Analysis: Renewal of food delivery for cost of living

By Toby Sterling and Hilary Russ

AMSTERDAM/NEW YORK (Reuters) – When food delivery service Grubhub struck a deal with Amazon earlier this month offering Prime customers free delivery for a year, the rivals’ shares collapsed.

The deal, a lifeline for Grubhub that will increase pressure on its competitors, was the latest example of a food delivery company taking steps to revamp its business to weather an expected downturn.

The loss-making food supply sector has been one of the biggest beneficiaries of the COVID-19 pandemic, but that effect is fading as consumers, faced with rising prices, have begun to tighten their grip.

Analysts still believe that food delivery will eventually become a money spinner, given customers’ penchant for convenience. For now, however, the sector will face the cost of living and companies will be judged on whether they meet their targets for margins, not growth.

That’s why companies are cutting costs and exiting unprofitable markets or taking tactical measures like Grubhub to cope with the tougher environment.

“It’s a misconception that competition will continue to increase forever,” said Fahd Beg, a director at Prosus, which has investments in meal companies around the world.

“As the funding frenzy of recent years subsides, many companies are looking to rationalize and exit markets where they do not have a leading position.”

Just Eat Takeaway has increased restaurant commissions across Europe and cut jobs in France, Uber Eats has exited Brazil and Britain’s Deliveroo has exited Spain.

“Everybody is downsizing, everybody understands that they have to become profitable now,” Citi analyst Monique Pollard said.

Players already dominant in one region are best placed to extend their lead, the analysts said.

These include DoorDash in the US, Just Eat in Northern Europe, Delivery Hero’s Glovo in Southern Europe and iFood in Brazil. These can invest the company’s profits to strengthen their delivery network and add more restaurants to their platforms.

Second- or third-place companies will suffer, the analysts said.

Under Grubhub’s Amazon deal, the company can use its delivery network to strengthen, build from urban strongholds like New York.

Amazon has a similar deal with Deliveroo, which is a major player in London and Paris.

SCHEME: Food delivery companies compete for market share

Weak appetite

U.S. restaurant delivery orders fell 6.3% for the 12 months ended June to 4.8 billion, the first year-over-year decline the industry has seen since 2016.

Morgan Stanley has said its polls showed spending on restaurants is one of the first places consumers will look to save money during a recession.

“Grocery delivery also stands out as uniquely threatened … given that it tends to be expensive on a per-person basis and is likely viewed as indulgence by some consumer groups,” they wrote.

SCHEDULE: Food delivery stocks have suffered in the past year

AMAZON BOOST

The Amazon deal will be a bull’s eye for Grubhub, which bought Just Eat Takeaway in 2021 for $7.3 billion but is now said to be up for sale.

The influx of new subscribers — about 2 million in July alone, as reported by the Wall Street Journal — will help Grubhub make better use of its existing delivery network, analysts say.

Morningstar’s analysis estimated Grubhub had 3 million subscribers by the end of 2021, and it could double that number in the first year of the Amazon deal.

It estimated that Amazon’s deal with UK-based Deliveroo, which started in September 2021, doubled its subscriber base from 750,000 to 1.5 million in the first month after the deal.

Amazon Prime has about 10 times as many subscribers in the US than in the UK.

Citi’s Pollard said DoorDash remains in a dominant position in the US, while Uber benefits from a nationwide delivery network in the country.

What the Amazon deal “does for Grubhub is it changes the story for them from one where they’re losing share to one where they’re starting to regain share, especially in the short term,” she said.

MAINTENANCE OF MARGINS

With only two to three players left in each country, the remaining players are better able to protect margins in a downturn.

Deliveroo and Delivery Hero both lowered their sales forecasts last week.

But their shares rose as they maintained or improved their forecasts for corporate earnings.

“Going forward, business efficiency will be rewarded and reflected in valuations in both the public and private markets,” Beg of Prosus said in emailed responses to questions from Reuters.

The leaders in each market are now established and those who focus on delivery “will be able to successfully defend their business,” he said.

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