Grubhub was acquired a year ago for $7.3 billion by Amsterdam-based Just Eat Takeaway but has struggled since. The deal was badly timed, coming in just as the pandemic-fueled meal delivery boom began to wane.
Just Eat has already started looking for a buyer for Grubhub- possibly at a much lower cost than what was paid for the company. Key amongst the issues plaguing the company is the fact that it has been losing market share in the U.S to its rivals DoorDash and Uber.
However, the stock took a turn on Wednesday following the announcement by Amazon (ticker: AMZN) and Just Eat (ticker: JTKWY) stating that with immediate effect, U.S Amazon Prime members would be allowed to sign up for a free Grubhub+ membership, which would include no-cost delivery from “hundreds of thousands” of restaurants. Grubhub typically costs roughly $9.99 a month.
The news affected DoorDash and Uber stock prices as the company’s shares were sold off in large volumes. Although Grubhub is considered a distant number three in the U.S food delivery market, there are obvious concerns that with Amazon, the company’s position could drastically improve. According to Goldman Sachs, Amazon is estimated to have 82 million U.S Prime subscribers- a large pool of potential Grubhub subscribers. Interestingly, Goldman places Grubhub + subscribers at roughly 2.5 million members.
Needham analyst Bernie McTierman commented that, if nothing else, this is a “headline negative” for both DoorDash (ticker: DASH) and Uber (ticker: UBER) and added that the actual impact of the deal would depend on how aggressive Amazon is in leveraging it.
“The bear case for the two incumbent leaders is if this step in Amazon entering the restaurant delivery marketplace, which would represent incremental competition relative to the status quo,” McTiernan wrote. “For DoorDash in particular, which has benefited strong share in the suburbs, this partnership could introduce a stronger competitor.”
He noted that it is “difficult to compete against free.” He also said this could signal Amazon becoming more aggressive in grocery, “a growing new end market” for both Uber and DoorDash.
This isn’t Amazon’s first rodeo into the food delivery market. In 2019, the company shut down its own food delivery service, Amazon Restaurants, following a four-year-run that found little success.
According to Just Eat, the deal is expected to be earnings and cash flow positive to its financial results in 2023 and beyond. As part of the deal, Amazon gets warrants representing 2% of Grubhub’s equity, exercisable at a “de minimus price,” with warrants for an additional 13% of the food delivery service at a “formula-based price.”
Just Eat Takeaway didn’t keep the fact that it continues to explore the total or partial sale of Grubhub a secret.
DoorDash shares dropped 7% on the news, landing at $69.99. Uber declined by 3.4% to $21.75. Just Eat ADRs stand at a 13.4% gain, landing at $3.19.