(Bloomberg Opinion) — Consolidation in the food delivery industry always seemed sort of inevitable. Now, it may finally be happening.
Bloomberg News reported Tuesday that Uber Eats parent Uber Technologies Inc. made an offer to acquire Grubhub Inc., citing people familiar with the matter. A deal may be reached as soon as this month. News of the possible merger — which would create a market leader in a business that has seen increased traffic lately from diners forced to shelter in place — sparked a jump in both companies’ shares, with Grubhub in particular soaring as much as 37% following the report.
Both Uber and Grubhub declined to comment on the rumored deal, though Grubhub in a statement said it was always looking for opportunities and that consolidation in the industry “could make sense.” It’s right about that. Over the past year, the food-delivery business has been extremely difficult financially for the four major players: DoorDash, Uber Eats, Grubhub and Postmates. The industry as a whole has pursued a growth-at-all costs strategy using aggressive discounting to gain share, resulting in massive aggregate operating losses. This simply isn’t sustainable over the long term. Further, investors and venture capitalists are increasingly growing hesitant about funding to large losses without a real path to profitability after the WeWork debacle.And it’s been a blood bath in terms of losses. Uber last week said Uber Eats lost more than $300 million in adjusted Ebitda, a measure of profitability, in the first quarter alone. And earlier this month, Grubhub posted a $33 million loss of its own for its first quarter. Industry analysts widely believe that the private players DoorDash and Postmates also have generated significant losses over the past year as well.These large losses can’t go on forever. That is why a Uber-Grubhub merger would benefit both the companies themselves and the rest of the industry. By taking out one big player, it could help rationalize pricing and lower the amount of promotional activity. Further, there are likely hundreds of millions of annual cost synergies between the two companies from the overlap in marketing and operating expenses, improving profitability as well.
The combination of Uber Eats and Grubhub would be especially powerful in major U.S. cities. According to Second Measure’s latest U.S. food-delivery market estimates, DoorDash leads with 42% share, followed by Grubhub’s 28% and Uber Eat’s 20%, with Postmates fourth at 9%. Gordon Haskett Research Advisors says Uber and Grubhub combined would control nearly 80% of the New York City market, 60% of Chicago and 65% of Miami, given the combined firm more pricing power if a deal is consummated.
This of course raises anti-trust questions around any possible deal. But given the industry’s large aggregate losses and the multiple major players that will still remain after a potential transaction, it may be less of an issue. And given the importance of food delivery in a pandemic world, a sustainable industry structure could be good news for everyone.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron’s, following an earlier career as an equity analyst.
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