The Chief Executive Officer of Domino’s Pizza (DPZ), Richard Allison delivered a message to the executives of some third-party food delivery companies like GrubHub and Uber Eats.
He spoke to Yahoo Finance saying, “I think we will see some shake-out in the third-party food delivery space. Delivery as a service that these third parties are offering is not sustainable in its current form. Look at what has happened to GrubHub’s P&L (profit and loss statement) since they went from being an order aggregator to being a third-party delivery company. They have grown revenue very rapidly but their profit has declined to almost nothing. Uber Eats in the third quarter lost over $300 million in EBITDA (earnings before interest, taxes, depreciation and amortization) delivering food. DoorDash is private, but speculation is out there they could be losing close to half a billion dollars.”
GrubHub (NYSE:GRUB) is an American online and mobile prepared food ordering and delivery marketplace that connects diners with local takeout restaurants, and based in Chicago. The company was founded in 2004 and went public in April 2014 after an IPO of $26 per share was launched. As of the first quarter of 2019, the company had 19.9 million active users and 115,000 associated restaurants across 2,200 cities in the United States.
In late October, Wall Street was shocked by the sub-par third quarter and outlook of the company. Sales of the company clocked in at $322 million, below analyst estimate of $330.5 million. Non-GAAP net earnings plunged to 27 cents per share from 45 cents per share a year ago which was in line with analyst estimates.
From January 2019 till Sept. 30, GrubHub’s non-GAAP net earnings dropped to $77.5 million from $135.7 million a year earlier despite a 35% increase in sales. The dynamic surging sales and declining profits indicates the intense competitive environment in food delivery where money must be spent on advertising and incentives to keep diners engaged. There are reports that GrubHub’s stock is down by about 35% year to date.
Following the slow growth, the founder and CEO of the company, Matt Maloney in October said in a letter to shareholders: “We will be moving quickly, spending more and trying many different strategies over the next 12-18 months to increase restaurant supply aggressively while making our dinner experience more sticky – effectively taking action to remove any reason for diners to look anywhere else.”
Uber Eats is an American online food ordering and delivery platform launched by Uber in 2014 and based in San Francisco, California. From the beginning of the year till Sept. 30, Uber Eats (UBER) lost a whole $911 million on an adjusted EBITDA basis (that is up from a $323 million loss a year ago). In its recent quarterly filing, Uber highlighted some issues with Uber Eats typical to the food delivery space and that are unlikely to end anytime soon.
The filing said, “Eats adjusted EBITDA loss increased primarily attributable to an increase in consumer promotions, brand marketing, and employee headcount costs."
According to Yahoo Finance, a shakeout along the lines of what Allison predicts could occur in three ways:
The entire third-party food delivery space goes under the weight of its own penchant for offering deep discounts on orders, heavy advertising and aggressive investment in tech. In turn, a large restaurant chain such as McDonald’s could swoop in and buy a major delivery player on the cheap and gain access to a turnkey operation.
A well-established player such as GrubHub continues to buy up smaller rivals to gain the required economies of scale to be a viable business longer term.
GrubHub may merge with Uber Eats, becoming its own stand-alone entity. Uber would therefore primarily be a ride-hailing/transport company, which it could make money on.
Allison is one of the most vocal critics in the restaurant industry, however, he is not letting the issue consume his time as CEO.
He said, “As I think about Domino’s Pizza, we have got to stay focused on the things we can control that will allow us to be successful regardless of when or how that shakeout occurs. So that means keeping our system and our franchisees focused on value, meaning we remain a very affordable way to feed your family tonight. We are that today, and we are very aggressively planning to compete in the future. We have got to be even better on being on time with delivery. We need to be even better in the years to come, we have an extensive set of initiatives underway to continue to improve service in our business.”