Will Amazon’s Grubhub deal kill Uber and Doordash’s food delivery dreams?

On July 6, huge news rippled through the food delivery industry when Amazon (AMZN -0.24%) announced a partnership with Grubhub, a subsidiary of Just eat take out (JTKWY 0.80%). As part of the deal, Amazon Prime members have the option to get Grubhub+ – the company’s premium subscription service – for free in the US. Given the enormous importance of Amazon Prime, Grubhub’s competitors Uber and door dash saw their shares sell off sharply on the day of the announcement.

Let’s see what this partnership means for Grubhub and the entire food delivery market.

Grubhub+ free for one year

Grubhub’s main announcement was that existing Amazon Prime members can try Grubhub+ for free for an entire year. Grubhub+ usually costs $9.99 per month, so it’s a huge bargain for food delivery users. With over 150 million estimated Prime accounts in the US, Grubhub can target virtually the entire country with this offer. (Remember that many Prime accounts have multiple users.)

In addition to this partnership, Amazon has agreed to acquire a 2% stake in Grubhub with the possibility of increasing it to 15% in the future. Since Grubhub is a subsidiary of Just Eat Takeaway, it’s hard to calculate the value of that stake, but it’s probably one of the main reasons Amazon agreed to the deal. If things go well for Grubhub, he can share the benefits.

How it hurts Doordash and Uber

DoorDash and Uber are the kings of food delivery in the United States. In May 2022, third-party analysts estimated that DoorDash had a 59% monthly sales market share and Uber 27% (combining Uber Eats and Postmates). These market shares have increased in recent years at the expense of Grubhub, which had an estimated market share of only 13% in May.

It’s pretty obvious that this partnership with Amazon could hurt Doordash and Uber. Food delivery is almost entirely a commodity business, and if Grubhub can offer consumers a better price, subsidized by one of the biggest companies in the world, it’s likely that many customers will switch providers.

We can already see this happening, with Grubhub’s mobile app climbing the app store rankings in the US. If I were an investor in Uber or Doordash, I would watch this partnership with Amazon with great interest because it could pose a huge threat to the long-term value of my shares.

There’s a ton on the line here. Doordash generated nearly $5 billion in revenue in 2021. With food delivery sales growing 8% annually right now, this could be a huge opportunity for Grubhub and Amazon if they can reclaim some market share. significant market for these delivery rivals.

Why it doesn’t matter

While there is a big revenue opportunity for Amazon and Grubhub with this partnership, food delivery is a tough business to make money on. DoorDash suffered huge operating losses in 2020 and 2021 even though it gained market share and had an ideal operating environment. during the COVID-19 lockdowns. Uber has never generated a positive operating profit.

Amazon will obviously be fine, as this is only a small part of its overall business. But if you’re considering investing in Just Eat Takeaway because of this Grubhub deal, you need to assess whether these business models are financially viable in the long term. If not, it’s best to avoid the food delivery space altogether.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Brett Schaefer has no position in the stocks mentioned. The Motley Fool occupies and recommends Amazon and DoorDash, Inc. The Motley Fool recommends Just Eat Takeaway.com NV and Uber Technologies. The Motley Fool has a disclosure policy.