Uber’s Grubhub Play: A Desperate Bid to avoid wasting A Business Everyone Hates

Uber UBER’s tender offer for Grubhub GRUB offers the potential for the rideshare giant to become the dominant player in food delivery, the newest consolidation play in a very business hated by both consumers and businesses alike.

The offer, which could value Grubhub at $6.9 billion, would give Uber Eats 55% of the delivery market with the addition of 24 million active users and inaugurate a brand new wave of consolidation that a lot of hope will hit a push-button on an industry that's both overpriced and unprofitable.

“It's all visiting shake out over the approaching 12 to 18 months. Should Uber buy Grubhub, an infinite ripple effect will happen,” says Daniel Ives, manager at Wedbush Securities, who is now eyeing DoorDash, this leader with a 35% market share. “It would potentially be a catalyst to DoorDash and Postmates to possess to induce married furthermore.”It’s an industry that needs to change. Third-party food delivery has been unprofitable for years, despite fees as high as 30% that restaurants pay on each delivery order, plus additional fees for processing, delivery, and marketing promotions

that hurt already slim margins. it absolutely was growing before the pandemic and surged once the lockdowns spread across the country. Still, both Grubhub and Uber Eats are struggling to seek out profits doing it, and are 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.

More consolidation would also give delivery services unparalleled power over neighborhood independents - which won’t be able to cut deals on fees like chains can with their scale. He adds that it’s also the most effective chance for both to finally make the business work, by streamlining duplicate expenses for marketing and staff, and allowing logistics software to batch orders and delivery routes more efficiently.

“This could be a survival play for both of those third-party platforms, Grubhub and Uber Eats,” says Scott Absher, co-founder, and CEO of publicly-traded ShiftPixy, a staffing platform for restaurants which makes a specialty of putting in franchisees of national chains to handle their own delivery. “They are visiting should reconcile themselves with the storm that’s coming. The pushback on commissions is powerful and it's not stopping.”

The criticism has found renewed strength during the crisis, as a receipt from Grubhub taking $666 for a $1,042 order posted on social media went viral during the crisis. And while DoordDash and Uber Eat waived fees charged to restaurants ahead of time, Grubhub unveiled its own $100 million relief effort, which hid the fine print of the deal: “suspend fees” really meant a short-term deferral and it came with the necessity to remain on the platform for a minimum of a year. It also offered owners “free exposure” with a catch of a third marketing rate increase. Grubhub is the strongest delivery provider in the big apple, Boston, and Chicago.

The controversy has spurred government action, including big apple City Mayor Bill de Blasio who announced Tuesday that he was in favor of capping delivery commissions at 10% while restaurants are restricted thanks to stay-at-home orders. His comment came after the urban center, Seattle, and D.C. started capping fees at 15% last month, while the city mandated a tenth fee cap last week.

“The regulatory swirls could put more pressure on consolidation,” says Wedbush’s Ives. “But consolidation has been long overdue for food delivery. The straw that broke the camel's back was Covid-19.”

The fees are an issue for both independent restaurants, which price prices for orders made through delivery apps and franchisees that are locked into national pricing strategies dictated by the key chains. Absher says the delivery providers should help independent restaurants price up the menu to account for the commission and other fees.

Talk of more M&A has been circulating for years. In January, Grubhub CEO Matt Maloney said he was receptive mergers, and drew speculation for weeks afterward as reports pointed to offers from grocers like Walmart and Kroger. Grubhub has already merged with a rival once when it bought Seamless in 2013. it absolutely was a special, consistently profitable business back then: Grubhub didn’t handle the particular delivery and mainly acted as a menu aggregator.

DoorDash was founded that year and got backing from Softbank in 2018, quickly rising to become the industry-leader, now with 35% market share. It forced Grubhub to rethink its model, as DoorDash took more share. In early 2020, DoorDash confidentiality filed for an IPO, after last year rumors swirled of a merger with Postmates which never materialized, and it later acquired Caviar. Postmates, meanwhile, also filed for an IPO in early 2019 and have since backed off.

“The competition within the food delivery wars is just like the streaming wars,” Postmates CEO co-founder Bastian Lehmann said at Forbes Under 30 Summit in Detroit last fall.

Another target: Slice, an independent app for 12,000 independent pizzerias which takes a flat fee for managing all digital services rather than taking a cut of each order to deliver the food, and announced on Tuesday that it had raised $43 million as a part of a Series C funding round, led by KKR KKR.

“Our job is to digitize their operations so they will make extra money and save longer,” says Slice CEO Ilir Sela. “As that average order value goes up, those benefits are passed on to the restaurant owner because we do not take a percentage on its order. A $100 order on Slice costs $2.25 to the little business owner. It wouldn't be $30 which is what you'd find with these third-party logistics players.”