Three food-delivery apps set to serve some growth

Leading food-delivery companies are quickly capturing market share in various geographies they serve. Investors hungry for a taste of this new frontier may want to keep tabs on the following names. These key industry players are quick to adapt to changing consumer behaviour and are pushing into underserved and faster growing markets through local tie-ups and tuck-in acquisitions. They have formidable customer bases and extensive network which equip them to ward off new competition from smaller peers.

Grubhub (GRUB) is an online takeout food platform for diners and restaurants. The firm generates revenue by charging restaurants a commission on each order and delivers it to diners for a fee. Grubhub has over 50,000 restaurant partners.

One of the first movers in the online food-delivery space, Grubhub provides consumers a website and a mobile app for easier takeout food ordering, while its restaurant partners utilize Grubhub for more effective marketing and more efficient order processing. “The firm’s revenue is based on each order received and completed, as it charges restaurants a commission that has averaged 13% to 16%,” says a Morningstar report.

More recently, though, the company has struggled to defend market share as the space got crowded with new entrants eroding Grubhub’s early-player advantage. In the absence of sustainable network effect and switching costs, “we expect pricing, or commission rate, to become the main differentiator, creating some margin pressure for Grubhub and its peers in this growing space,” says Mogharabi.

One way to counter declining market share could be expanding the lower-margin delivery service to more cities. As well, “the firm will likely take the acquisition route to maintain its leadership position,” says Mogharabi, cautioning that even there it could face competition from better capitalized rivals.

Despite near-term challenges, the attractiveness of the US$200 billion total addressable market size supports a cheery outlook for on-demand food takeaway businesses. “We expect revenue to grow at a 5-year CAGR of 21%, thanks to a growing number of restaurants, diners, and orders,” adds Mogharabi, who puts the stock’s fair value at US$80.

Global ride-sharing behemoth, Uber Technologies (UBER) provides technology that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could expand to additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, the firm’s aerial ride-sharing platform.

Monthly, about 91 million users across 63 countries order rides or foods through the company’s ride-hailing (Uber) and food delivery (Uber Eats) apps. Approximately 83% of its gross revenue comes from ride-sharing and 16% from food delivery. “Uber Eats, the firm’s food delivery service, will be one of the main revenue growth drivers for the firm as it will benefit from cross-selling to its large ride-sharing user base,” says a Morningstar equity report.

Uber Eats is rapidly gaining market share by cross-selling to its large ride-sharing user base, especially in the U.S. where it competes with rivals like Grubhub and DoorDash. “In addition, Uber has continued to aggressively invest in and price its service to attract more restaurants and expand the food delivery business,” says Mogharabi, noting such strategy could create another “network effect moat sourced business within the firm.”

Mogharabi’s US$58 per share fair value estimate for Uber forms the basis for the assertion that Uber Eats could be valued at around US$15 billion, or 1.9 times 2018 gross food sales. The higher multiple, he adds, is justified by Uber Eats’ rapid growth and the fact that it will continue to benefit from Uber’s overall network effect and moaty on-demand platform, which could lower diner acquisition costs in the long term.

The world’s highest-grossing online retailer, Amazon (AMZN) rang up US$233 billion in sales and US$408 billion in gross merchandise volume in 2018. The company generates revenue from online product and digital media sales (53% of 2018 revenue), commissions, related fulfillment and shipping fees, and other third-party seller services (18%), Amazon Web Services (11%), Prime membership (6%), and Whole Foods and other physical stores (7%), among other sources. International segments constituted 32% of Amazon’s non-AWS sales in 2018.

Earlier this year, Amazon shuttered is food delivery business, Amazon Restaurants, a service that operated across more than 20 U.S. cities. However, the e-commerce giant is far from leaving the online takeout business. Amazon recently invested a whopping US$575 Million in the U.K.-based food-delivery service Deliveroo. London-based Deliveroo operates in 14 countries including those in Europe (the U.K., France, Germany and Spain) and elsewhere (Singapore, Taiwan, Australia and the UAE).

Amazon is also sniffing a sizable opportunity in India’s burgeoning online food-delivery market where it’s reported to enter later this year around the onset of the local festive season. The company’s online food delivery service in India, a market projected by research firm Redseer to be US$3 billion in 2020, could pose a major threat to established local rivals such as Swiggy (backed by Chinese tech giant Tencent) and Zomato, as well as its global peers like Uber Eats. India’s rising middle class has galvanized the app-based food-delivery sector, which saw number of orders skyrocketing to 176% in 2018, according to Redseer.

Mogharabi says: “Amazon [with more than 100 million Prime members] and Uber have the luxury to cross-sell online food ordering and delivery to their current clients.”

Morningstar sector strategist, R.J. Hottovy, puts the stock’s fair value at US$2,300.

Editor's note: The author owns a small position in shares of Uber.