from a business and financial perspective. Hopefully the executives and bankers were watching CNBC this morning and realize how great of an idea Mr. Faber shared on the air.