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Home / US Business / Party or famine: Grubhub needs Uber merger (NYSE: GRUB)

Party or famine: Grubhub needs Uber merger (NYSE: GRUB)



Editor's note: Seeking Alpha is proud to welcome J Ryan Cameron as a new contributor. It's easy to become a Searcher Alpha contributor and make money from your best investment ideas. Active contributors also get free access to SA PREMIUM. Click here to find out more »

Editor's note: Seeking Alpha is proud to welcome J Ryan Cameron as a new contributor. It's easy to become a Searcher Alpha contributor and make money from your best investment ideas. Active contributors also get free access to SA PREMIUM. Click here to find out more »

Grubhub (GRUB) desperately needs to complete a merger to ensure long-term viability. Fortunately, Uber (UBER) has reportedly been in merger discussions with Grubhub, but a deal is far from over. Grubhub's CEO has said that the offer price for Uber is too low, and there is speculation that a merger between these two food delivery giants could give rise to considerable regulatory scrutiny. That said, Grubhub's longevity as a key player in the growing $ 94B food delivery market hinges on the ability to consolidate with a competitor, like Uber Eats, to survive the industry's strong competitive dynamics and poor scalability in the business model. Investors will want to keep up with the merger development, and if an agreement cannot be reached, they should sell the stock as soon as they can.

Since March 21, Grubhub's share price has risen above 75%, mainly based on the news of a potential merger with Uber. Uber's latest offer values ​​Grubhub at about $ 65 per share. For a stock that traded close to $ 30 a share from the end of March, Grubhub investors should be cheering on this offer price. However, Grubhub's CEO has been keen on the offer and is eagerly asking for more during a time when Grubhub's basic stuff is faltering.

Source: Yahoo! Finance Share Chart

The food delivery business is becoming increasingly unattractive as aggressive competition builds up in an industry that requires billions of dollars of marketing costs per year to stay in the top spot with consumers. It's no secret that consumers have multiple delivery options at their fingertips, all with non-existent switching costs. This has created brand-agnostic consumers who only care about paying the lowest delivery fee for the commoditized service. Brands have struggled to differentiate themselves in consumers and in turn their restaurant partners. To top it off, Google recently announced that the popular Google Maps app will soon feature a feature that allows restaurants to highlight their preferred delivery platform, which will only enhance competition. These industry features are classic warning signs that an inevitable price war may be underway: high capital costs upfront with little promise to recover this capital if business fails, brand-friendly customers with low switching costs and a commoditized service.

Source: Google Maps & # 39; Current Food Delivery Delivery Options

A closer look at Grubhub's revenue per order development over time gives investors an idea that there may be a price war in the food delivery industry. Grubhub's daily average orders, a key metric used by management to measure business health, have grown ~ 14% on average over the past three years. However, an analysis of Grubhub's latest 10-Q will leave a sour taste in investors' mouths – daily average orders actually dropped ~ 1% in Q1 2020 compared to last year. While average revenue per order grew at a reasonable rate, if daily average orders continue to fall, management will have few options other than reducing the price to sustain the revenue growth that investors expect.

As if a potential price war were not scary enough, the business model of food delivery is not meaningfully scalable. Food delivery companies must rely on people (at least for now) who can only deliver a maximum of two to three orders per hour due to travel times and to prevent food from getting cold. These delays force companies to hire more and more delivery personnel to satisfy an increasing number of orders. Because food delivery consumers are so unruly, a bad experience with long delivery time or cold food from their favorite restaurant can cause consumers to quickly blacklist the company.

As a result, Grubhub has experienced rapidly increasing direct costs associated with providing its independent delivery network. By analyzing these costs per order basis, investors can see how bloated Grubhub has become. Direct costs per order have increased by ~ 31% on average over the last four years, and they have more than doubled since 2017. This explosion in direct costs has led to a reduction of 21 percentage points per order over the last four years. Even more alarming, this margin deterioration has worsened over time.

Okay … so what?

Grubhub will continue to experience declining revenue growth unless the company spends more money on sales and marketing to stay engaged with consumers and drive order volume growth. Furthermore, these orders will continue to have lower and lower margins unless management can avoid a price war and reduce costs.

These alarming trends should be teasing to investors, and they require a major change to boost Grubhub's stock price – Grubhub must merge with a competitor to relieve potential future downward price pressure and to cut excess overhead to improve operating margins. If a deal can be made and regulators eventually approve the potential transaction, analysts have estimated that a merger between Grubhub and Uber could provide $ 300 million in cost savings for the two companies. In addition, the transaction will give the merged companies an estimated 55% market share in the third-party food industry and enable them to ensure price stability in the short to medium term.

Key Investor Takeaway

If Grubhub approves an agreement to merge with Uber, there will undoubtedly be significant regulatory scrutiny given the deal's potential for "pandemic profiteering" that has been widely criticized by public officials lately. In addition, a merged company with 55% market share will almost certainly raise antitrust problems due to the potential for increased prices for consumers. The food delivery business has only recently come under fire with regard to its pricing policies.

Investors will want to keep up with the merger talks and any regulatory roadblocks; In my opinion, while Grubhub needs a large-scale merger to thrive in the crowded food delivery area, regulators are likely to prevent the transaction from being completed for the aforementioned reasons. This threatened merger attempt will cause Grubhub's share price to crate as supply margins continue to decline over time. The long-term outlook of the industry is not favorable to a company that has struggled to meaningfully differentiate itself. This stock is a seller, and I recommend investors underweight Grubhub.

Disclosure: I / We have no positions in the said shares, and have no plans to exercise any positions in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.


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