Can GrubHub Inc (NYSE:GRUB) survive the Amazon.com, Inc. (NASDAQ:AMZN), Uber threat?
GrubHub Inc (NYSE:GRUB) reported a mixed 1Q2016 in which financial performance met or exceeded expectations but key performance indicators such as active diner growth declined. Is that a sign that the company is beginning to feel the heat of Amazon.com, Inc. (NASDAQ:AMZN)’s and Uber’s entry into the food delivery market?
If you pose that question to GrubHub’s CEO, Matt Maloney, he will tell you those competitors do not understand what they are getting into. But what are the facts? This GrubHub analysis article discusses the company’s risks and opportunities to enable you make a more informed investment decision regarding the stock. But first, here is a quick recap of last quarter’s earnings results.
Revenue reading of $112.2 million for 1Q2016 came on the high end of the internal guidance of $109 to $112 million. The topline number also surpassed the consensus estimate of $111 million. Adjusted EPS of $0.20 rose from $0.18 a year ago and matched the consensus estimate of $0.20.
GrubHub Inc (NYSE:GRUB) is looking for 2Q2016 revenue in the band of $109 to $111 million. The consensus estimate calls for revenue of $109.5 million.
The chart below shows GrubHub’s revenue for the last five quarters:
What’s exciting about GrubHub?
The business is transforming
It is difficult to understand what GrubHub Inc (NYSE:GRUB) is up to and what it is capable of without first getting to know where it stands presently. GrubHub operates an online meal ordering platform that can be access both on desktop and mobile. The platform connects over 44,000 local restaurants with nearly 7 million customers. The company also does food delivery and that is where the issue of business transformation comes in.
GrubHub started out as a provider of a platform where people could browse and order meals from local restaurants to be delivered to them. The company didn’t concern itself with the delivery job until 2015 when competition seemed to become intense in the online ordering market and the management also felt the need to transform or diversify the business. Moreover, there was a gap to fill in the food delivery space and GrubHub saw the opportunity to expand into the market. That was when the company ventured into delivery services business, primarily targeting restaurants that didn’t have their own delivery infrastructure.
Today, GrubHub makes money from to main sources. It takes a cut from the orders filled through its platform and also charges a fee to deliver orders on behalf of restaurants.
But food delivery service is a competitive market. In the market, the company is in direct competition with Uber, Amazon, DoorDash, Postmates and a host of other competitors of different sizes and forms. The management of GrubHub recently addressed the issue of competition in the food delivery space and as it turns out, the company enjoys some unique competitive advantage. The CEO Maloney said that while Amazon, Uber and others might have the delivery scale, food delivery is not just about being able to move items from one point to another. There is art and craft involved in food delivery and GrubHub understands them better than the competition.
Perhaps the company is taking pride in its years of experience in online food ordering industry going back to 2004 where it got to understand what people want and what they don’t. As such, one advantage for GrubHub is that major competitors such as Amazon and Uber still have a steep learning curve to go through in understanding how food ordering and delivery market works.
Straightforward business model
GrubHub Inc (NYSE:GRUB) wants to distinguish itself as an online food purveyor. With that, the management has developed a simple but pointed business model that focus primarily on food ordering and delivery. That means that the company is not interested in following the competition into other areas of delivery such as the delivery of flowers and other items to keep drivers engaged throughout the day. According to the CEO Maloney, trying to be everything for everyone would cause unnecessary distraction, which is why the company has decided to narrow its to the area that it understand best. In any case, Maloney says there are almost limitless opportunities in the food industry.
To bolster its internal growth efforts, GrubHub Inc (NYSE:GRUB) is in the process of acquiring LAbite, a Los Angeles-based startup involved in food delivery services. The acquisition is expected to consume $65 million in cash and will add about $2 million in fresh monthly revenue to GrubHub in 2016.
GrubHub is also looking to the acquisition to expand its scale, scope and geographic footprint. The company’s other recent strategic acquisitions in the recent times include Restaurants on the Run and DiningIn. The assets enabled the company to expand its footprint in online ordering for independent restaurants.
GrubHub Inc (NYSE:GRUB) is targeting about 61% of U.S. restaurants with its Web and mobile takeout service. The company’s target market consists of more than 350,000 independent restaurants. On the minimum, Americans spend more than $204 billion in dependent restaurants annually with takeout accounting for 33% of the spending.
But online takeout orders account for only 5% of total takeout orders. You can look at it from different perspectives. A pessimistic perspective shows a tiny market, but an optimistic view reveals a massive growth opportunity considering the billions of dollars at stake in the takeout market.
GrubHub Inc (NYSE:GRUB)’s average daily active diners increased 14% to reach 267,800 in 1Q2016. Total active diners (reflecting accounts used at least once in the previous 12 months) increased 24% to 6.97 million.
As the company adds more users, orders and reviews on the platform will increase, thus creative a vibrant meal ordering platform that people come to establish connections with new restaurants.
What’s worrying GruHub?
Slowdown in user growth
GrubHub Inc (NYSE:GRUB) reported deceleration in active diners growth to 24.4% YoY in 1Q2016 compared to a growth of 34% in the previous quarter. Daily average orders for the quarter also grew slower at 14%. The management blamed the pullback in orders on unfavorable weather conditions and tried to sooth investors by saying that it had anticipated the impact and there was nothing much to worry about.
Because of the somewhat low barriers to entry in the online order delivery market and the lucrative nature of the industry, GrubHub is facing growing competition. The greatest competitive threat for the company comes from Uber, Yelp Inc (NYSE:YELP) and Amazon, which are aggressively expanding into restaurant delivery space. As much as GrubHub enjoys the advantage of better understanding of the restaurant ordering and delivery industry, the deep-pocket competitors pose great uncertainty for the company.
Native ordering apps
Besides competition from larger players with fatter bank accounts such as Amazon, the GrubHub Inc (NYSE:GRUB)’s online ordering is also in direct competition with restaurant’s native apps. As restaurants launch their own apps, there is the risk of GrubHub being cut off in the transaction chain.
GrubHub must jealously guard its brand reputation because it makes the difference in a competitive market such as food ordering and delivery industry. But as the company recruits more restaurants to the platform, risk to its brand reputation also increases. For example, failure by it’s a restaurant partner to produce quality foods or make timely delivery can have a serious adverse impact on the brand of the company.
GrubHub Inc (NYSE:GRUB)’s straightforward business model is a great defense against the competition. But the company has to aggressively expand its ordering and delivery network or else the competition will lock it out in key markets.
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