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Technology Stocks : Peer-to-Peer, Gig and On-Demand Economies

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From: Glenn Petersen6/12/2020 9:18:17 AM
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Grubhub and Just Eat Takeaway position to win third-party delivery market share from ‘irrational’ competitors

Just Eat Takeaway CEO Jitse Groen says the combined companies will ‘push back’ on rivals giving away food for free; the delivery group will have more than 360,000 restaurant partners in 25 countries

Nancy Luna | Jun 11, 2020
Nation's Restaurant News

In the third-party delivery horse race, Just Eat Takeaway from the Netherlands has emerged as the longshot winner that came out of nowhere to cross the finish line and win the ultimate prize: dominance in the restaurant delivery sector.

By taking over controversial U.S. third-party delivery operator Grubhub in a deal valued at $7.3 billion, Just Eat Takeaway gains instant access into the coveted and highly competitive U.S. market — a missing piece in its worldwide presence. The sale creates a combined group that will have more than 360,000 restaurant partners in 25 countries, serving 70 million active consumers.

Related: Los Angeles and New York City cap third-party delivery fees

“The acquisition of Grubhub is critical to our long-term mission to be the best food delivery company on the planet,” Jitse Groen, chief executive of Just Eat Takeaway.

He and Grubhub CEO Matt Maloney, who will lead the company’s North America division, said by joining forces Grubhub can better defend its leadership position in coveted markets like New York City while also having the financial strength to regain its No. 1 market share status in the U.S.

Related: Just Eat Takeaway agrees to acquire Grubhub in $7.3B deal

“We are taking back share,” Maloney told investors Thursday during a conference call to discuss the sale. “The Takeaway team is fully committed to support us in that aggressive competitive position for as long as it takes to win.”

Groen, who created his food-delivery company in his Netherlands attic, said Chicago-based Grubhub can now rely on the global strength of Just Eats Takeaway to fortress the business against ‘irrational’ players who are burning cash to push out market leaders.

“A big global company that is EBITDA positive can choose which battles are important to it. We are agnostic to where we have to defend our business,” Groen said. “It is pretty obvious to us that as long as we are large, EBITDA positive, and very dominant in the markets that actually matter, that cannot happen to us. And on top of that, we're going to push back.”

Groen went on to say that Grubhub’s position in New York City is very profitable, and far more important to defend than smaller markets.

“That doesn't mean that we should not be large in Arizona, but because obviously, we are interested in that as well. It just means that we can sustain for quite a long time a level of competition with irrational players, and we call these players irrational because they are essentially giving away food for free,” Groen said when pressed by an analyst to explain its U.S. strategy.

Losing the horse race to acquire Grubhub was frontrunner Uber Technologies. The company, which operates Uber Eats, had been negotiating a takeover of Grubhub for weeks. The merger would have brought together the U.S. sector’s No. 2 and No. 3 players and effectively put the combined companies on equal footing with current U.S. market delivery leader DoorDash.

Just Eat Takeaway said it was attracted to Grubhub’s hybrid business model, which focuses on both marketplace and last-mile delivery logistics.

“It has been built by a founder-led management team who've had a proven track record in building leading positions in markets of scale,” Groen said.

But Just Eats Takeway is inheriting a third-party operator that’s been one of the most criticized delivery players in the U.S. segment. Grubhub’s tactics for earning commissions from struggling restaurants has been questioned for more than a year, especially in New York City, Grubhub’s largest market.

For months, restaurant industry watchers had expected consolidation in the U.S. delivery market space. How the European-U.S. combination will impact restaurants – and more importantly restaurant commission fees – remains to be seen.

“I think it's too early to tell. I still do not believe aggregators will have long-term success because of the high prices that cut into operator profits,” restaurant analyst Tim Powell of Foodservice IP said. “Consolidation of Grubhub is not a big deal - probably not a winner for operators, but one for diners looking for discounts. The fewer aggregators out there, the fewer choices we will have and prices will likely increase.”

Gary Stibel, an analyst at New England Consulting Group, said: “Unlike a double negative, which can produce a positive, combining two questionable business models, particularly across a small body of water, does not a profitable business make.”

During the call, Maloney briefly addressed the pressure Grubhub and other aggregators have been under to reduce commission fees during the COVID-19 crisis.

The pandemic has led to a surge in delivery orders. Before the pandemic, delivery represented 3% of all restaurant orders. It’s now grown to 7% of orders, according to the latest market research from The NPD Group.

Delivery became a crucial channel for earning revenue for operators hampered by dine-in restrictions. But restaurant owners have grown increasingly frustrated by the profit-hurting fees, a pain point that has escalated during the pandemic. That’s led to a nationwide revolt with leaders from Seattle, Los Angeles, San Francisco and New York City enacting commission caps.

Maloney said he understands why “local municipalities are working very hard” to help restaurants during the COVID-19 crisis.

But “the reality is there is a fundamental misunderstanding in many of those cities as to the economics of the typical delivery order,” he said. “For example, about 25% of the total order volume size is what it cost to deliver the food. So, any fee cap that is under 25% literally doesn't pay for the delivery itself.”

In its latest earnings call, Grubhub said commission caps ultimately hurt independent restaurants as it forces consumers to order from less expensive quick-service restaurants. The brand has repeatedly said that it has been acting to help restaurants by reinvesting profits into advertising and promotions that will generate more revenue to restaurants.

Last year, Netherlands-based Takeway.com merged with Just Eat to form Just Eat Takeaway. The combined companies formed a leading position in three profitable food delivery markets: the United Kingdom, Germany and the Netherlands. The Grubhub purchase, which is subject to approval by shareholders at both companies, is not expected to close until the first quarter 2021. If the deal is finalized, Just Eat Takeaway will become one of largest delivery companies in the world outside China.

Contact Nancy Luna at nancy.luna@informa.com

Follow her on Twitter: @fastfoodmaven

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