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More Consolidation in the Food Delivery Industry Will Likely Only Hurt Local Restaurants

By Evan Niu, CFA – Jun 13, 2020 at 10:00AM

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Food delivery companies will only get stronger, likely hurting your favorite local restaurant.

Following months of speculation that Uber might acquire GrubHub (GRUB), the latter company has decided to instead merge with European food delivery company Just Eat (JTKWY 2.99%). The prospect of Uber Eats combining with GrubHub had already started to garner pushback from lawmakers over anticompetitive concerns.

Unfortunately, more consolidation in the global food delivery industry will likely just hurt small local restaurants.

Person using GrubHub app on a phone

Image source: GrubHub.

How the deal is structured

By acquiring GrubHub, Just Eat is looking to expand into the U.S. market while creating the largest food delivery platform in the world outside of China. The deal is structured as an all-stock transaction, with GrubHub shareholders receiving American depository receipts (ADRs) representing 0.671 Just Eat share per GrubHub share.

Based on the value of Just Eat Takeaway's shares at Tuesday's close (before the companies acknowledged they were engaged in merger negotiations), the deal values each GrubHub share at $75.15, translating into a total equity valuation of $7.3 billion. GrubHub investors will own roughly 30% of the combined company after the transaction closes. Investors appear somewhat skeptical about the deal, as Just Eat stock has declined following the announcement, which in turn reduces the implied value of GrubHub shares.

GrubHub founder and CEO Matt Maloney will join Just Eat's leadership team and be in charge of the business in North America. Just Eat also already owns SkipTheDishes, a leading food delivery platform in Canada.

The combined company will have an estimated 71 million active customers across 25 countries, with over 360,000 partner restaurants across its platforms.

Is a combined company a good thing?

Food delivery tech companies have been under fire recently, with criticism mounting that the platforms charge exorbitant fees that hurt small local restaurants. GrubHub has been accused of inflating its commission rates by setting up websites and phone numbers on behalf of restaurants without their approval, charging fees for nonexistent phone orders while extracting higher commissions from website referrals.

Consumers have filed a class action lawsuit against numerous platforms on anticompetitive grounds, alleging that the major companies abuse their market power and that the higher fees will be passed along to consumers in the form of higher prices. Non-partner restaurants have also filed a separate class action lawsuit alleging that GrubHub falsely claims the eateries are closed in an effort to nudge consumers toward ordering from a partner restaurant.

GrubHub has leveraged numerous acquisitions and mergers throughout its history to become the dominant force it is today. More consolidation in the food delivery sector will only give the leading platforms even more market power, inevitably to the detriment of mom-and-pop restaurants that are struggling to survive during the COVID-19 pandemic.

Despite all of the alleged questionable business practices and past consolidation, GrubHub posted a net loss of $18.5 million in 2019 -- before the coronavirus outbreak escalated into a global crisis -- in part due to lavish spending on marketing and incentives. Just Eat reported a net loss after tax of 115.5 million euros last year, or about $130 million based on current exchange rates. GrubHub and Just Eat say that the combined company will be "one of the few profitable players at scale in the space."

That may not be so easy for an industry notorious for burning cash raised from investors, oftentimes through promotions to grab customers that aren't necessarily loyal to any platform. For example, privately held peer DoorDash is reportedly preparing to raise several hundred million dollars in a new funding round with mutual funds after losing an estimated $450 million last year. 

The latest merger is expected to close in the first quarter of 2021.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GrubHub Inc. Stock Quote
GrubHub Inc.
Just Eat N.V. Stock Quote
Just Eat N.V.
$3.10 (2.99%) $0.09
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$26.50 (0.30%) $0.08

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