Competition has intensified in the rapidly changing food delivery industry after US giant Uber threw down the gauntlet to rivals with the $2.65 billion, all-share deal for Postmates.
UK investors will know Uber, which runs ride sharing in the US, UK and elsewhere, and whose Uber Eats food delivery bike riders are frequently seen on city streets. Postmates will be less familiar. It is a US-only food delivery peer with a stronger presence among small and medium sized restaurants, particularly in the US Southwest.
FOOD DELIVERY SUBSCRIPTIONS
Where Postmates stands out is with its subscription service. This works by charging users $9.99 a month for unlimited deliveries (over $12). The model should provide some level of order visibility for the enlarged company, which could be vital given the intensity of competition in this space.
Around 30% of its orders are placed through its subscription platform. Postmates said first quarter gross bookings this year jumped 67% to $643 million, and the company is said to be approaching run-rate profitability on an earnings before interest, tax, depreciation and amortisation (EBITDA) basis.
Interestingly, Uber has been trialling a similar scheme since late last year.
This now leaves the three biggest US food delivery players as Uber Eats/Postmates, UK-listed Just Eat Takeaway.com (JET) – (including its recent $7.3 billion Grubhub acquisition), and SoftBank-backed DoorDash, which is eyeing an IPO.
RACE FOR SCALE
‘This latest deal serves to further highlight the underlying dynamics for the food delivery marketplace, with little customer loyalty putting further pricing pressures on an already low-margin business model,’ said Megabuyte analyst Devun Mistry.
‘Consolidation seems to be a key path towards making the business model sustainable, particularly where synergies can be extracted.’
Uber shares rose 6% to $32.52 in overnight trading, although this was largely down to the strong rally in technology stocks. It will be interesting to see how investors react to this deal, with US equity futures pointing to modest profit taking when Wall Street opens for business later this afternoon, based on Bloomberg data.
The share price of London-listed Just Eat Takeaway.com declined 1.8% to £86.82, although its strong performance since announcing the Grubhub deal, and very strong over run during the Covid-19 pandemic should be noted.