• Tom Bradley

Uber Eats and Grubhub Merger : A Step Closer to Profit?

An Uber Eats courier, Source: Getty Images

Uber are currently in talks to acquire Grubhub, a major competitor for its food delivery business Uber Eats. The deal would see Uber Eats become the largest food delivery app in the US, this comes at a time where the food delivery and takeaway business is booming as a result of widespread lockdowns. The firms are alleged to have been in talks since the beginning of the year with the possibility of a deal being agreed by the end of May. The break of the news lead to Grubhub shares soaring by 37% (giving it a market capitalisation of $5.6bn) whilst Uber shares also saw a sharp growth of 4.1%, highlighting the strong market sentiment towards the potential deal. Estimates for the market share of the proposed firm vary but are generally around the 50% figure and would mean Doordash lose their place as market leader, hence this deal could reshape the landscape of the burgeoning industry.

On the release of the news both firms issued statements with Uber saying whilst they were “constantly looking at ways to provide more value” they would not comment on “speculative M&A premiums”. Grubhub adopted a similar stance admitting “consolidation could make sense” and that they were “always looking at value-enhancing opportunities” but also failed to comment on the rumoured deal. Uber chief executive Dara Khosrowshahi did confirm Uber were considering potential acquisitions, claiming they were in “dialogue with many players” at Uber’s Q1 2020 earnings release in early May.

Despite Uber Eats enjoying a 50% rise in sales in Q1 as lockdowns were imposed it remains loss making with an EBITDA of -$313m. This contributed to Uber’s overall EBITDA of -$612m for Q1 and overall losses of $2.9bn as the firm continues to struggle on its path to profitability. Grubhub has been consistently EBITDA positive although still recorded a $33m loss in Q1. Grubhub currently have a market capitalisation of just over $5bn, although with the synergies the deal could create and Uber Eats remaining loss-making Grubhub are in a strong position to demand a high premium for the acquisition.

Uber CEO Dara Khosrowshahi, Source: Getty Images

The meal delivery industry grew 24% between March 2019 and March 2020, with a recent surge due to the closing of sit-in restaurants. Often the delivery of takeaways is done by a 3rd party – such as Uber or Grubhub. CBRE analysts anticipate that 70% of all meal deliveries will be undertaken by a 3rd party by 2022 as the industry continues to grow in size. The rapid expansion of the industry has been driven in part by the growth-at-any-cost strategy that has been pursued by the major players in the industry. This has been characterised by aggressive price wars as firms have attempted to increase their market share, however the heavy discounting pursued has led to large operating losses and means that firms are struggling to earn profits. With the significant losses firms are incurring consolidation in the industry appears inevitable with the potential for hundreds of millions saved in cost synergies.

The industry has long been criticised for the large cuts they take from restaurants, generally around 30%, which has made it particularly difficult for small independent restaurants to profit from deliveries. Many major US cities have imposed caps on the share – with San Francisco, Seattle and Washington DC limiting the share taken to 15% and more are expected to follow, including New York which is set for a 20% cap. However, this regulation will only further drive down earnings for the already loss-making delivery firms and makes consolidation even more important.

Uber Eats had previously been in talks with US market leader Doordash, however Doordash were reluctant to enter talks to begin with, only agreeing to open negotiations due to pressure from key financial backer SoftBank, so unsurprisingly no deal was agreed. Uber also saw a breakdown in talks in the UK where they sought the acquisition of rival Deliveroo, however Uber were not willing to pay anywhere near the $4bn asking price, believing their competitor was worth around the $2bn mark. Whilst Uber has struggled other deals have been reached in the industry – Doordash acquired high-end meal delivery service Caviar for $410m in 2019 and in the UK key players Just Eat and takeaway.com are set for a £6bn merger. With consolidation already beginning in the industry Uber will recognise the importance of moving quickly in order to ensure they remain a key player.

Share of the US food market, Source: FT

The potential deal has come under fire from antitrust authorities and state representatives with fears that increased market power will lead to price hikes that would be detrimental to both restaurants and consumers. The Chair of the house of representatives antitrust committee, David Cicilline, has been particularly outspoken in his disapproval of the deal criticising “predatory” Uber and claiming the deal “marks a new low in pandemic profiteering”. Cicilline also criticised Grubhub for their “deceptive tactics and extortionate fees” as well as their “history of exploiting local restaurants”. These concerns have been echoed by many local level politicians and William Kovacic, former chair of US federal trade commission.

The deal would have a major impact on a local level with the merged firm representing an 80% market share in New York and a share of around 60% in Chicago and Miami. This would give Uber far greater bargaining power with restaurants, enabling them to demand higher cuts and raise fees. It is possible that lawmakers will seek to block the deal, citing the potential for exploitation of restaurants.

In defence of the deal Uber may adopt the “failing firm” argument claiming that Grubhub will not survive on their own given the price wars in the industry. This argument has succeeded in the UK recently with Amazon using it to justify their $575m investment in Deliveroo. A lengthy review of the deal is expected in the coming months but there appears a general consensus that the deal will be approved.

Independent restaurants in Midtown Manhattan, NYC. Source: Flickr

The deal is archetypal of the current Uber eats strategy as they move out of markets they do not believe they can become the dominant player in whilst seeking to make strategic acquisitions in those they can. In a recent announcement Uber Eats declared they would cease operations in Czech Republic, Egypt, Honduras, Romania, Saudi Arabia, Uruguay and Ukraine and were transferring their UAE service to subsidiary Careem by June 4th. These markets represented 1% of total deliveries and 4% of losses for Uber. This follows decisions to exit the Indian market in January when Uber sold its food delivery business to market leader Zomato and the exit of the South Korean market in 2019.

Uber appear set on leaving countries it cannot perform in to cut losses and it is likely there will be more withdrawals in the coming months. Alongside these withdrawals is an intent to expand where Uber can become the market leader, and eventually profitable, marked by the attempt to acquire Grubhub and previous talks with Doordash and Deliveroo.

The proposed deal comes at a crucial time for the food delivery industry as firms seek consolidation to survive after the aggressive price wars that have prevented the key players from becoming EBITDA positive. With the merger of the two firms Uber Eats will become the US market leader, reshaping the industry and potentially triggering consolidation between other rivals. There are questions over whether the restaurants that Uber Eats serve stand to benefit from the deal with a loss of bargaining power, and these concerns will persist, although ultimately are likely to be inconsequential in the deal completion process. Consolidation in the industry has appeared inevitable for many quarters and the cost saving synergies may finally allow for Uber Eats to become profitable. This marks crucial progress in Uber’s drawn-out path to profitability and should the acquisition go through Uber will likely become profitable sooner rather than later.