Meal-Delivery Space Consolidates Further

In this episode of Industry Focus: Tech, Dylan Lewis chats with Motley Fool contributor Brian Feroldi about the latest news from Wall Street. They discuss further consolidation happening in the meal-delivery space and how it will impact the companies, restaurants, and consumers. Also, a social media giant might go the subscription route, and much more.

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This video was recorded on July 10, 2020.

Dylan Lewis: It's Friday, July 10, and we're talking about more consolidation in the meal-delivery space and a potential subscription offer from Twitter (TWTR). I'm your host, Dylan Lewis, and I'm joined by Fool.com's head honcho of ho-humness, Brian Feroldi. [laughs] Who had thought that your title would be the part that I would say cleanly on that introduction? [laughs]

Brian Feroldi: [laughs] I had a very productive vacation last week, Dylan. I thought of new titles for myself to keep you busy.

Lewis: I'm a huge fan of alliteration; I think it leads to some fun. It reminds me, for any viewers of BoJack Horseman, of the type of dialogue and thoughts that go into that. Brian, fun stuff going on in the news this week. We got some interesting stories that are really covering spaces we've talked about so many times. This is now going to be the third time we've talked about the meal-delivery space, in as many months, and that's because, as we thought consolidation has happened; though perhaps not the way that we originally expected it to.

Feroldi: Yeah, in this case, we finally got the news that Uber (UBER -2.81%) is making a move to bolster its Uber Eats property. A few weeks ago, we were talking about the potential rumors for Uber to be buying Grubhub (GRUB). It turned out that Just Eat Takeaway.com came in and swooped away from Grubhub for about $7 billion, away from Uber, but Uber appears to have got some redemption earlier this week.

Lewis: Yeah. They agreed to buy Postmates in, what is roughly a $2.5 billion deal. Brian, I think Just Eat Takeaway.com is very close to head honcho ho-humness in terms of mouthful-ness [laughs] and toughness to get through. For people not familiar, Just Eat Takeaway.com is primarily in Europe, they're in some other markets as well. So they scooped up Grubhub for over $7 billion, as kind of a way to enter the U.S. market. And I think, looking at the last couple of weeks, if you're Grubhub, this worked out pretty well for you. The original considerations were Uber possibly buying Grubhub for about $6 billion; they wound up getting even more than that from this foreign investor.

Feroldi: Yeah, they ended up squeezing out a $7.3 billion valuation; so, kudos to them for hanging in there, toughing it out, and squeezing out, hey, an extra, basically, $1 billion for their shareholders.

Lewis: Yeah, nothing to sneeze at there. I'm sure the shareholders are happy. With Uber, that kind of put them in a spot where they did not have a dancing partner. And we were kind of operating under the assumption that there was going to be consolidation in this space for a long time. It seems like the economics would only support a more consolidated meal-delivery market.

We got the news this week that they are buying Postmates for $2.65 billion. This is an all-stock deal, supposed to close in Q1 of 2021. And as I understand it, they are going to be operating two independent stand-alone apps. So it's not like all of Postmates is immediately going to be folded up underneath Uber Eats. The plan is for these two things to continue to operate on their own. We have leadership from Postmates staying on. In some ways, a little bit of a bolt-on acquisition, although there are clearly some synergies here, Brian.

Feroldi: Yeah, and that's the plan as it exists right now; you never know what's actually going to happen once two cultures are mixed together. It's possible that Postmates and Uber have such different cultures that the CEO of Postmates -- he's decided to stay on, or at least he says he's going to for right now, it's possible that might not be the case over the long term -- but I do like the fact that Uber is allowing Postmates to operate independently; Postmates is having some success that Uber doesn't appear to want to mess with -- at least on the consumer-facing side. So I like that decision.

Lewis: Yeah. And as is always the case, when we get an announcement for a deal, this is subject to regulatory approval. And so, the regulators are going to be taking a look at this one, and I think this is probably a more palatable deal than had Uber Eats bought Grubhub. When you look at the way that market share plays out in the space, and we can kind of dive into that a little bit more, but I think that there's probably going to be some questions around, you know, is this the most competitive thing? Is this fair? I believe the consolidated Uber Eats-Postmates business would be about 35% of the overall meal-delivery business, but it would still be second place to DoorDash.

Feroldi: Yeah, I don't think regulators will give this too much scrutiny. As you mentioned, DoorDash, which acquired Caviar a few years ago, away from Square, is currently the market share leader. Kudos to them for doing so. They have really taken market share over the last couple of years, both organically and through acquisitions. But DoorDash is currently the No. 1 player with a 45% market share. Uber Eats is currently 28%, and Postmates is 7%. So them tying up would only be the No. 2 player. If they went ahead with Grubhub, Grubhub is currently 17%, so that would have pushed them to No. 1. So I don't think regulators would give them much pushback here; but who knows, they're regulators.

Lewis: [laughs] It's worth emphasizing, as you run through that list of all the different people playing in the space, how dramatically it has changed over the last, we'll say, five or six years, because if you were to have looked at market share, well, say, in like 2015, 2014, I think Grubhub would've been the runaway winner.

Feroldi: Yeah, that's correct. Grubhub was the top dog in the space for many years. They were also happy to make acquisition after acquisition and to consolidate their leadership position. That's when I became a shareholder, a couple years ago. I thought that they had an unassailable lead, but as we've talked about on the show before, boy! Did I get that wrong, and boy! Has Uber Eats and DoorDash really taken a significant amount of market share away from them over the last couple of years.

Lewis: Yeah, I think there's a good lesson there in, like, even if you're a market leader, if there's someone who is willing to light money on fire [laughs] to disrupt your business, it's going to be really hard to maintain that position. And that is, kind of, the interesting element of this market, because, you know, Grubhub was a public company, and the incentives are going to be a little different for a public company. Businesses that are venture backed are private, are still in hypergrowth mode, like DoorDash was. I think venture capitalists are going to be willing to let them accumulate market share on the prospect of making it up on volume at some point and then being able to raise prices as they control a market, a little bit more than maybe some public investors would be for a stock that's on the exchanges.

Feroldi: Yeah. And that's something we've talked about in this space before. The economics, at the unit level, really do not work yet. This is a low-margin business for a lot of restaurants. And the prices that these meal-delivery companies are charging really challenge the economics of the entire structure. So with so many competitors out there, each vying for market share with VC funding, as you pointed out, just willing to burn and burn and burn through capital in order to capture market share, consolidation was inevitable. But even with this consolidation, it's still hard for me to [laughs] call this market attractive as an investor given that the economics are still very challenging.

Lewis: Yeah, I think it's kind of curious that if you look at where DoorDash is now, they just raised about $400 million for an implied valuation of about $16 billion. Well, if you go back and look at Grubhub at peak, and this is when there was more competition coming into this marketplace, they were worth just over $12 billion. And so the industry leader, in an industry that we're talking about all these problems with, is already eclipsing the valuation for what was the industry leader. History doesn't always repeat itself, but it does tend to rhyme, Brian. [laughs]

Feroldi: Yeah. And to Uber's credit here, I'm sure they're assuming that there will be synergies and they would be able to capture ever more market share by going through with this deal. And Uber Eats has really been kind of a star for them in the last couple of months with their traditional ride-hailing business under so much pressure due to COVID-19. But Uber Eats itself is growing fantastically well; over a 100% revenue growth year over year in the most recent quarter, and it's starting to account for a sizable portion of Uber's overall revenue. You know, ride hailing is still the lion's share of Uber at 75%, but Uber Eats is quickly catching up to over 25%. And if this deal goes through, it could, at least according to the CEO, accelerate their ability to get to profitability. He made that very clear, as part of this deal, that they're going to get to profitability next year. Now, he didn't go into details about what profitability means, [laughs] because profitability means different things to different people, and Uber's financials right now suggest that they are nowhere close to profitability. I mean, $14.5 billion in revenue over the last years, and operating loss was $8 billion. So that's a heck of a lot of ground to make up in less than a year.

Lewis: Yeah. And for the most part, that cost is getting eaten away with research and development and what we're seeing in terms of SG&A, which is, you know, for the most part going to be their administrative stuff, but also their marketing. R&D, obviously a huge part of this business, because for all the different places they're playing, autonomous driving is an important tailwind and will dramatically change the way that these businesses operate, might even make them financially feasible.

Feroldi: That's possible, and Uber is putting capital behind that, but I view the autonomous-driving network as a massive threat to these companies. I mean, Uber has relied historically on humans to drive back and forth. Once an autonomous vehicle network is out there, why would a company like, say, Tesla, which is pushing toward this, why would they need Uber as a third party? Why couldn't they just offer it themselves. You could say a very similar thing for Waymo, which is Google's [Alphabet] autonomous taxi service that's out there. So Uber has to put money into these programs if they hope to compete. And from what I've seen, they're still pretty far behind in that race. So I view this as a massive long-term risk to the business.

Lewis: Yeah, they have to put the money there. And when you look at the people they are competing with, I mean, you know, Alphabet doesn't need to win autonomous driving; at least the way that I look at their business right now and the way that I look at the thesis. You know, you could argue that Tesla might need to win autonomous driving, but they make great cars that people seem to really love. So they can probably continue to thrive, even if they aren't the first person to autonomous driving. They have the brand strength there. I think ride hailing hinges on being able to be at the forefront of whatever people are doing.

Feroldi: I think that's completely right, which is, one big reason why I have just steered clear of Uber and Lyft since they've come public, to say nothing of the challenging economics [laughs] they're already facing.

Lewis: Yeah, it's a tough landscape on all fronts. I look at this and I think this is a very hard business. And it doesn't really matter which way you look at it, whether it's ride hailing or the meal-delivery stuff, it's tough. I think at least with this acquisition, they are committing to diversifying out their revenue streams a little bit, moving away from being so reliant on ride hailing, which is important given how disrupted that business has been by COVID-19. They've seen a huge drop in the number of rides, and really what's going on there.

I think it's worth looking a little bit at the Postmates side of this and what it brings to the table. We don't have a ton of information on that, Brian, but what I have been able to put together is that this business did over $100 million in revenue in Q1 2020, likely benefiting from a little bit of a spike related to, kind of, the anticipatory parts of COVID, people beginning to stay at home, being a little bit more resistant to going outside. They offer Shopify and Square integrations so that people can work delivery into their businesses, which is kind of cool. I think that that's kind of an interesting element of this. And one thing that I think, kind of, gets missed when we talk about Postmates and some of the optionality within the meal-delivery business is we think of Postmates as food delivery, but it also has this delivery-as-a-service element to it.

And in addition to, I think, what you and I recognize as -- you know, we order something, they are on the hook for bringing it to us, and we're ordering it through them or using them, and very obviously using them. They also have this white-label delivery-as-a-service option. And so, if there are retailers that want to offer very quick delivery, possibly same-day delivery or next-hour delivery, something like that, Postmates offers that, and it's within the skin of that retailer; you almost don't even realize you are using Postmates. And so this is something that is really helpful for last-mile, really helpful for getting stuff to people quickly without those businesses having to build out the infrastructure themselves.

Feroldi: Yeah, that's a very attractive part of this acquisition, and probably the thing that pushed Uber over the edge here. So their delivery-as-a-service retailers can partner with Postmates to provide, as you said, same-day delivery of certain items within a local geography. And if I was a retailer, I would find that to be incredibly attractive to help me compete against Amazon or Walmart, which are pushing very hard to up their delivery game. And if I could offer same-day delivery on items in my store to, say, within a few miles of my store, that can help me to fend off that competition. And Postmates is a company that does just that.

And it's also worth pointing out that last week, Uber made a push into this market too. They launched their Grocery Delivery, a grocery delivery service in both Latin America and Canada, and they did say that the U.S. will be following on there. So that, to me, is a natural extension of Uber's network as they exist today. And that should excite you if you're an Uber shareholder. So helping and partnering with small or even big retailers that want to add this service, to me, is a great use of their networks.

Lewis: We've talked a lot about how this is a tough market, and that's why, I think, I've stayed out of it, it seems like that's why you've stayed out of it. It's worth emphasizing that these are challenges that Uber is going to have to fix. And then Just Eat Takeaway is probably going to have to fix it in the United States. DoorDash is going to have to work through this too. It doesn't really matter who's operating. The reality is, you have a lot of companies that are jockeying for control. Almost all of them are losing money. The restaurants are operating on [laughs] pretty thin margins and they are paying pretty heavy fees in order to get their food delivered. The relationship between restaurants and these meal-delivery apps are... frenemy, maybe might be the most generous way to put it, you know. There are some practices that these apps do that are not very restaurant friendly, and that continues to be a story here. And the people that are actually doing these deliveries aren't getting paid enough. So it's not really worth their time either. I don't know what the magic bullet is for making this work. I think maybe we're closer to the economics being better, because there are less players. But ultimately, I think that means prices are going up.

Feroldi: That's exactly right. I think they're going to have to eventually. Consumers have basically been subsidized by venture capitalists for years and they're used to it. And it's hard to judge what kind of impact that would have on demand if fees, all of a sudden, rose sharply. You can say the exact same thing for the ride-hailing business too. From what I've seen, the economics there are not all that great either. So it's possible that fees might have to rise for consumers on that side of things too. How does that ultimately shakes out? It's really hard to say right now, but I do believe that consumers value these services and that they should exist. What that market looks like and what the end price is for consumers versus what they are today, that's really hard to see.

Lewis: Yeah. And I'm curious, Brian. We knew that consolidation was going to happen, this was kind of an inevitable part of this business. I mean, almost everyone in the business was talking about how it was going to be happening. You can parse different management commentary and see that this was going to be something happening over the course of 2020. Do you think this is it? Do you think we've gotten to the point where all of the players are the players, and it's going to be these big three, it's going to be DoorDash, the combined Uber Eats plus Postmates, and then Grubhub with the backing of Just Eat Takeaway. Or do you think there's more activity to come?

Feroldi: More activity to come wouldn't surprise me. Again, as we've pointed out, the economics do not really work currently. So that's going to tell me that consolidation is going to continue to happen until they do work out. So it wouldn't surprise me to see even more consolidation in the future, but I think we're closer to the end than we are to the beginning right now. [laughs]

Lewis: [laughs] That sounds grim for this futuristic and wonderful space that we're watching. I mean, that's convenient. If nothing else, it's convenient; we'll give it that.

All right. The second news item that we want to talk about, Brian, is Twitter potentially rolling out a subscription element to its service or its platform. We are, kind of, operating on very little details here, but every now and then a job posting goes up in the tech space that raises some eyebrows, and that was the case this week.

Feroldi: Yeah. So Twitter put out a job posting for a senior full stack software engineer to be part of a new team, which is code named Griffin. And Twitter said that it's building out a "subscription platform," one that can be reused by other teams. And this is a first for Twitter! So you know it's a big deal, right? [laughs]

Lewis: [laughs] Yeah. And, you know, I love -- like, I think one of my favorite parts of the tech industry is seeing how people look at career postings, look at LinkedIn profiles, and try to understand where businesses are going. This is such a large part of, kind of, understanding the stuff that's under the hood that maybe we don't get a lens into otherwise.

And this is a particularly interesting one, because we've seen some traction for this type of offering out in the wild. It's not like other platforms haven't explored subscription options. Twitter hasn't, but it isn't exactly sure what it might look like, it's not necessarily that we'd be paying to use Twitter rather than being ad supported, but it does seem to offer some interesting monetization opportunities.

Feroldi: Yeah, the posting did say that it's going to be working -- collaborating closely with the payments team at Twitter, which payments and Twitter might make a whole lot of sense, especially with Jack Dorsey also happens to lead a company called Square that knows a little something about payments. We've seen, kind of, a whole bunch of reports out there that are speculating on what this could mean. Could it allow Twitter power users to monetize their followers, kind of, like Patreon or Substack? That could be interesting. Could it be a subscription service that helps marketers are journalists or professionals to gain some kind of additional insight into Twitter or even be verified as real? Twitter shut down its verification program a few years ago, the little checkmark that you get. And I would, personally, love to see that come back, at least, in -- if it wasn't in the same way, in a different way, to help people get verified on Twitter.

But if this report is true and this becomes something, this would help Twitter to build out a third leg of revenue. So currently, they get most of their revenue from advertising; that is the majority lion's share of revenue. And that business has really slowed down with COVID-19. So while the total number of monetizable daily active users, basically people that are capable of seeing Twitter's ads, rose 24% last quarter to 166 million, revenue only grew 3%. And a big reason because of that was because ad revenue only grew 1%, so that's a mismatch between ad revenue and monetizable users.

Now, the second leg of their revenue is from data and licensing. And that's actually a pretty sizable business. That actually grew 16% last quarter to $125 million, so a not-insignificant part of the total. If they could add a third leg to that, to be some kind of subscription offering, and it had any kind of success, that can really make a bull case for owning Twitter stock.

Lewis: Yeah, I think so. And you mentioned that there are some struggles there with advertising and COVID, but this wasn't exactly a business that was lighting the world on fire with its revenue growth prior to COVID. I think one of the things that has always kept me on the sidelines with Twitter is that, for an ad-based business, cost per engagement has always been falling down. You know, this is kind of one of the core things you look at, because if you're an ad-based business, you can basically move the needle one of two ways. You can show more ads or you can collect more money for every ad that you're showing. Ideally, both of those things are going up.

In Twitter's case, most of the revenue growth has come because they've been able to find ways to create more monetizable activity, whether that's increasing the ad load on the site or getting people to spend more time on the site; which is great, those are things that you want with the platform. Unfortunately, that's been basically covering the fact that their cost per engagement has been down year over year pretty regularly. And that, to me, says that Twitter ads aren't quite doing what they need to do. Advertisers aren't seeing the value. And when you have folks like Facebook and Alphabet's Google out there, they're going to put the money there instead, because it's more effective.

Feroldi: That's always been my problem with Twitter too. I'm a power Twitter user; I'm on the platform every single day. However, I go to Twitter to engage with other people. When I see an ad, it's intrusive, it really subtracts from the experience. And I don't have all of my personal data on Twitter. So Twitter is only using my tweets, I'm guessing, to serve me up ads.

When I compare that to something like Facebook...Facebook, to me, is a much more monetizable platform than Twitter. I could say the same about a number of Google's properties too. This is a big reason why, Dylan, I'm such a big bull on Pinterest. You knew I was going there, didn't you?

Lewis: [laughs] You can't help yourself, Brian.

Feroldi: [laughs] Pinterest is a platform that people go to, and ads actually are a part of the experience, people want to see pretty pictures and use them to take action. That, to me, is a very monetizable thing -- a monetizable platform when compared to something like Twitter or Snapchat [Snap] or even something like any other messaging platform like WhatsApp.

I don't view messaging as a platform that is as easily monetizable as other forms of social networking, but if Twitter can, again, build out a robust subscription platform that makes more use of their audience, that could be something that's worth paying attention to.

Lewis: Yeah. And the financial part of that is true. And I think it does add another interesting revenue stream. And I have to think that subscription revenue, you know, even if they're just taking a little bit of that to facilitate, is going to be relatively high margin for them. That's an easy thing for them to roll out; Jack Dorsey has payments experience and expertise. They're going to find a way to make that work, if they want to make that work.

An important element of this too, I think though is, if you are thinking about platforms, Twitter is a very valuable platform because people that matter are on it, and there are communities that are important. And what we've seen with a lot of major platforms, like, Snap is a really good example of this, you know, Vine is a really good example of this, and Instagram, of course, great example of this is, influencers and people out of clout are going to go to spaces where they can well monetize that clout. And if you're Twitter, I think you want to make sure that people that have huge followings, are tastemakers on the platform, have a lot of tools to make their influence worth their time, because otherwise, they might explore other platforms and some of that network effect that Twitter enjoys could go away.

Feroldi: I think that's a completely fair point, which is why when I heard about that they're integrating so closely with the payments team, I think it's having some, kind of, Patreon-like feature on there where you can tip or provide bits or something like that to your favorite power users, that could be very attractive and really help to bring key influencers back to the platform, because they'd have an incentive to. So this will be a very fascinating story to watch.

Lewis: Yeah. So it could be a financial thing, it could just be a strategic thing, in terms of maintaining their audience, because you know, we've talked about it. The member growth or the user growth for Twitter has not been crazy. They've kind of hit their audience in a lot of the key markets and more or less stayed there. The people that are on Twitter are pretty much always there. [laughs] Like, you know, we're not getting a lot of people going over that hurdle that Facebook has been able to get people to do. And so at that point, you kind of have to work with what you got, you know. All the tools are on the table you got to figure out how to make a valid business out of it.

Feroldi: Yeah, that's completely fair. And, by the way, if you're in the financial community, Twitter has become the platform for communication. So if you're not on there, join. It's actually really good.

Lewis: [laughs] Yeah, Brian, what's your handle?

Feroldi: @BrianFeroldi. What's your handle, Dylan?

Lewis: I am @WilyLewis. And I will say, I'm going to make this note, if you follow Brian Feroldi on Twitter, make sure that you are not following an imitator. [laughs] I know that Brian has run into some issues recently with some folks thinking that his online presence is so fantastic that they just wanted to copy it themselves. [laughs]

Feroldi: Thankfully, that imposter was removed recently, but, yes, you make sure you get my handle. [laughs]

Lewis: [laughs] To your point about verification, though; that's an important thing.

Feroldi: Exactly. I would happily pay to be verified, and get that checkmark. So there you go, Twitter. Monetize me.

Lewis: [laughs] Well, I am happy to have the true and verified, Brian Feroldi on this episode of Industry Focus. Brian, thanks so much for hopping on and helping me.

Feroldi: Thanks for having me, Dylan, have an awesome weekend.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey!" shoot us an email over at [email protected], or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe on iTunes, Spotify, wherever you get your podcasts; we're everywhere.

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 Tim Sparks for all his work behind the glass today. Until next time, guys, Fool on!