Company / Analytics

Analytics, 15 May 2020

Uber’s acquisition of Grubhub. What to expect?

News broke out this week that Uber is in talks to buy the food delivery app Grubhub. According to the New York Times, Uber approached Grubhub, with a potential all-stock takeover bid. The negotiations are ongoing and could potentially collapse. But what would it mean for both companies if the deal goes ahead? Our analysis.

In offering to buy Grubhub, Uber aims to create one giant player in the food delivery business as more people turn toward those services in the wake of the Coronavirus outbreak which has upended everything from the way that people are eating to how businesses must shift to find new growth.

In response to Uber’s offer, Grubhub asked for two Uber shares for each of its shares. That would value Grubhub’s stock at more than $60 a share, pegging a deal at around $6.1 billion, or roughly a 25% premium to Grubhub’s closing price on Monday ($46.81). Shares of Grubhub surged 25% to more than $58 per share after a trading halt due to volatility, following the report of a potential takeover by Uber on Tuesday. Uber rejected the all-stock offer deal, and Uber’s board is expected to review the proposal in the coming days. But what does this deal mean for Uber?

Uber Eats will become the dominant player

Acquisition of Grubhub offers the potential for Uber Eats to become the dominant player in the food delivery business. According to Yahoo Finance, in Q1 2020 Uber Eats experienced major growth with gross bookings of $4.68 billion, up 52% from that same quarter one year ago. In the same period, Grubhub’s gross food sales increased to $1.6 billion, up from $1.5 billion in the same period last year.

In terms of market share, Uber Eats had just 20% of the market share and Grubhub had 28% in March 2020. Another competitor, DoorDash accounted for 42% of the market. A merger of Uber Eats and Grubhub would undoubtedly help Uber gain more dominance in the on-demand food delivery space.

The deal would give Uber Eats an additional 24 million active users and usher in a new wave of consolidation that many hope will hit a reset button on an industry (food delivery) that is seen as overpriced and unprofitable. But criticism abound.

Industry criticism

The food delivery industry is criticized for being opportunistic and predatory. Many see the fees charged by the apps as high, with restaurants paying up to 30% on each delivery order, plus additional fees for processing, delivery, and marketing promotions that hurt already slim margins.

The industry was growing before the pandemic and surged once the lockdowns spread across the country. But both Grubhub and Uber Eats are struggling to find profits doing it, and have been hurt by the sudden surge, which led all the services to defer or waive fees while offering discounts, loyalty rewards and special offers to consumers.

Consolidation through a merger would give delivery services unparalleled power over neighbourhood independents (restaurants) - which won’t be able to cut deals on fees like chains can with their scale. Both businesses would also be able to make their businesses work, by streamlining duplicate expenses for marketing and staff and allowing logistics software to batch orders and delivery routes more efficiently.

Nevertheless, Uber Eats and Grubhub must reconcile themselves with the pushback storm that will follow their merger. The pushback on commissions is particularly strong and may not stop soon. Much like the challenges that faced Uber in California, and across the world, over driver commissions.

Grubhub was recently accused of taking advantage of the pandemic and charging exorbitant commissions when a receipt was shared showing that Grubhub took $666 for a $1,042 order, as compared with Uber and DoorDash which had already waived fees charged on restaurants. With mounting criticisms about the industry’s commission modalities, a battle with regulators is inevitable.

Regulatory battles

The controversy around commissions has already provoked government action. In New York City, Mayor Bill de Blasio announced that he was in favour of capping delivery commissions at 10% while restaurants are restricted due to stay-at-home orders. New York City this week cap commissions at 20%. His comment came after San Francisco, Seattle, and D.C. started capping fees at 15% last month, while Jersey City mandated a 10% fee cap last week. Grubhub is the strongest delivery provider in New York, Boston, and Chicago.

Though the merger deal has strong support in Wall Street, it could face regulatory challenges in Washington. Beyond the price argument, strong resistance is emerging from Capitol Hill. For instance, Rep. David Cicilline, D-R.I., chair of the House antitrust subcommittee chairman, recently asked lawmakers to include language in the next relief package that would ban mergers that do not involve companies that are severely distressed.

Neither Uber nor Grubhub, with their cash reserves and hefty market valuations, could be seen as severely distressed. Furthermore, the deal is very much likely to get a review by U.S. antitrust regulators as Uber and Grubhub are among the top three players in the food delivery business.

Following the announcement of the acquisition talks this week, Rep. David Cicilline said in a statement that “Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub — which has a history of exploiting local restaurants through deceptive tactics and extortionate fees — marks a new low in pandemic profiteering.”

Competition from other delivery apps

DoorDash, which got backing from Softbank in 2018 has risen to become the industry leader, with more than 35% market share. For instance, DoorDash forced Grubhub to rethink its model, as DoorDash took more share.

Slice, an independent app for 12,000 independent pizzerias which takes a flat fee for managing all digital services instead of taking a cut of every order to deliver the food. Slice announced on Tuesday that it had raised $43 million as part of a Series C funding round.

Uber Eats and Grubhub face competition from emerging apps like Slice, which charge less commission and allows restaurants to take most of the margins. For instance, a $100 order on Slice costs $2.25 to the small business owner whereas on Uber and Grubhub that could be $30.

Whatever happens next? It’s clear that the merger deal will undergo serious scrutiny on many different levels. The optics, as PR people like to say, are not good for any kind of deal that stinks of “pandemic profiteering,” and the fact that they are looking to merge amid rising demand.

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