GrubHub (GRUB) might be poised to deliver big a New Year's present to a beleaguered restaurant-delivery market.
GrubHub's stock rose 12.6% on Wednesday, and rival Uber's (UBER) stock rose 3.4%, after The Wall Street Journal reported that GrubHub has hired financial advisers to help it explore strategic options "that could include a sale of the company or an acquisition." The company also reportedly wants to be prepared in the event that an activist comes knocking.
Those following the 2019 struggles of the U.S. restaurant-delivery market's top four players -- DoorDash, Postmates, GrubHub and Uber's Uber Eats unit -- probably weren't shocked to see the WSJ's report. Indeed, one of my 2020 tech predictions (#15) was that the restaurant-delivery market would consolidate (while online grocery sales surged).
A no-holds-barred pricing and promotional environment, one in which companies have gone the extra mile to reel in both consumers and restaurants, had led red ink to flow freely. In December, The Information reported that DoorDash expected to lose $450 million in 2019 on revenue of $900 million to $1 billion. A month earlier, Uber reported a $316 million Q3 adjusted EBITDA loss for Uber Eats...and that figure doesn't account for Eats' share of Uber's company-wide R&D, G&A, depreciation and amortization expenses.
December also saw reports that Uber is in advanced talks to sell its Indian food-delivery business to rival Zomato. TechCrunch reported that the deal values the business around $400 million, and that Uber might invest $150 million to $200 million in Zomato as part of the transaction.
There haven't been any reports about Postmates' 2019 financial performance. However, the company did disclose a $75 million operating loss for 2018, and (given the state of the food-delivery market and Postmates' aggressive promotional activity) it wouldn't be surprising if 2019's loss was larger.
GrubHub, which operates both a restaurant-delivery business and a large takeout-ordering business, said in its Q3 shareholder letter that it expects 2020 adjusted EBITDA of "at least" $100 million. This compares with reported 2018 adjusted EBITDA of $234 million, and a 2019 adjusted EBITDA consensus of $184 million.
GrubHub's shareholder letter, it's worth adding, featured a very realistic and hard-headed view of the challenges facing restaurant-delivery players. Though talking up GrubHub's historical profitability and the breadth of its offerings, management also noted that online restaurant-ordering growth was slowing following a surge caused by an explosion in delivery orders. It also asserted that logistics are a commodity in this space, and (given that drivers still need to be paid to deliver individual orders) questioned the assumption that higher ordering volumes would yield much greater economies of scale.
This hard-headed appraisal of the market's economics is likely a key reason why -- in the wake of Square's (SQ) 2019 sale of its Caviar restaurant-delivery business to DoorDash -- GrubHub is apparently interested in driving additional consolidation, either as a seller or a buyer. And the gains posted by both GrubHub and Uber's shares in response to the WSJ's report makes it clear that Wall Street is eager to see such consolidation happen.
In Uber's case, it's worth noting that the company's financial performance looks meaningfully better if Uber Eats is taken out of the picture, even if it's still nothing to write home about. Excluding Eats' segment performance -- but still including Eats' share of company-wide G&A and R&D expenses -- Uber's total Q3 adjusted EBITDA comes in at negative $269 million, rather than the negative $585 million that was reported.
If a consolidated and more rational food-delivery market allowed Eats to merely run around breakeven, Uber's path to profitability over the next few years would get a lot easier. The company would still need to continue posting healthy ride-sharing bookings growth, and perhaps also pare the losses posted by some of its other initiatives such as Uber Freight, but one giant albatross would be taken off its neck.
