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Bear of the Day: Grubhub (GRUB)

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Founded in 2004, Grubhub (GRUB - Free Report) initially set out to use internet technology to eliminate outdated paper delivery menus for restaurants, allowing customers to quickly update menu choices and prices and reach a wider audience. Grubhub subsequently moved into providing delivery services as well, giving access to a wide range of restaurant choices to consumers who never have to leave home to enjoy their favorite menu items.

Grubhub now provides delivery services for over 80,000 restaurants in more than 1,600 cities in the US and the UK.

The company went public in 2014 and had seen shares appreciate as much as 475% from the offering price of $26/share, hitting a high of $149/share in September of 2018. A steep drop since then has Grubhub currently trading around $80/share and there are some dark clouds on the horizon.

The problem is increased competition in the food delivery space. Though its services have undeniable appeal to consumers and restaurants alike, there are no serious barriers to entry in the industry. Acquiring early brand recognition and a dedicated customer base provided a first-mover advantage for Grubhub, but several deep-pocketed competitors with experience in transportation now threaten to capture a significant share of the market.

UberEats

Ride-sharing behemoth Uber built its business on the concept of utilizing idle assets. Realizing that many automobiles aren’t being used at any given time, Uber applied cell phone location and mapping technology to the problem, allowing independent drivers to use their own vehicles to provide rides to strangers for a fee.

After dominating the market for human passengers, Uber realized that cars on the road without a passenger could also be used to deliver mail-order packages and restaurant to-go orders. UberEats now delivers restaurant food in much the same way as Grubhub and has become enormously popular, especially with millennials who are already accustomed to using the company’s transportation services.

The website ridesharingforum.com recently conducted an experiment in which they ordered identical items using Grubhub, UberEats and a third competitor, DoorDash. They found that the total prices paid and the amount of time it took for the food to be delivered were essentially identical. The only minor differences were in the way the restaurants were compensated for the orders (invisible to the customers) and the method for tipping the drivers. In other words, from a customer perspective, the services are totally fungible. There’s no compelling reason to prefer one over the other.

Uber is not standing still either. Continuing with the theme of using idle capacity, Uber is now a partner in over 1,600 “virtual” restaurants in which underutilized kitchen space in existing restaurants is used to produce menu items for restaurants that don’t actually exist as physical spaces where customers could go. The restaurant partners get to share some of the cost of rent and labor that would otherwise be wasted and Uber gets to keep part of the menu prices – around 30% - as well as the delivery fees.

The recent arrival of Amazon (AMZN - Free Report) to the food delivery markets with its limited but growing “Amazon Food” operation is more bad news for the existing players.

Currently a Zacks Rank #5 (Strong Sell), Grubhub has seen analyst earnings estimates falling sharply over the last 30 days.

New technologies have improved our lives in many significant ways and many companies have come seemingly from nowhere to dominate industries that didn’t even exist a few years ago. While the convenience of quick and inexpensive delivery of restaurant meals is undeniable, competitive pressures make it a less than ideal investment.

Investors interested in a company that’s using internet technology to improve the customer experience should check out Etsy, Inc (ETSY - Free Report) , a Zacks Ranks #1 (strong Buy).

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