Uber’s next big move to win the food delivery war
Whether it’s using Uber to pool you and your friends back from a night out or waiting 15 minutes for the new rotation of free-delivery promotions to pop up on Uber Eats, there’s a good chance you’ve come across Uber. And it’s no mystery that they might be taking over a new realm — Food Delivery!
Uber was born out of humble beginnings one snowy night in Paris on December ’08 amidst the Global Financial Crisis — founders Travis Kalanick and Garret Camp were stuck and couldn’t find a ride back home. Fast forward to 2020, Uber now boasts 75 million active users with 3.9 million drivers across 75 different countries.
Translating this success into other industries, Uber expanded its business into the on-demand food delivery space through the launch of its Ubereats arm in 2014. Given the food delivery space is forecasted to be a $467 billion-dollar industry by 2025, the move comes as no surprise.
However, Uber isn’t the only company who caught wind of this massive opportunity. Its main competitors Doordash, Grubhub and Postmates now fight to retain the dominant market share of the space.
While Ubereats commands a sizeable 60% of the total Australian food delivery market (estimated value of $US 2.08 billion), it seems to be losing its footing in the much more lucrative U.S market ($US 26.5 billion) where it only holds 20% market share, as opposed to rivals Doordash and Grubhub who command 35% and 30% respectively.
There have been rumours of Uber’s alleged takeover of Grubhub, which would allow the company to reclaim 50% of the US delivery market and eventually dethrone main competitor Doordash.
The markets reacted positively to the speculation, as shares of GrubHub increased a staggering 36% in one day whereas Uber shares increased 2%. The Wallstreet Journal claims that Uber is willing to pay 1.9 Uber shares for each Grubhub share in a stock-for-stock merger, valuing Grubhub shares around $62.72 per share, marking a rough 10% premium for the company. That offer has since been rejected, with talks supposing that Grubhub could receive as much as $75 per share, according to Barclays.
Looking at the proposition from a surface level, it seems to make a lot of sense. Acquiring Grubhub would allow Uber to expand its already huge network of customers, drivers and partners by synergising Grubhub’s stakeholders into the Uber ecosystem. This is the network effect — expanding an existing network will further encourage potential customers, drivers and other restaurants to join the network (Think of how you reacted when you noticed all your friends were signing up to Facebook, Instagram and the likes!).
However, buying Grubhub at a 25% premium would mean that Uber would be valuing the company at approximately $US 7.2 billion, a hefty price tag considering that Grubhub itself only generated $1.3 billion last financial year in revenue and recorded an overall loss in net income.
Thus, for the takeover to make sense, Uber will need to bet that its synergies with Grubhub would bring Grubhub’s value to at least $7.2 billion or more. This growth would need to be achieved through increasing the return on new invested capital by cutting costs and increasing margins or by increasing the profits reinvested back into the business.
However, even assuming a deal can be reached between the two companies, the actual merger may be stopped through existing anti-trust laws that prohibit companies from gaining too much market share to avoid the establishment of monopolies/duopolies that can lead to unfavourable economic outcomes such as price gouging.
Only time will tell whether Uber’s big bet to win the food delivery space will pay off, or ultimately destroy shareholder value.
Check out more stories like this at Textbook Ventures’ Medium publication.
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