By: Roshni Padhi (Stanford University)
In the span of one year, five large players in the food delivery industry have consolidated into three, following three landmark mergers. First, Amsterdam-based Takeaway announced its acquisition of London-based Just Eat on July 29th, 2019 as an all-stock transaction of $7.8 billion. The deal was approved by regulators in late April of 2020 and was intended to increase Takeaway’s market share in the UK, among other countries, while creating cost synergies of $25 million (primarily through centralizing customer acquisition and restaurant partnership processes). Then, in early March of this year, Uber and Grubhub discussed a possible acquisition of the latter by the former. The deal aimed at consolidating the US food delivery industry with a pro-forma market share of 48%, a number larger than DoorDash’s 42%, but it was renegotiated several times between the two parties as they attempted to find a fair price. From Uber’s viewpoint, it made sense to zero in on the Uber Eats portion of their franchise, given that COVID-19 has ensured that ridesharing has taken a hit. Grubhub, on the other hand, was relying on the fact that it would be valued at a premium during the transaction as well as that they would gain access to Uber’s superior intelligence regarding delivery networks. However, this deal fell apart due to antitrust issues, the inability to agree on a price, and a cultural mismatch. Both Uber and Grubhub rebounded soon enough, though. On June 10th, the newly formed Just Eat Takeaway leapt at the opportunity to acquire Grubhub in an all-stock deal of $7.3 billion, allowing Just Eat Takeaway to access the North American market and become a global leader. Uber, not one to be left behind, announced on July 6th that it was going to be acquiring Postmates for $2.65 billion in stock, citing revenue synergies arising from complementary strengths in customer geographies and restaurant partners. The two major food delivery services left in the space are UK-based Deliveroo (which stars Amazon as one of its lead investors) and US-based Doordash, which confidentially filed to go public in February and is now raising about $400 million in Series H funding.
This recent consolidation in the food delivery space revolves around a few key factors. First, the markets are facing uncertainty due to COVID-19, leading companies to prioritize liquidity and want to conserve cash – that’s why all of the mergers described above took place as all-stock transactions. Second, if a food delivery company were to have larger number of customers – a common synergy arising from these acquisitions – it could reduce the amount of delivery fees that it charges per customer, making it extremely attractive in an industry where margins are so competitive. Third, the pandemic has forced the majority of restaurants to transition to a “delivery-first” model where they rely heavily on orders placed through food delivery apps. Food delivery companies such as Uber Eats and Grubhub are rushing to step up to the challenge by eliminating either delivery or commission fees. All in all, delivery sales are expected to attain a 12% annual growth rate over the next five years due to consolidation as well as the rise of technology-based delivery solutions.
One possible strategy that food delivery players might adopt in response to this trend is the acquisition of ghost kitchens. Ghost kitchens are kitchens that operate without physical brick-and-mortar kitchen locations and sell to customers solely through food delivery and takeout services. There are over 1,200 ghost kitchens globally, generally concentrated in metropolitan cities to encourage pickup and reduce delivery costs. They offer several unique benefits compared to other restaurants, including allowing providers to focus on a delivery-only model at centralized locations that minimize distances to customers, in some cases even building “pods” that are mobile settings converted into kitchens and can be moved to wherever demand is greatest. This also prevents them from having to put a large down payment on the retail space upfront, meaning that rent averages out to be about 25 times less expensive and there is no need to hire additional staff beyond employees who work in the kitchen itself. Since the facilities are fully furnished, chefs don’t have to spend money on buying kitchen equipment and appliances either. Ghost kitchens can also eliminate the friction that arises as a result of working with multiple (sometimes even up to eight) delivery platforms. They can also expand outreach to markets that might be inaccessible otherwise as well as constantly adapt their menu offerings based on real time customer feedback with low initial investment.
Food delivery companies have recognized the services that ghost kitchens offer and are beginning to experiment with their unique value proposition. For example, Uber noticed an increase in poke orders and therefore partnered with an existing Japanese restaurant SushiYaa to create a new separate brand Poke Station which would exclusively contact and sell customers through Uber Eats. A major food delivery service in India, Swiggy, has over 1,000 ghost kitchens, and expects this investment to propel a current median of twelve meals per month per user to over forty in the long term, illustrating more than a 200% increase in revenue. Additionally, Deliveroo acquired ghost kitchen Maple in 2017 with the intention of using the technology that Maple had developed in order to help grow Deliveroo’s recent investment into ghost kitchens, or what they termed “editions.” The ghost kitchen market is projected to reach a valuation of $1.8 billion by 2025 with a 20.4% annual increase until then, and this estimate is despite a 10% discount due to the economic impacts of COVID-19. In line with this, venture capital activity in the area has steadily increased at a rate of more than 2.4 times every year since 2016. The largest VC investment into ghost kitchens is recorded to be the $900 million late-stage investment into Reef Technology, led by Softbank Investment Advisors, indicating a long-term positive outlook for the industry.
By reducing delivery fees and expenses, streamlining the takeout process, and being able to quickly adapt to constantly changing environments, ghost kitchens offer added value for both the customers that they serve as well as the enterprises and chefs that run them. However, it can be difficult for them to establish a strong reputation amongst customers who would never be able to interact with a physical, brick-and-mortar location of the company. This lack of recognition and immediate relationship establishment is why acquisitions by food delivery titans are so symbiotic – since most food delivery platforms are cash flow negative due to the fact that competition for market share is so cutthroat, ghost kitchens allow them to establish a unique value proposition for their customers, while also allowing the ghost kitchens to access a much larger base of customers. This vertical integration will lend a hand to strategic consolidation within the food delivery industry; this is not only reflective of how competitive the industry is, since it forces different platforms to constantly reduce their margin in order to remain appealing to the customer, but it also demonstrates the way in which the restaurant industry can and will thrive in the face of adversity.
Pitchbook Report: “The Burgeoning Ghost Kitchen Industry: An In-Depth Analysis of the Haunting World of a New Food Industry Model.”
Pitchbook Report: “Foodtech: Q1 2020.”