With COVID-19 coronavirus reaching pandemic proportions around the globe, the restaurant business is feeling the pinch of lessened traffic, especially in China -- raising the possibility that food delivery services like Grubhub (NYSE:GRUB) could cash in. At least one analyst at a prominent firm went out on a limb Monday, predicting that the troubled culinary courier could potentially earn significantly from the outbreak. China provides a partial example of possible effects on the delivery industry, but key differences between China and the USA could lead to different outcomes, too.
Dine-in shrivels, delivery booms in China
Upgrading Grubhub from an "underperform" to a "market perform" rating on the basis of the coronavirus outbreak highlights a seldom-considered side effect from COVID-19's spread. That's the possibility of bullish effects for delivery services even as the rest of the market reels. The theory goes that if people stay home, avoiding crowded restaurants where they'll sit for hours in close proximity to potentially infectious fellow diners, some restaurant food demand will transfer to off-premise sales.
The changing pattern of in-restaurant dining versus delivery in China during the coronavirus emergency supports this idea to a degree. Meituan, China's premier food delivery service, reported quadrupled delivery orders in early 2020, with 80% of customers requesting contactless delivery to minimize exposure to the driver. The outbreak also increased the number of multiple-person households ordering food delivery during the period, an anomaly for China, where usually only one-person households make use of a food courier, according to Meituan.
Contactless delivery is a crucial part of the Chinese restaurant and grocery industry response. Pizza Hut and KFC, both subsidiaries of Yum China Holdings, Inc. (NYSE:YUMC), have followed the lead of Chinese services by also launching contactless delivery. Out of approximately 9,000 total restaurant locations, Yum China reports it has temporarily closed 30%, with up to a 50% drop in dine-in sales at the outlets still operating.
The delivery method involves stringent protective measures designed to keep customers from getting an invisible side order of respiratory viruses along with their chicken and dumplings. Restaurants regularly take the temperatures of kitchen staff and include cards with many orders, listing the current body temperature of all food workers involved with a meal's preparation to demonstrate that none of them are running a fever. Delivery drivers wear gloves and masks. The exterior of food bags is sprayed down with disinfectants, and delivery vehicles are also repeatedly disinfected. The delivery driver leaves the food at a prearranged pickup spot, then texts customers after departing the area.
Grubhub's CEO is cautious
Coronavirus' direct impact on the USA still remains uncertain, with a rising number of confirmed cases in Washington State and New York City, and a scattering elsewhere. America currently has only hundreds of cases, rather than tens of thousands, but that could change rapidly.
CEO Matt Maloney says he's watching for opportunities caused by coronavirus. During a late February interview on CNBC, he focused mainly on potential problems such as a drop in the "supply" of drivers, but added that "no matter what happens, we're going to be all over it." He said that with no idea whatsoever on the virus' effects on the American delivery market, the company had no specific response plans yet. It will instead continue focusing on making itself more competitive through programs like the Grubhub subscription-based membership.
In the meantime, Grubhub's response to the coronavirus is purely preventative. To help safeguard the health of drivers and customers, the company issued a set of guidelines on their website. Citing COVID-19 as a cause for extra vigilance, it urged frequent hand-washing, disinfection of delivery bags, and never touching customer food. Additionally, it instructed drivers who felt unwell to stay home.
What is the outlook for virus-driven Grubhub gains?
While the effects of an epidemic are unpredictable, Matt Maloney's caution about expecting significant gains from COVID-19 seems well-founded. While a full-scale outbreak in the USA could edge up sales in a way that's nothing to sneeze at, the differences in population density in the United States and China, to say nothing of the extremely divergent legal, governmental, and cultural framework, make a duplication of the Chinese situation extremely unlikely.
The extreme density of Chinese living arrangements in the major cities means that a single courier can potentially deliver dozens of orders to a single address, such as an apartment building. Large-scale quarantines and bans on internal movement, like those imposed in China, are probably legally and politically impossible in the USA. Additionally, many Chinese deliveries are actually grocery deliveries, with food preparation then occurring in the home, which drives delivery numbers higher.
The added precautions needed to make contactless delivery feasible in the USA would likely tone down profit from a coronavirus-driven surge in off-premise orders. With the population more spread out, delivery efficiency couldn't match the Chinese model. While the virus might win Grubhub extra sales for a few weeks, or perhaps a month or two, Fools investing in restaurant stocks should be cautious about expecting a large, permanent improvement in share value from coronavirus, at least until signs of real gains appear.