Should Amazon And GrubHub’s Deal Make DoorDash Nervous?

Key Takeaways

• Amazon Prime members will receive free GrubHub+ memberships as part of a new deal with GrubHub’s parent company, JustEat Takeaway.com
• In exchange, Amazon will receive options to purchase between 2 and 15% of JustEat Takeaway.com, with the final figure dependent on how many new users it drives to GrubHub.
• The market has responded positively to the move, with shares in JustEat Takeaway.com up 12.40% so far this week.

In a move that will demoralize personal trainers across the country, GrubHub and Amazon are getting into business together. The partnership was announced by GrubHub’s Dutch parent company JustEat Takeaway.com (try saying that five times fast), with the company’s share price responding positively to the news.

The deal will see Amazon receive stock options that represent a 2% stake in JustEat and they’ll also be given the chance to increase this to 15% if the deal works out.

And it’s not just JustEat shareholders who are the winners from this arrangement. Amazon Prime members will be receiving a year’s free subscription to GrubHub+, which gives customers free food delivery for what is usually a monthly subscription of around $10.

It’s a shot in the arm for GrubHub and JustEat Takeaway.com, with the food delivery space coming under significant pressure in recent times. Let’s dive into this background and take a look at what this deal could mean for Amazon and GrubHub in the long term.

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Turbulent times in the food delivery industry

Online food delivery has exploded in recent years, but its history in the U.S. goes back to the mid-90’s. Pioneering startup World Wide Waiter started in California in 1995 and still exists today as Waiter.com, but it has been well and truly taken over by other companies since then.

The industry has come a long way since the early days of World Wide Waiter. There are a huge number of services fighting for market share, with new startups arriving on the scene all the time. Currently, the market is dominated by four companies, DoorDash, Grubhub, Uber Eats and Postmates, which has been owned by Uber Eats since 2020.

Growth has been steady for a number of years now, but it accelerated rapidly after the onset of the Covid-19 pandemic. Prior to March 2020, food delivery sales were increasing at a healthy 7 – 8% per year. Between March and May when lockdowns were at their most severe, demand shot through the roof and has continued to rise at a much greater rate than pre-pandemic levels.

Despite huge increases in demand and revenue, food delivery services are struggling for profitability. They operate on razor thin margins, and there are limited areas to improve those based on their current operating model.

For example, restaurants tend to operate with profit margins of between 7 and 22%, and, yet, delivery services will generally charge the restaurant a commission of between 15 to 30%. Many are prepared to operate the delivery service as a loss leader to be a marketing exercise for their restaurant, but as the percentage of deliveries creeps up the economics get wonky.

There are many ways that the industry is looking to tackle this. One of the fastest growing in recent times are ‘dark kitchens’ which operate without a front of house and offer food for delivery only.

Other innovations include improvements ranging from the simplistic, such as routing of orders and stacking multiple orders together, to the somewhat outrageous, like the use of delivery robots.

Investors are holding strong in the belief that the sector will be able to reach profitability, and with sufficient scale this has the potential to generate significant profits.

The Amazon and GrubHub deal explained

Amazon wants the piece of the pie. The deal will see GrubHub+ membership provided to all Amazon Prime members for a year, which allows them to access free delivery and members-only benefits.

In return, Amazon will receive options to purchase 2% of GrubHub’s parent company JustEat Takeaway.com, which can rise to 15% depending on the number of new customers that the arrangement creates for GrubHub.

This is a really interesting deal for both parties. From GrubHub’s perspective, it gives them a huge marketing boost with access to the 160 million plus Amazon Prime users in the U.S. They’re likely to drive a big increase in subscribers who are prepared to try out the service, and there will inevitably be a percentage that will continue to use the service even after the free GrubHub+ benefit ends.

If the deal works and Amazon exercises their right to purchase up to 15% of JustEat Takeaway.com, it’s likely to mean a more long term tie-up between Amazon and GrubHub. This will provide the opportunity for continued growth of new users onto the delivery service.

If the deal doesn’t end up being that successful and Amazon doesn’t exercise the rights, or don’t achieve sufficient customer growth to get above the 2% threshold, GrubHub will have enjoyed 12 months of increased publicity without giving up the farm.

From Amazon’s perspective it makes a lot of sense as well. They’re able to market an additional benefit to Prime members without the need to spend any money upfront. Existing Prime members may see the added benefit of free food delivery as enough to continue paying for it, at a time when household budgets are under pressure.

It could also serve as an additional drawcard for potential new Prime members who have been on the fence about joining the program.

Should the partnership fail to drive value to Amazon, they’ll be able to walk away without having committed any capital. The structure of the deal means that Amazon has the option to buy shares in Just Eat Takeaway.com, but they aren’t obligated to do it if they don’t want to.

JustEat Takeaway.com has stated that they expect the deal to have a neutral impact on their financials this year and a positive impact in future years.

How will this impact GrubHub’s competitors?

DoorDash and Uber Eats may need to keep an eye on GrubHub. Over the past three years, DoorDash has grown their market share significantly, up to almost 60% in May 2022 from less than 20% in 2018. UberEats has broadly maintained its position as number two over that time, whilst GrubHub has given up significant ground.

Back in 2018, GrubHub held around 30% of the market, but this has declined to 13% as of May 2022. Of course, the overall market has grown significantly over that time.

In addition to GrubHub, JustEat Takeaway.com owns some of the largest online food delivery services throughout Europe, Australia, Canada and South America. Their stock price has been absolutely hammered in recent years and is down over 85% since its peak in October 2020.

With new backing and potential minority ownership from one of the largest companies on earth, DoorDash and Uber Eats would be right to feel somewhat nervous.

Amazon has the potential to get into their position in Just Eat Takeway.com at a very attractive price, which will give them considerable leeway to grow the brand and go after the current industry leaders.

Jeff Bezos also isn’t shy about sustaining multiple years of losses for a long term payoff. That’s a good thing too, because there may still be significant time needed for the market to reach maturity and long term profitability.

What does the Amazon and GrubHub deal mean for investors?

Investors in Just Eat Takaway.com will be feeling pretty good about the announcement, with their shares on the Amsterdam stock exchange jumping 12.40% by the close on Wednesday 6th July.

It could potentially slow the slide in the stock price that has accelerated in 2022. It also floats the potential for further good news for investors, should the arrangement prove beneficial for both Amazon and GrubHub.

If Amazon decides to exercise their warrants and purchase a percentage of Just Eat Takeaway.com, this would likely be received well by the market as a vote of confidence in the long term prospects of the company. Of course, whether this eventually parlays into actual profits will remain to be seen.

It’s interesting to note the bet that Amazon is taking here. They’ve seen the massive drawdown in JustEat Takeaway.com’s share price, and there’s a chance that they believe it’s oversold. This deal with GrubHub provides them with an opportunity to back a turnaround.

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