January 9, 2020

Breakingviews: Grubhub jump-starts race for food-delivery M&A

by Breakingviews.

Grubhub has jump-started the race for food-delivery consolidation. The company is mulling a sale, according to the Wall Street Journal, an obvious solution to problems Chief Executive Matt Maloney spelled out in an October letter to shareholders. Competition from cash-burning rivals like Uber Technologies has eroded the $5 billion meal delivery firm’s operating margins from 10% two years ago to 1% in their most recent quarter, knocking shares 60% from their peak. But regulatory problems may await, so it’s best to be the first to complete a deal.

The predicament in meal delivery is simple: too much competition. The overall target market makes for a tantalizing opportunity, and the companies are rapidly growing. Grubhub’s revenue increased 30% in the third quarter, to $322 million. But rivals like Uber, DoorDash and Postmates all think size will eventually deliver efficiency and profits. They are spending mightily for customers, splashing out with perks and advertising in order to lure in users.

Consolidation would deliver the efficiency they need to boost profits, and so for a company like Uber, it might be worth keeping Grubhub out of the hands of rivals. A combination with DoorDash or Postmates has even more benefits, like a rapid way for the private firms to acquire a public listing.

But the deals lessen competition, too, which likely won’t be lost on regulators. DoorDash captured 37% of U.S. food-delivery sales in November, Grubhub had 30% and Uber Eats was at 20%, according to Second Measure. Repackaging the competition could lead to a near monopoly in certain markets.

The various firms’ strengths vary by region, with Grubhub dominant in the Northeast, DoorDash prevalent in Houston and Dallas, and Uber Eats strong in Miami. Regulators might view competitive concerns based on dynamics in each metropolitan area, similar to the approach they’ve taken in deals among car-rental companies and airlines. In 2013, American Airlines and US Airways had to give up takeoff and landing slots at airports in Washington, D.C. and New York City to win antitrust approval.

But the relatively new business model could also give regulators pause, and both state and federal regulators are becoming less predictable. Given the ferocious competition, consolidation is the best way forward on paper, but some laggards could eventually suffer pushback. The last to launch a deal might end up with a regulatory stomachache.


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