McDonald's (MCD 0.23%) and Grubhub (GRUB) are interested in serving hungry customers' needs, but they go about it in different ways. Grubhub connects restaurants with diners through a platform where customers can place orders for either pickup or delivery. McDonald's needs no explanation. The iconic restaurant chain has been delighting customers for decades and now has over 39,000 locations in operation worldwide.
Let's consider if Grubhub's rapid growth provides more value to investors over McDonald's steady profits.
Grubhub is being bought
Importantly, on June 10, Grubhub agreed to be acquired by Just Eat Takeaway.com (JTKWY 0.98%) in an all-stock deal valued at $7.3 billion. As a result of the transaction, Grubhub shareholders will receive 0.671 JET shares, which gave an implied value of $75.15 to Grubhub shares. The transaction is expected to be completed in the first half of 2021.
The sale essentially connected Grubhub shareholders to JET. Both Grubhub and JET are experiencing rapid growth in customer orders in recent months as people order in more often to avoid exposing themselves to COVID-19. Specifically, JET experienced a 46% increase in customer orders in its third quarter. And coincidentally, Grubhub experienced 46% in a similar metric as well.
With the number of coronavirus cases surging in several parts of the world, it would be reasonable to expect order growth to continue on the upward trajectory. While there was positive news on a vaccine, it may take several months or even longer to get enough of the population vaccinated. In the meantime, in-person dining will be slow to recover to pre-pandemic levels.
Meeting customers where they are
Interestingly, McDonald's is primarily a franchisor -- franchisees run 93% of its locations. The choice of business model is one reason the company has sustained healthy margins. In its decades of existence, the company has endured many challenges and become stronger as a result. The challenge brought on by the coronavirus pandemic is another hurdle the company must get through.
In response to the challenge of serving customers while unable to open its dining rooms, McDonald's has put the pedal to the metal on its three Ds (delivery, drive-thru, digital) initiative. Impressively, the company now offers delivery in over 27,000 restaurants worldwide. Coincidentally, McDonald's partnered with JET to enable delivery from 800 of its McDonald's locations in the U.K.
This feature is likely to add incremental sales growth long after the pandemic has run its course -- one example of how McDonald's will come out stronger on the other side of the tragic outbreak. However, one long-term challenge that might evolve from the pandemic is that a higher proportion of the population will be working from home. That will hurt McDonald's sales during breakfast hours when people formerly picked up a coffee and a snack.
Overall, McDonald's is a more profitable company, while Grubhub is growing much faster. Moreover, where McDonald's is hurt by the potential of more restrictions on in-person dining, Grubhub benefits from it.
The near-term tailwind from people's hesitancy to dine at restaurants, combined with the long-term potential for the food delivery business, make Grubhub a better consumer discretionary stock to buy right now.