Grubhub shows food delivery alone won’t bring profits

Last year, multinational food delivery company Just Eat Takeaway finalized its Grubhub (WORM) – Get the report from Grubhub, Inc. purchase in an all-stock deal a year and a half after (founded in 2000 in the Netherlands) and Just Eat (founded in 2001 in Denmark) merged into a single company.

The move was a bit of a surprise, as Uber Eats (UBER) – Get the report from Uber Technologies, Inc. rumor had it that he was interested in buying Grubhub before Just Eat beat it in 2020.

The sale of Grubhub took place in June 2021, and when it was presented in the third quarter, there was already bad news. Its earnings before interest, taxes, depreciation and amortization margins fell 1% to 1.5%.

But Just Eat Takeaway has struggled to turn a profit for some time, as according to the first-half 2021 earnings report, its revenue grew 52% year-over-year to around $3 billion. . But its overall adjusted EBITDA fell 192% to a loss of around $220 million.

The company called the first half of 2021 the peak of its absolute losses, with CEO Jitse Groen saying “Our customer base, restaurant selection and order frequency have increased significantly, which will drive improved profitability going forward.”

Activist investor Cat Rock Capital Management, which holds a 6.5% stake in Just Eat, blamed Grubhub for the underperformance and urged Just Eat to sell it, possibly to Amazon. But instead, Just Eats retained its investment and its EBITDA is expected to be between “minus 1% and minus 1.5%” for the year, according to its fourth quarter report.

During 2021, Just Eat processed 1.1 billion orders, an increase of 33% over the previous year, but the company noted in its report that “order growth over the full year, excluding Grubhub, was over 40%. year-on-year, against the 45% target, despite the moderating effect of the reopening of restaurants. »

Why isn’t Grubhub making money?

Like Netflix and Zoom, Grubhub was one of those companies that flourished when the world went to hell in 2020. While people generally cooked more at home as restaurants were largely banned, at least initially, not many people were cooking every night so take orders surged.

Grubhub posted sales of $459 million in the second quarter of June, a 41% increase that surprised even the company. So if Grubhub were ever to turn a profit now would be the time, right?

The problem is that the profit margins are pretty brutal. Delivery apps like Grubhub charge restaurants a percentage of the order, which according to an internal site is usually 20% for marketing and a 10% delivery fee plus a 30 cent + 3.05% handling fee, although he has been accused of asking restaurants pay percentages of up to 30% for better placement on the site.

From there, Grubhub has to hire delivery people, “that’s the biggest expense”, notes the Wall Street Journal.

Grubhub isn’t the only delivery service struggling with profitability, as none of the other delivery apps (including Seamless, which Grubhub bought in 2013) have yet turned a profit.

Grubhub, Doordash (which has yet to report Q4 2021 earnings, but had $1.28 billion in Q3 revenue), and Uber Eats, whose loss margin EBITDA improved to 1.4% from 2.1%, all dominate the market, controlling 85% of the food delivery world, but struggle with tight margins.

Grubhub wants to deliver as much as possible

GrubHub pounded by analysts for disappointing advice

Grubhub is in a margin game right now, so it’s better from a business perspective to get customers to order more items, that’s why it’s expanded into groceries and delivery alcohol, and “to bundle non-perishable items with food” to increase the number of orders and reduce delivery costs.

So that explains why Grubhub has now introduced Grubhub Goods, a collaboration with 7-Eleven. Following a pilot program in Manhattan, customers at more than 3,000 Grubhub Goods locations can order groceries for delivery, including ice cream, milk, deodorant and beer, according to the site.

But aside from getting people to buy more stuff, part of the reasoning behind the move is simply to keep customers associating Grubhub with convenient delivery, as the company reports that people who order convenience items on Grubhub then go there. more orders from restaurants the following month than those who do not order ready meals.

When does Grubhub expect to be profitable?

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Grubhub co-founder and former CEO Matt Maloney left the company in December, and so far Groen has given no indication as to when he thinks the company will become profitable, and the company did not respond to questions from TheStreet about when it thinks so. will turn the corner.

But the likely answer is… soon after, as the company is currently in the process of delisting from the Nasdaq. (NASDQ) which she says is part of a drive to cut costs.

Groen claimed that there are no plans to sell Grubhub and that only the biggest food delivery players in each market will eventually become profitable, he said in an interview with the Dutch television program “Business Class“.

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