The promise of online takeout and food delivery services is simple but seductive: Click a few buttons and have restaurant-quality food delivered straight to your door.
When it works, it is one of the true perks of the modern age. But investors should be wary of overly hyped claims that this market has nowhere to go but up.
Delivery is on the rise in the United States. Nearly a third of the restaurant meals consumed between September 2017 and September 2018 were consumed in the customer’s home, up 2 percent from the year prior, according to the NPD Group Inc. By comparison, the number of meals eaten at restaurants did not change over that year. Investment firm William Blair & Co. estimated that annual online restaurant delivery sales total about $25 billion today and predicted sales will grow to $62 billion by 2022.
Growth so far has been spurred in part by increased availability in suburban and rural markets, and in part by many Americans choosing to spend slightly more in order to avoid the time involved with preparing homemade meals or going out. But there are reasons to worry that this market, if not exactly a bubble, may be at risk for not meeting lofty goals as it runs into certain headwinds.
Grubhub is the oldest and, by some measures, the largest of the third-party services that have helped to facilitate the shift in Americans’ food delivery habits. It is currently valued at almost $7 billion and operates in more than 2,000 cities; Bloomberg reported that the company had made 530 million deliveries in the five-year period ending in December 2018. Grubhub merged with former competitor Seamless in 2013 and has acquired several smaller companies as well, but still faces competition from a variety of services including DoorDash, Postmates and Uber Eats. Amazon, too, is looking to squeeze its way into this space with Amazon Prime Now. Together these third-party services currently handle about 52 percent of all online restaurant orders. Restaurants pay fees that average 10 to 25 percent per order, but many feel they have no choice but to participate since convenience-seeking customers generally gravitate to the most frictionless experience.
The growth of online delivery orders has brought growing pains, however, some of which may lead to changes in the existing model. As a personal example, my wife and I decided to avoid the hassle of making dinner reservations on Valentine’s Day. Instead, we thought we would turn to Grubhub and mark the special occasion with a meal in the comfort of our own home. Unfortunately, it seems that a lot of other Atlanta-based couples had precisely the same idea. By the time our Indian food finally arrived, two-and-a-half hours later, hunger had driven us to give up and resort to the food in our refrigerator.
Grubhub has said in the past that it will not institute surge pricing for busy times, but without it you can run into congestion issues like my ill-fated Valentine’s Day plan. The other option would be to find a way to offer very accurate predicted delivery times before orders are placed, though this risks losing customers who balk when they read “Your order will be delivered in 150-160 minutes.” Grubhub may eventually find itself the lone holdout in this area. Postmates has incorporated “Blitz Pricing” since 2014, and DoorDash also employs surge pricing. Uber Eats, as of last year, modifies its base delivery fee depending on your distance from the restaurant you order from.
Technology has also not yet solved the problem that some foods simply travel better than others. Pizza, Chinese food and curry all travel well, but even the speediest delivery worker is hard-pressed to hand over French fries that remain fresh. Some restaurants have experimented with delivery and found that delivering a meal that costs more for the restaurant and offers customers a lower-quality experience simply is not worthwhile.
Grubhub and many of its more robust peers are doing well for now, in spite of these challenges. Fourteen years after its launch, Grubhub is profitable and still growing revenues at nearly 40 percent year over year. Grubhub’s shares dropped sharply in value in early February, however, as the company announced a lackluster fourth quarter. The company’s revenue was nearly 11 percent below expectations, and its profit per order was down more than 35 percent from the quarter prior. This shift was largely due to increased investment in marketing, as the competition for users increases among services and Grubhub’s competitors gain a foothold. Both Uber and Postmates plan to make initial public offerings sometime this year. DoorDash, which remains a private company, is currently valued at $7.1 billion and raised $400 million in February alone.
While third-party delivery services may do well in the short term, they rest on a foundation that may not be scalable or economically sound, at least in its current incarnation. The Wall Street Journal reported that most delivery orders are unprofitable for the restaurants involved. For now, restaurants are simply absorbing these costs because they don’t want to lose the customers entirely, especially when growth for walk-in customers remains sluggish. But eventually, much like ride-hailing, something will have to give.
Delivery services have experimented with a few approaches that may help. Services could start charging enough for delivery that restaurants are no longer losing money, though customers who have gotten used to lower prices might resist. According to a survey by Tillster, an online ordering platform, 85 percent of customers are unwilling to pay more than $5 for delivery under any circumstances. Some services have considered offering a subscription model, where users can get unlimited delivery in exchange for a monthly fee, though this model is not yet common. Some companies have also experimented with automation to try to reduce delivery costs, though widespread adoption of food-delivery robots may not arrive for many years, if at all.
In the meantime, delivery services largely rely on the fact that restaurants need them more than the other way around. But Grubhub, Uber Eats and other competitors are vulnerable to a future where restaurants grow weary of taking a loss on delivery orders. Some investors have warned that the rush on delivery services seems reminiscent of the boom of meal kits in recent years – a service line that has since largely busted.
Despite the occasional mishap and my concerns about its business model, I plan to continue using Grubhub. It is an incredibly convenient service, especially when I travel for business and find myself in an unfamiliar location at the end of a long day. But investors may want to steer clear of these companies until a more obvious path to long-term profits emerges.
Posted by Paul Jacobs, CFP®, EA
photo by Flickr user shopblocks
The promise of online takeout and food delivery services is simple but seductive: Click a few buttons and have restaurant-quality food delivered straight to your door.
When it works, it is one of the true perks of the modern age. But investors should be wary of overly hyped claims that this market has nowhere to go but up.
Delivery is on the rise in the United States. Nearly a third of the restaurant meals consumed between September 2017 and September 2018 were consumed in the customer’s home, up 2 percent from the year prior, according to the NPD Group Inc. By comparison, the number of meals eaten at restaurants did not change over that year. Investment firm William Blair & Co. estimated that annual online restaurant delivery sales total about $25 billion today and predicted sales will grow to $62 billion by 2022.
Growth so far has been spurred in part by increased availability in suburban and rural markets, and in part by many Americans choosing to spend slightly more in order to avoid the time involved with preparing homemade meals or going out. But there are reasons to worry that this market, if not exactly a bubble, may be at risk for not meeting lofty goals as it runs into certain headwinds.
Grubhub is the oldest and, by some measures, the largest of the third-party services that have helped to facilitate the shift in Americans’ food delivery habits. It is currently valued at almost $7 billion and operates in more than 2,000 cities; Bloomberg reported that the company had made 530 million deliveries in the five-year period ending in December 2018. Grubhub merged with former competitor Seamless in 2013 and has acquired several smaller companies as well, but still faces competition from a variety of services including DoorDash, Postmates and Uber Eats. Amazon, too, is looking to squeeze its way into this space with Amazon Prime Now. Together these third-party services currently handle about 52 percent of all online restaurant orders. Restaurants pay fees that average 10 to 25 percent per order, but many feel they have no choice but to participate since convenience-seeking customers generally gravitate to the most frictionless experience.
The growth of online delivery orders has brought growing pains, however, some of which may lead to changes in the existing model. As a personal example, my wife and I decided to avoid the hassle of making dinner reservations on Valentine’s Day. Instead, we thought we would turn to Grubhub and mark the special occasion with a meal in the comfort of our own home. Unfortunately, it seems that a lot of other Atlanta-based couples had precisely the same idea. By the time our Indian food finally arrived, two-and-a-half hours later, hunger had driven us to give up and resort to the food in our refrigerator.
Grubhub has said in the past that it will not institute surge pricing for busy times, but without it you can run into congestion issues like my ill-fated Valentine’s Day plan. The other option would be to find a way to offer very accurate predicted delivery times before orders are placed, though this risks losing customers who balk when they read “Your order will be delivered in 150-160 minutes.” Grubhub may eventually find itself the lone holdout in this area. Postmates has incorporated “Blitz Pricing” since 2014, and DoorDash also employs surge pricing. Uber Eats, as of last year, modifies its base delivery fee depending on your distance from the restaurant you order from.
Technology has also not yet solved the problem that some foods simply travel better than others. Pizza, Chinese food and curry all travel well, but even the speediest delivery worker is hard-pressed to hand over French fries that remain fresh. Some restaurants have experimented with delivery and found that delivering a meal that costs more for the restaurant and offers customers a lower-quality experience simply is not worthwhile.
Grubhub and many of its more robust peers are doing well for now, in spite of these challenges. Fourteen years after its launch, Grubhub is profitable and still growing revenues at nearly 40 percent year over year. Grubhub’s shares dropped sharply in value in early February, however, as the company announced a lackluster fourth quarter. The company’s revenue was nearly 11 percent below expectations, and its profit per order was down more than 35 percent from the quarter prior. This shift was largely due to increased investment in marketing, as the competition for users increases among services and Grubhub’s competitors gain a foothold. Both Uber and Postmates plan to make initial public offerings sometime this year. DoorDash, which remains a private company, is currently valued at $7.1 billion and raised $400 million in February alone.
While third-party delivery services may do well in the short term, they rest on a foundation that may not be scalable or economically sound, at least in its current incarnation. The Wall Street Journal reported that most delivery orders are unprofitable for the restaurants involved. For now, restaurants are simply absorbing these costs because they don’t want to lose the customers entirely, especially when growth for walk-in customers remains sluggish. But eventually, much like ride-hailing, something will have to give.
Delivery services have experimented with a few approaches that may help. Services could start charging enough for delivery that restaurants are no longer losing money, though customers who have gotten used to lower prices might resist. According to a survey by Tillster, an online ordering platform, 85 percent of customers are unwilling to pay more than $5 for delivery under any circumstances. Some services have considered offering a subscription model, where users can get unlimited delivery in exchange for a monthly fee, though this model is not yet common. Some companies have also experimented with automation to try to reduce delivery costs, though widespread adoption of food-delivery robots may not arrive for many years, if at all.
In the meantime, delivery services largely rely on the fact that restaurants need them more than the other way around. But Grubhub, Uber Eats and other competitors are vulnerable to a future where restaurants grow weary of taking a loss on delivery orders. Some investors have warned that the rush on delivery services seems reminiscent of the boom of meal kits in recent years – a service line that has since largely busted.
Despite the occasional mishap and my concerns about its business model, I plan to continue using Grubhub. It is an incredibly convenient service, especially when I travel for business and find myself in an unfamiliar location at the end of a long day. But investors may want to steer clear of these companies until a more obvious path to long-term profits emerges.
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