Analysis: Food Delivery Companies Renewed by the Cost of Living Crisis

AMSTERDAM/NEW YORK (Reuters) – When food delivery service Grubhub struck a deal with Amazon (AMZN.O) earlier this month to offer Prime customers a year of free delivery, shares in rivals slumped.

The deal, a lifeline for Grubhub that will increase pressure on its competitors, was the latest example of a meal delivery company taking action to revamp its business to adapt to an expected downturn. Read more

The money-losing food delivery sector has been one of the biggest beneficiaries of the COVID-19 pandemic, but that effect has diminished as consumers, who have faced rising prices, begin to fall back.

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Analysts still believe that food delivery will eventually become a money-motor, given customers’ love of convenience. But for now, the sector has to deal with a cost-of-living crunch, and companies will be judged on whether they’re meeting margin targets, not growth.

To that end, companies are working to cut costs and exit unprofitable markets or take tactical steps like Grubhub to deal with the harsher climate.

“It’s a misconception that competition will continue to increase forever,” said Fahad Beg, CEO of Prosus (PRX.AS), which has investments in meal companies around the world.

“As the finance frenzy fades in the past few years, many companies are looking to rationalize and exit markets where they don’t have a leadership position.”

Just Eat Takeaway (TKWY.AS) has raised restaurant commissions across Europe and eliminated jobs in France, Uber Eats (UBER.N) has pulled out of Brazil and Britain’s Deliveroo (ROO.L) has pulled out of Spain.

“Everyone’s going down, everybody’s realizing they now need to get to profitability,” said City analyst Monique Pollard.

Analysts said that players who are already dominant in one region are in a better position to extend their lead.

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

Analysts said companies ranked second or third would suffer.

Under Amazon’s deal with Grubhub, the company could use its delivery network partnership to boost construction from city strongholds such as New York.

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

poor appetite

The number of US restaurant delivery orders fell 6.3% for the 12 months ending in June to 4.8 billion, the sector’s first annual decline since 2016.

Morgan Stanley said surveys have shown that spending on restaurants is one of the first places consumers look to save money during a recession.

“Food delivery also stands out as uniquely at risk … given that this tends to be costly on an individual basis and is likely to be seen as tolerant by some consumer groups,” they wrote.

amazon batch

The Amazon deal would be a shot at the arm of Grubhub, which Just Eat Takeaway bought for $7.3 billion in 2021 but has now said it’s up for sale. Read more

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

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

It estimated that Amazon’s deal with Britain’s Deliveroo launched in September 2021 doubled subscribers from 750,000 to 1.5 million in the first month after the deal.

Amazon Prime has nearly 10 times as many subscribers in the US than it does in Britain.

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

What the Amazon deal, she said, “does for Grubhub is it changes the narrative for them from one situation where they lose their stake to another where they start to get their share back, particularly in the short term.”

Fixed margins

With only two to three players left in each country, those who stayed are in a better position to protect margins in the event of a downturn.

Deliveroo and Delivery Hero both lowered sales forecasts last week. Read more

But their shares rose while maintaining or improving operating profit expectations.

“From now on, operational efficiencies will be rewarded and reflected in public and private market assessments,” Prosus’ Big said in e-mailed answers to Reuters questions.

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

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(Reporting by Toby Sterling and Hilary Ross) Additional reporting by Paul Sandel. Editing by Matt Skovham and Jane Merriman

Our Standards: Thomson Reuters Trust Principles.

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