Grubhub Deals Gut Check for Food-Delivery Companies
Wall St. Journal
Oct 30, 2019
Grubhub Inc. GRUB -43.30% is raising tough questions—about the future of its own industry.
The company’s stock fell 43% Tuesday following a gloomy forecast for its future profits and sales, the latest reflection of the many challenges mounting for the food-delivery business.
Delivery companies are spending furiously on incentives to lure customers and gain market share, while contending with growing frustration among restaurants that resist paying fees to have their meals delivered.
The companies are also facing pushback from lawmakers about their fees and operations and from gig economy workers over compensation. Customer loyalty is proving elusive as the services’ users opt for whichever one offers the best deal.
“We now view this as a race to the bottom with no clear winners,” said Robert Mollins, an analyst at market-research firm Gordon Haskett Research Advisors, which cut its rating on Grubhub’s stock.
The stock slide marked Grubhub’s biggest one-day decline since the Chicago-based company went public in 2014. Growth across the industry is slowing, executives said, and competitors are plowing money into promotions and discounts to gain market share, making it harder for Grubhub to turn a profit.
Shifting its strategy, the company said it would now try to match some competitors’ tactics, including offering more discounts and delivery from more restaurants where it doesn’t have formal partnerships. But Grubhub Chief Financial Officer Adam Dewitt told investors Tuesday, “There’s not a lot of magic tricks where you can just throw hundreds of thousands of new restaurants on a platform.”
Shares in Uber Technologies Inc., which owns Uber Eats, fell 2.4%. Shares in Waitr Holdings Inc., a regional player in the South, West and Midwest, fell 9.6%.
The biggest food-delivery company, DoorDash Inc., is private, as is Postmates Inc. Both are exploring initial public offerings and have raised a total of nearly $3 billion in private funding, according to PitchBook. Postmates said earlier this month that it was delaying its planned offering because of market choppiness.
Grubhub Chief Executive Matt Maloney said in an interview that rivals will struggle to maintain their market share—some of it drawn from his company over the past year—while also turning a profit. He predicted delivery companies would need to merge to gain scale and the leverage to cut discounts.
“We are seeing a lot of signals. The markets wants profits now,” he said.
DoorDash bought restaurant-delivery service Caviar Inc. in August for $410 million, and analysts expect more consolidation. DoorDash Chief Executive Tony Xu said at the WSJ Tech Live conference last week that third-party delivery companies currently serve only about 5% of the U.S. restaurant industry, leaving room for his company and others to grow.
Still, investor pressure for profit could mean higher prices for consumers. Gordon Haskett analysts said this month that roughly a third of the 35 restaurant chains the firm tracks have offered free delivery at some point since April 2018, with the offering usually funded at least in part by a delivery company. Other surveys by market-research firms have found that consumers say price plays a big role in deciding whether to order delivery.
Mr. Maloney pointed to the botched attempt at a public debut by WeWork’s parent company as a sign of the new scrutiny facing consumer-technology companies seeking to transition from rapid growth to profitability.
SoftBank Group Corp. , a lead investor in WeWork, led a round of funding and took a seat on DoorDash’s board last year. The funding was used for growth for DoorDash, which has expanded rapidly over the past year thanks in part to customer discounts and scores of new restaurant partnerships. The fund has also raised investments for Uber, whose UberEats competes with DoorDash, Grubhub and others.
Each of those companies now offers delivery in most major U.S. markets, leaving them to fight each other for share. Labor costs are rising, too, as low unemployment increases competition for drivers and as lawmakers in some states and cities push delivery companies to share more of their proceeds with couriers.
At the same time, some restaurants are pushing back against fees that delivery companies charge and the excess strain those orders put on their kitchens.
Many restaurants have dropped exclusive partnerships with a single delivery company in search of a better deal and more customers. McDonald’s Corp. now offers delivery through both Grubhub and DoorDash in addition to Uber Eats, with which it struck an exclusive deal in 2017.
“The restaurant companies have gotten smart, and they’ve realized that aligning with one delivery partner probably doesn’t make a lot of sense,” Domino’s Pizza Inc. Chief Executive Ritch Allison told investors earlier this month.
Domino’s has refused to offer delivery beyond its own couriers, sapping sales but protecting the pizza chain’s margins. The chain’s stance has proved controversial with many investors who wish the company would at least advertise its business on third-party marketplaces, even if it makes its own deliveries. Mr. Allison has said such a compromise would still cost too much.
Even some chains that don’t offer delivery are refusing to put their food into the hands of the delivery startups. “We love third-party delivery for competitors—that drives more to-go into our stores,” Texas Roadhouse Inc. Chief Executive Wayne Kent Taylor told investors Monday. The Louisville, Ky.-based chain has taken a hard stance against outside delivery because of its costs. The company’s stock soared 21% to $60 Tuesday after it reported robust third-quarter revenue and profit.
Some investors said they saw Grubhub’s steep selloff as a short-term corrective for a business that is still at the forefront of a major shift in how people eat.
“I do believe this is an incredulous overreaction by the Street today,” said Jake Dollarhide, chief executive of Tulsa-based Longbow Asset Management Co., who bought Grubhub at $33 a share on Tuesday.
Grubhub declined to give guidance for next year, and its fourth-quarter sales estimates now fall around 15% below expectations of analysts polled by FactSet. Sill, Mr. Maloney said Grubhub will be profitable after its new spending on marketing and to add additional restaurants to its platform. He believes that food delivery has become a commodity and that those who have developed the best services to date will survive.
“There is no more innovation left. Everything is on the table,” Mr. Maloney said.