In this episode of Industry Focus: Tech, Dylan Lewis and Motley Fool contributor Brian Feroldi discuss the meal delivery space in general, including Uber's (NYSE:UBER) reported plan to buy Grubhub (NYSE:GRUB). They provide a bit of background on the two companies, their current operational metrics, and what the future holds. Get some details about the deal and what it means for the shareholders, customers, and other stakeholders and much more.
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This video was recorded on May 15, 2020.
Dylan Lewis: It is Friday, May 15th, and we are talking about Uber's reported plans to buy Grubhub and the meal delivery space. I'm your host Dylan Lewis, and I'm joined by Fool.com's "just OK" Brian Feroldi. Brian, you put that in there, I didn't put that in the outline.
Brian Feroldi: This is how the people know me; I have to be consistent, right? [laughs]
Lewis: [laughs] That's right. That's a long-standing joke between Brian and I. Brian is exceptional. And I think anyone who watches the Member Livestream that we have, knows that he's been an absolute star on that. Brian --
Feroldi: -- not according to what you just read, Dylan. According to you, I'm just OK, and I'm happy with that. [laughs]
Lewis: It's the danger of a direct quote. So, Brian, you know, we talk stocks. Sometimes I have you come on and we pitch stocks to people. And then every now and then news happens that is just so fantastic to talk about. And in this case, earlier this week we got news that Uber is in talks to buy Grubhub at a roughly $6 billion valuation. In some ways, a surprising piece of news, in some ways, not a surprising piece of news; we're going to kind of explore all of that on today's show. But Grubhub is a company that you're very familiar with.
Feroldi: Yeah, we actually did a deep dive on this company or semi-deep dive on this company in June of 2018, believe it or not, almost two years ago, [laughs] boy! Did that go by fast. And we got reports that something like this may have been happening in January of this year. So, this seems to be much more serious now, given the reports we've seen so far. But Grubhub, for a little while there, for a couple of years there, was a Wall Street darling, growing like crazy, profitable. I actually was a shareholder for a couple of years, but the last, let's say, 18 months haven't been nearly as pretty. So, I was a little surprised to see this news, but I wasn't shocked.
Lewis: Yeah. Let kind of dig into the history on Grubhub, because this is a company that I've followed a little bit. I actually pitched it, I think, I went back and looked at it, it was in a roundtable in 2014. So, based on the cost-basis back then, that actually would have been a pretty decent pick, but depending on when you decided to buy the shares, if you're a shareholder, you might not be as happy with the company's performance.
This company goes back a lot further than I think most people think of modern food delivery and the app-based food delivery economy.
Feroldi: Yes. So, Grubhub, as it goes today, was founded in 2004 by Matt Maloney, who is still the CEO to this day. I love the founding story here. So, he is a coder and he was going home from work and he wanted to get a bite to eat and he asked himself, why do I still have to use a phone and carry paper menus in my house to place an order at a restaurant, it just seems so archaic. So, he created Grubhub to basically solve his own problem. He wanted to be able to order food fast, quickly and through the website. And that's what he created, and you know, you fast-forward to today, the company has been hugely successful at signing up restaurants and consumers.
And on the surface, this platform just makes so much sense. The consumer gets access to thousands of restaurants and menus, they don't have to place an order over the phone, they don't have to go on hold, they can do everything right through a nice app. The restaurant theoretically wins because they get a full-priced meal and they get to use their kitchen to produce more food. It's in theory a great profit for them; I know we're going to talk about that later. And then Grubhub just takes a commission to, kind of, match up buyer and seller.
So, the company currently has over 300,000 restaurants in its network. It's in 4,000 cities in the U.S. and London. As of last quarter 24 million active buyers and they do more than 500,000 daily active grubs per day; and 1.6 billion in gross food sales last quarter. So, a sizable business.
Lewis: I love that, the daily active grubs. I think that [laughs] that's such a great internal non-GAAP metric, that's a fun little nickname for things. And this is a business that I think in the last maybe two months, if you didn't know about Grubhub, you're probably aware of it now.
Feroldi: Yeah. No surprise, right, people are stuck at home. I know that we are ordering out more than ever before. So, these guys had a huge uptick in the number of daily active diners. That makes complete sense. They are one of the market leaders, so completely understandable why daily active diners has just skyrocketed.
Lewis: I think Grubhub's management is the owner of what might be one of the most interesting pull quotes I've ever seen in a conference call, in an earnings conference call. And I think it was within the last year their management team found that their users and diners were "promiscuous" [laughs] and they were not loyal to simply Grubhub as an app. And that quote really speaks to what is going on in the food delivery space. What we have seen over the last 10 years is, you know, Grubhub came out in 2004, came out to this huge advantage, because there weren't really a lot of players there and they really dominated food delivery for a really long time. A lot of people have looked and said, you know, that's a pretty interesting market, we're going to hop in there too.
Feroldi: Yeah. And throughout this company's history -- it has known since basically day one that this would likely be a winner-take-most market. So, it actually has been very acquisitive overtime. I mean, it has a number of different properties under its Grubhub name. So, they've purchased Seamless, LevelUp, Eat24, AllMenus, MenuPages. So, that's been a big part of the company's strategy over time.
And I was under the impression that being the top-dog would be a huge competitive advantage. To your point there, boy! Has that not been the case recently. We've seen so much competition come in from the likes of DoorDash, Waitr, Uber Eats, Postmates, Caviar. So, this is a very competitive market.
Lewis: It is. And I think that if you look at market share over time for Grubhub, it really tells a story. I mean, they own the space. Their market share in 2018 was over 50%; and that's because they were the first one there, they were the big player and, kind of, the OG if you're thinking about the delivery food market. They had basically a 10-year lead on Uber Eats and DoorDash, and then things started getting a little bit crowded.
They are not the market leader, really, in the same way anymore. And this space is actually quite similar to the ride-hailing space that Uber is currently operating in, where it is brutally cutthroat, and for a long time you've had a lot of private companies that were essentially subsidized by venture capital dollars and able to very aggressively market to try to eat away at the legacy players.
Feroldi: And that has worked, that strategy has completely worked. You look at the Caviar and Uber Eats, in particular, those guys have come in, in a big way, signed up restaurants and just stolen a huge chunk of Grubhub's market right from underneath it. And full disclosure, I was a shareholder for several years, but I exited a couple of months ago prior to this buyout speculation, because I just felt that I was completely wrong about this company's competitive advantage. I thought that they had a really strong position, but the promiscuous quote came back to bite them, that's exactly what we've seen over the last couple of months.
Grubhub has had to invest hugely in marketing and sales to, kind of, keep it top-of-mind with consumers. So, that just has eroded profitability. This company used to be highly profitable; last quarter it actually reported a net loss.
Lewis: So, Brian, I think maybe we shouldn't have been so surprised about this given the history of Grubhub being fairly acquisitive, but also, we have seen speculation about more consolidation in the space for a long time.
Feroldi: Yeah. Again, throughout Grubhub's history, it has been highly acquisitive. So, it's purchased its way to growth. So, that, kind of, tells me from the outset that this is a market that will naturally, eventually go toward one or two big players. I mean, how many apps do you want on your phone to order food? I would just want one, personally, and I know that millions of other people feel the same way, but there is apparently, consumers are very willing to do two or three apps, and they're very price sensitive. So, that surprised me.
But you know, this last year Square made the smart move of selling its food delivery service Caviar for $410 [million] to DoorDash; that should have been a big signal to me [laughs] that maybe this business isn't as great as I thought it was, but I wasn't smart enough to take that as a clue. But, yeah, we've seen a lot of M&A in this sector, so I put a lot of belief behind Uber is serious about this offer and that a deal will probably eventually happen.
Lewis: So, I'm just going to hop in there and say, it was $410 million, that Square Caviar sale. [laughs]
Feroldi: Did I say billion?
Lewis: No, 410 period. [laughs] Which would have been a very large writedown for Square given that they bought Caviar for $90 million in 2014. But you look at that it's like, you know, Square with that sale, might be one of the few people to be making money in meal delivery, [laughs] having sold something for about 4X what they paid for it. So, that wound up working out fairly well to them.
But we've also seen the other apps out there. You know, we talked about the private players. Postmates is one of those names, and there were rumors in 2019 that they were exploring a sale to either Uber or DoorDash rather than going public. I think a lot of the companies here are, kind of, just waiting for the music to start, so they can start playing musical chairs, because they all kind of know what's happening.
Feroldi: Yeah. I think they all, kind of, understand at this point. I mean, again, it's really telling that last quarter, Grubhub, theoretically, you couldn't have peered a better environment for Grubhub with basically every restaurant in America forced to go to delivery and takeout, and yet they still couldn't post a profit because they were spending so heavily. So, it's kind of the Goldilocks scenario [laughs] for them right now. So, I think that consolidation is inevitable in the industry. The question is going to be at this point, price, how much are they willing to accept? And equally as importantly, what do regulators think about this? Because this isn't exactly a slam-dunk on the regulatory side. We've actually seen a lot of pushback from states and cities.
Lewis: Yeah, that's right. And like, I can understand that [laughs] because, you know, if you're talking about the thesis being a one-winner-take-all kind of market, what that ultimately means is that the prices that people have gotten used to paying for this aren't probably going to stay where they are, you know, they're going to go up. And that speaks to, kind of, one of the systemic problems with this market where it doesn't really seem like anyone is making money and it doesn't really seem like anyone is happy with the current arrangement. You know, you look at the restaurants, and those are businesses that have razor-thin margins to begin with and Grubhub and several other of these delivery apps have caught a lot of flak recently for the percentage of sales that they're taking from these restaurants who often are mom-and-pop shops and don't have a lot of money to spend to begin with.
And so, you know, restaurants aren't happy, the delivery apps, to your point earlier, aren't profitable, and maybe the only folks that are happy right now are the customers, because they're able to [laughs] play between a whole bunch of these different apps and just go with whatever's cheap. But I have to think that there's consolidation and that means that ultimately customers are going to be paying more, and that's the kind of thing that regulators tend to pay attention to.
Feroldi: Yeah, the market will rationalize itself. But to your point about this not being well worked out for restaurants. On Grubhub's platform, we've seen commissions as high as 40% based on some sales. And you know, we've seen a number of municipalities really start to push back against that. Actually, New York City just passed a bill that caps delivery fees. We've seen the same thing happen in San Francisco and Seattle, other restrictions are already in places in Chicago, in L.A.
I mean, obviously, this is not great news for Grubhub, and they're pushing back and saying this is killing innovation, and, you know, they can't operate on these levels. And what we're seeing is, these municipalities are putting in saying that there can only be a 15% markup on deliveries, on that. And if they do that, you take the economics that already don't work and you make them really even more challenging.
So, if that happens, you know, what does Uber think of that, does that give them huge leverage to really push down the price? We don't know. So, a lot of question marks.
Lewis: Yeah. And I think that anyone that's not familiar with the story with Grubhub and these delivery apps and the fact that they caught should check it out. I mean, it's worth looking into -- I know Fool.com's Evan Niu has done a lot of writing on this, it's a space that he covers pretty closely. But there are operational things that these companies do that warrant commissions.
And then there are tactics that some of them have used that are, I think, beyond the pale. And one of the ones that caught a lot of attention recently was, you know, these apps basically putting websites together that looked quite a bit like the restaurants' websites and were almost masquerading as the restaurants' websites and, you know, complete with phone numbers that were actually Grubhub or DoorDash numbers or what have you, but routed to the restaurant. And the delivery apps were collecting a commission on every call going in regardless of whether those calls actually led to sales. And very often these were, you know, $5 or something like that for every single call. And some of them were just informational questions, you know, people being like, "Do you have Crab Rangoon?" [laughs] And you know, for a restaurant to have to pay $5 for that is clearly not fair.
And I think, as is the case with a lot of gig economy-type businesses, these businesses have innovated very quickly and maybe asked questions second. And we're seeing now, when they're, kind of, on full display that there are some cracks in how they've been operating.
Feroldi: Yeah, these things only work if all of the major stakeholders benefit from them, right? So, it only works if consumers are happy, restaurants are happy, and drivers happy and Grubhub is happy. From what we've seen thus far, Grubhub and some others are doing a bad job at kind of balancing out those stakeholders. So, yeah, that's another reason why this market is just going to be challenging.
And I think, again, consolidation. I think there is a market here, people clearly want to order from home, people clearly like the convenience. What the ultimate pricing works like and what the economics look like? That we're not nearly as sure about.
Lewis: Yeah. And it solves a problem for restaurants. I mean, it's expensive for restaurants to have a dedicated delivery person running orders and it's probably inefficient. The idea is that a platform can probably do this better, probably do it more efficiently, but it also needs to be something where the restaurants are able to continue to make money, especially the smaller ones who don't really have access to a lot of capital to begin with.
We talked about some of the terms of the deal here with Uber and Grubhub, but I think it's worth digging into it a little bit. That sticker figure that you're going to see heavily reported is a $6 billion deal. And, Brian, that's actually a pretty sizable premium from where Grubhub was prior to all this speculation. As you mentioned before, the stock had fallen off quite a bit over the last year or so.
Feroldi: Yeah, I'm curious where that number was actually compared to Grubhub's all-time high. So, give me a second while I look that up, [laughs] I wasn't prepared to go backwards, Dylan.
Lewis: [laughs] Well, and as you look that up. I mean, I think, prior to this announcement coming out, the company was trading at somewhere north of a $4 billion valuation; it might be like $4.2 billion or $4.3 billion. And so, a $6 billion deal winds up being, you know, high-30%, maybe low-40% premium.
Feroldi: Yeah. So, if you look at 2018 when this company was just trading at its peak, it fetched the market cap of over $13 billion. So, in less than 18 months, if they're going to be -- if $6 billion is the true number, boy! Is that a big haircut in a short period of time, and it shows you that they, kind of, realized that things have changed.
Lewis: Things have changed. And you know, the market cap for that company is probably going to track with its market share to some extent. You know, talking about the importance of being the winner, in a winner-take-all market, you know, as we start to see some vulnerabilities there and other people hop in, it's only natural that that valuations is going to come down a little bit.
One of the other interesting elements of this is that this is a stock-for-stock deal. And so, while we're seeing that $6 billion sticker figure, what the real negotiations are here are how many [laughs] shares of Uber are Grubhub shareholders going to be getting in this deal? And I think I've seen Grubhub pushing for 2.1 shares of Uber, and Uber saying, 1.9 feels a little bit more accurate to us.
Feroldi: Yeah. And just for a sense of scale, Uber's market cap currently is about $55 billion. So, this is a sizable bite for them if in fact, that does come to pass, that's going to be about a 10% dilution for shareholders. I still think it makes sense, but that's just something to keep in mind.
Lewis: Yeah. And if you're thinking about Uber's overall business. You know, this is sort of a ride-hailing company first-and-foremost, the meal delivery part, Uber Eats, is something that they've rolled out over, I think, the last four years -- I'd have to check that -- but it is much younger, and is a much smaller part of their revenue contribution. This would be a pretty big commitment for Uber saying, we're getting into this market and we're getting in, in a really big way, this is going to become a much larger part of what our financials look like.
Feroldi: If they want to own the market, I mean, this deal just makes sense. And I do think -- I know that this is a big growth avenue for them, and we didn't touch upon this yet, but in previous conversations, Grubhub's management team has basically estimated their total addressable market opportunity at about $200 billion in gross sales. So, that's a really, really huge market.
If this deal goes through and Uber can successfully use its network and its vast network of drivers to really make this model work, that's a big revenue opportunity that Uber could be going after.
Lewis: Yeah. And it's worth noting here, I mean, Uber is also not profitable, they're not bringing money in. [laughs] And they do actually have a decent amount of cash on the balance sheet. If you look over, I mean, they have just short of $9 billion in cash and short-term receivables, long-term debt is short of that. So, you know, if you're looking on a long-term debt basis, they do have a positive net cash position. But the stock-for-stock deal obviously signals, they'd rather hold on to the cash.
Kind of interesting though, they put out a $900 billion [million] (sic) convertible bond offering recently. So, perhaps they are trying to bolster their balance sheet a little bit ahead of this. And that seems to me, to lend some credence to the fact that these are some pretty serious conversations that they're having.
Feroldi: Yeah. And then the financials for that convertible bond offering, they did note, it could be used for acquisition purposes. So, yeah, again, just another sign that this deal should be taken seriously. And probably you can understand why both Uber and Grubhub are interested in this. But, again, the big question mark here is, what do regulators think? That is an unknown.
Lewis: [laughs] Yeah. And the last piece of news. You know, we talked about how New York City and some other municipalities have talked about putting out some new guidelines for delivery apps, we talked about this deal. The other piece of news related to these companies this week that I want to touch just quickly, Brian, is Uber provided updated policies for maintaining customer and driver safety during COVID, and so beginning in just a few days, May 18th, a maximum of three riders will be allowed in an Uber, and passengers cannot ride in the front seat. I believe all drivers and passengers are going to be required to wear masks.
I'm actually surprised that this just came out. Is it just me or is that like a little late? [laughs]
Feroldi: What took so long, my goodness? And I wish they would just always make a blanket statement about passengers not allowed to ride in the front seat. I never know what to do when I'm about to get in one. I'm like, do I be rude and sit in the back or is it rude to sit in the front? So, I like that they have a policy, just seat in the back.
Lewis: Just sit in the back. Yeah, I think this is a no-brainer, and hopefully something that people don't have too much of a problem abiding by. I mean, the only reason you need to be in the front seat, Brian, is if you're riding with four people, and based on this new policy, only three. So, even that number seems a little high to me.
I see the folks out on the scooters in DC still, and the idea of sharing a scooter, given everything that's going on in the world, it's not something that I'm too keen on.
Feroldi: I can't imagine being in Uber with three people plus a driver right now. That seems a little nuts too, so. But, hey, I mean, boy! Their business has really been impacted by this. So, they got to do something.
Lewis: They got to do something, and maybe that's why they're looking to this meal delivery option as well. You know, it might be for Uber saying, this is a chance for us to diversify a little bit away from something that is pretty prone to being disrupted by the pandemic. And you know, this, meal delivery, while there are a lot of issues going on with the meal delivery market, clearly something that's pretty essential for a lot of people right now.
Feroldi: Yeah, exactly.
Lewis: Brian, I think we're going to wrap our taping right there. Thanks so much for hopping on the show with me.
Feroldi: Always great to be here, Dylan.
Lewis: [laughs] Even if you're "just OK," I thought the episode was great.
Feroldi: [laughs] What's that, Dylan?
Lewis: Listeners that's going to do it for this episode of Industry Focus, if you have any questions, if you want to reach out and say, "Hey!" shoot us an email over at IndustryFocus@Fool.com or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes or wherever you get your podcasts, Stitcher, Spotify, you name it, we're there.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for all his work behind the glass today, the metaphorical glass, he's sitting at home. For Brian Feroldi, I'm Dylan Lewis, thanks for listening, and Fool on!