For Uber Technologies Inc., the logic of gobbling up food-delivery rival Grubhub Inc. seemed pretty straightforward: reduce the number of competitors, making it easier to charge higher prices to diners and earn more commission from restaurants. The rationale isn't so clear-cut for Dutch deliverer Just Eat Takeaway.com NV, which leapfrogged Uber to announce on Wednesday that it was acquiring Grubhub in an all-share deal.
Unlike Uber, the Amsterdam-based firm is not present in the U.S., where the main players are Grubhub, Uber Eats and DoorDash Inc., with the startup Postmates Inc. a distant fourth. That highly competitive landscape won't change with a Just Eat Takeaway purchase of Grubhub, which may explain why investors initially found the idea of such a deal unpalatable: Just Eat Takeaway shares fell as much 19% after news of the tie-up was first reported as a possibility by the Wall Street Journal. That's equivalent to some 2 billion euros ($2.3 billion) of value.
But the lack of value creation discerned by the firm's shareholders is also the same reason that regulators may look upon a deal far more favorably than they would an Uber-Grubhub combination. What is bad for shareholders is good for customers, who benefit from a price war. It's also doubly bad news for Uber: If an existing U.S. rival were the acquirer, it would still have the effect of reducing competition.
The deal is a gamble on the operational nous of Jitse Groen, the chief executive of the company that was this time last year still known simply as Takeaway.com. Yes, he has an impressive track record, growing a Netherlands-focused operation with revenue of 23 million euros in 2013 into a pan-European giant with sales topping 1.2 billion euros last year.
But he has also only just wrapped up the 6 billion pound ($7.7 billion) acquisition of Britain's Just Eat Plc. Like the Grubhub deal, it was an all-share transaction sold to investors on the basis of his operational acumen. By giving Just Eat shareholders a stake in the new venture, ran the argument, they'd benefit from the value that Groen and his team would be able to generate once they got their teeth into the British firm.
That will be a harder case to make to U.S. investors, where fierce price wars have made market consolidation seem the only way for food delivery platforms to improve profitability. Uber Eats has lost $2.2 billion on an adjusted Ebitda basis, a measure of profit, in the past two years. Grubhub, struggling to compete, has seen its Ebitda margin fall from a 2014 peak of 28% of revenue to 0.2% in the three months through March, according to data compiled by Bloomberg.
That declining profitability is largely because of Grubhub's changing business model. Historically, it operated purely as a marketplace _ connecting diners with restaurants, which themselves were responsible for delivering the food. That differed from the approach favored by Uber Eats, DoorDash and Postmates, who operated their own fleets of deliverers. The marketplace approach, with its lower costs, was a lot more profitable, but it made it harder to attract chains such as McDonald's Corp., who were wary about taking on the significant fixed cost that operating a delivery network might entail. So Grubhub has started to add its own deliverers � perhaps 30% of revenue now comes from its own delivery network, likely growing to 45% by the end of the year, according to Bloomberg Intelligence analyst Mandeep Singh.
Groen is an unashamed proponent of the marketplace model. Don't be surprised if he pedals back Grubhub's delivery ambitions. But he'll face the daunting task of integrating two acquisitions, where both targets are larger than the original Takeaway.com, in two of the most competitive markets in the world for food delivery. He might be about to bite off more than he can chew.
