May 31, 2019

Breakingviews: U.S. food-delivery rivals risk capital destruction

by Breakingviews.

Using the internet to turn people’s laziness and hunger into a business sounds like a sure win for Silicon Valley. Uber Technologies, Grubhub, DoorDash and others are feasting on meal-delivery cravings. But sector valuations may overstate the market opportunity, at least in the United States.

Americans spent nearly $800 billion on food away from home in 2017, according to the Department of Agriculture, rising at about 5% per year. Assuming the trend continues, sales should be about $1 trillion in five years.

But internet-enabled delivery is increasing fast. Uber’s first quarter figures, set to be unveiled in detail on Thursday, should show bookings doubling over the past year to $3 billion, much faster growth than its ride-hailing business. DoorDash is growing even faster. That helps explain why investors are salivating. DoorDash’s private funding round in May valued it at $12.6 billion, up from $1.4 billion in early 2018.

Perhaps a fifth of all restaurant sales worldwide are from takeout and delivery, according to Euromonitor. Assume this figure goes up to 30% in the United States and delivery firms capture half that total, probably generous estimates. That leaves roughly $150 billion of potential bookings for the delivery firms by 2024 or so.

Delivery businesses only keep a fraction of that. Uber Eats says its so-called take rate – the amount that actually becomes revenue, as opposed to what goes to the restaurant or delivery driver – has steadily declined, reaching a tenth of bookings in 2018. Suppose that holds in the United States, and the firms involved will be sharing around $15 billion of revenue.

As long as players vie for market share, margins are likely to be thin even once hyper-competitive discounts are history. A 10% net profit, a bit more than Grubhub managed last year, may be as good as it gets. That equates to $1.5 billion of earnings for the sector. Put this on a price-to-earnings multiple of 20, generous once the business is more mature, and there’s up to $30 billion in potential market capitalization up for grabs.

The problem is DoorDash, Grubhub, Uber Eats and the smaller Postmates are currently worth nearly that much, assuming Uber’s U.S. delivery business is worth as much as Grubhub’s roughly $6 billion market value. And that doesn’t even count e-commerce giant Amazon’s effort.

An optimistic ending would be one firm knocking out rivals and boosting its pricing power. A more likely one may be that valuations, far from getting hotter and rewarding venture capitalists, grow cold.

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