Analyst weighs in on Uber’s reported negotiations to acquire Grubhub

USA – Uber Technologies, the parent company of UberEats has been reported to table an offer seeking to acquire the oldest of the major food delivery companies in the United States, Grubhub.

This deal, if completed, would combine the first and second largest online foodservice delivery firms in the US. However, Packaged Facts analyst Cara Rasch, notes that negotiations could still fall through or any agreed-upon deal could fail to pass likely regulatory hurdles

As the food delivery industry continues to welcome an eye catching number of new entrants in an attempt by restaurants and retailers of all types to expand convenience food options by making more items available for carryout and delivery, pioneers in the industry have reported squeezed profit margins compared to several years ago

“Over the last few years, the advent of apps and web portals allowing users to order from local restaurants and stores via the internet or a mobile application has caused carryout, and especially delivery, of prepared food to expand rapidly,” says analyst Cara Rasch

The deal between Uber and Grubhub has therefore been viewed as one that could help consolidate the US online food delivery market and reduce cash burn.

As for Uber, the UberEats unit has been the bright spot for the company recently as stay-at-home orders and sharp reductions in travel for business and pleasure have led to steep declines for the company’s flagship ride-hailing unit.

Infact, Uber CEO, Dara Khosrowshahi noted on a recent earnings call that “a higher and higher percentage of our Rides customers are using Eats.”

However, based on the nature of food delivery business being largely unprofitable, various reports have raised speculations on potential consolidation in the industry. If the merger between Grubhub and Uber goes through, the companies will control a giant 55% of the market, according to a Bloomberg report.

DoorDash, which is privately held and backed by SoftBank Group, is the most popular in the US, followed by Grubhub and Uber. However, any merger between the major apps is expected to draw antitrust scrutiny.

Dynamics in the food delivery market

Online order services can be offered by third parties or proprietary, in-house applications. However, Anlayst Rasch notes that third-party apps have a number of advantages, including consumer convenience of being able to order from a variety of restaurants using one app.

She explains that while some restaurants consider the commissions that third-party online delivery companies charge to be a burden, they allow a restaurant to participate in delivery without investing in their own app or delivery staff.”

According to Rasch, using a third-party delivery app has high costs, and the potential rewards are therefore through expanding customer base and appealing to consumer needs.

“Many restaurants have begun to use these services to remain competitive during the COVID-19 crisis,” she observes.

Notably, some of the third-party delivery apps have offered independent restaurants a temporary suspension of commissions or reduced commissions during this time when dine-in service is closed.

While this is remarkable, Rasch says that, “the question remains if this just buys the restaurants time to develop their own processes or if they will stick with the third-party apps when the high commission rates return.”

Profitability difficulties and labor issues have challenged the third-party delivery industry, which is still in its infancy.

According to Rasch, third-party digital delivery operators will in the longer run be faced with more foodservice operators developing their own delivery services. Additionally, foodservice companies may also combine with other local foodservice providers to offer the service at a lower fee level and to have more control of the delivery process

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