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  1. Home
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Can UberEats Eat GrubHub and DoorDash's Lunch?

Uber is promising growth with UberEats but its up to consumers to decide who can really deliver the goods.
By KEVIN CURRAN Aug 09, 2019 | 03:22 PM EDT
Stocks quotes in this article: UBER, LYFT, MCD, SBUX, DPZ, SQ, CMG, YUM, YELP, AMZN, GRUB

Uber Technologies (UBER) is clearly targeting dominance in food delivery as it continues to invest, but much as is the question in ridesharing as it competes with Lyft (LYFT) and numerous international companies, competition remains a roadblock.

The numbers from Eats were somewhat encouraging in the second quarter, with monthly active users growing 140% year over year, with gross bookings jumping 98% to $3.4 billion.

"We made significant progress in expanding restaurant selection with over 315,000 restaurant partners now on the platform at the end of the quarter," CEO Dara Khosrowshahi told analysts on Thursday evening. "We launched several Eats product features during the quarter including pilots, the test subscription, pricing strategies with our most engaged users. We continue to work on improving restaurant onboarding efficiency by reducing friction, including point of sale integration through partnerships such as Olo and custom integration via our own APIs."

He added that the still nascent effort is not the number one or two food player in the U.S., Japan, France, Mexico, Australia, and New Zealand.

"In the back half of 2019, we'll continue to invest in our most strategic Eats markets, lean in on pole marketing programs with partners such as McDonald's (MCD) and Starbucks (SBUX) , and accelerate our innovation in restaurant selection engine," he concluded.

Considering the increased consumer demand for delivery services that has been borne out in recent results from pizza company leaders like Domino's (DPZ) , the investment in the effort appears justified.

According to data analytics firm Second Measure, sales for the online delivery industry as a whole rose 45% year-over-year and 24% of Americans reported use of online platforms, which is a 7% increase year over year.

Who's Delivering the Goods?

Still, the competition, particularly domestically, remains fierce as the opportunity is so apparent.

"The Eats market will continue to be competitive as competitors have raised funds invest in growth in its fast growing category," Uber CFO Nelson Chai said, acknowledging the remaining challenge. "We will continue to invest, including in the fourth of 2019, when seasonal career cost increase and expect to see continued strong growth for the balance of the year."

The increasing competition could well be an uphill battle for some time as the market remains much more scattered than the essential duopoly in ride sharing.

The Second Measure report notes that GrubHub (GRUB) and the soon-to-IPO DoorDash control over 60% of the U.S. market cumulatively which should only increase due to the recent acquisition of Caviar by DoorDash from Square (SQ) .

"Sales at nearly all the delivery companies in our analysis are growing, but DoorDash's growth stands out," the Second Measure report states. "In June, the company saw a staggering 175-percent year-over-year jump."

Full comparative data on DoorDash is somewhat lacking as the company is not yet public, but its aggressive acquisition strategy and significant venture capital backing appears a formidable entry against Uber and could curb the expansion that Khosrowshahi and his team expect

That is especially true as Uber was outbid for Caviar, which could have proven a key catalyst to taking the lead in the food delivery wars to come.

Gaining on GrubHub

Interestingly, as Uber continues to lag, its publicly traded food delivery peer GrubHub is also having a very bad day after already encountering some turbulence to close out July, likely feeling the pressure of new entrants threatening its formerly dominant market share.

Part of the risk is GrubHub's concentration in particular metropolitan areas, with much of its dominance emanating from its stranglehold on New York City, Chicago, Philadelphia, and Boston.

With the amount of Uber drivers in these highly populated cities, the pricing pressure for deliveries and the pass-on of costs from restaurants to a third party is a real headline risk for GrubHub on both the consumer and restaurant end of the trade.

For one, customers have not as of yet shown much loyalty to any one service. Secondly, UberEats has shown much more of a proclivity to partner with fast food restaurants that are not typically known for delivery services like Chipotle (CMG) .

Also, its pinpoint focus on specific cities has allowed UberEats to eat into market share in cities like Atlanta, Dallas, and Miami. DoorDash meanwhile is king in cities like San Francisco, Phoenix and Houston.

GrubHub has countered the competition from UberEats' partnership prowess with tie-ins to Yum Brands (YUM) and Yelp (YELP) , but the deep pockets of both Uber and DoorDash puts the majority of its restaurants at risk.

Lastly, the main catalyst for Uber in its competition with each of these prominent peers will be progress of its loyalty programs to garner that retention rate that has yet appeared elusive.

"We're really looking for increased retention, increased spend," Uber's Chai said. "You can expect with the expansion of our loyalty programs in the U.S. and into other markets, you should assume that we're expanding it because we like what we see."

International Aims

The last, and main differentiator for UberEats is its international presence that gives it a significantly larger user base to draw from than its peers.

In fact, outside of China, UberEats is already the biggest show in town.

"Our Eats business in Japan is doing incredibly well and in Japan I think we will be in Eat first and then ride second business, which is terrific," Khosrowshahi told analysts, highlighting regional success. "It goes to some of the flexibility that we have in our model as far as introducing the Uber brand into the market, and then expanding the definition of what Uber means to consumers in that market."

He added that Korea and Spain, outside of Barcelona, are also quickly accelerating positive food delivery dynamics.

However, likely the most promising in the path ahead for Uber is the potential success in the soon to be most populous nation in the world: India.

"We're very happy with the results there both in terms of category position, the top line and especially the bottom line, and we're taking some of the lessons and extending them into the Eats category," Khosrowshahi said. "Right now the market is very, very competitive. There are a few very strong competitors there. Generally, I will tell you that we want to be the number one or number two in every single market. Right now in India, we are the number three, and so the team knows there's a big lift ahead of them."

Still, he suggested that the market share for UberEats is growing and should continue to expand on the prominent opportunity to seize on a growing population and growing middle class in the country that currently tallies in as the third largest food delivery market in the world.

"We're kind of a local company in India," Khosrowshahi concluded. "We've proven our ability to win in rides, and my expectation is the same on Eats side."

Even if the company cannot carry forward momentum to displace the top two domestic competitors Swiggy and Zomato, Amazon (AMZN) may be ready to take up the fight and offer a helpful capital infusion for the cash burning company.

According to a report from Business Standard, Amazon is currently in talks for a buyout, with the option for a strategic alliance also to be discussed.

Amazon India is interested in entering the food delivery business so that it can add it to the list of services it provides, especially through its Prime membership, the report said, citing sources.

Aside from what is sure to be a knock down, drag out battle in the U.S. and abroad, the potential for a sizable deal for this business could be the next catalyst to keep an eye out for.

(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells Amazon? Learn more now.)

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TAGS: Earnings | Investing | Stocks | Consumer | Food & Drink | Transportation | E-Commerce | India | Japan | Stock of the Day

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