Three milestone deals over the course of the last twelve months have caused the six central players in the food delivery industry to consolidate into four. The competition for a cheaper delivery service, the global restaurant shift to a ‘delivery-first’ model and the prioritization of liquidity have accelerated consolidation amongst market leaders, with a number of high-profile acquisitions in recent times. COVID-19 and its subsequent impact on consumer behaviour have further accelerated change in the industry, leading to a movement away from on-premises consumption and an increase in ‘Ghost Kitchens’- takeaway suppliers without an in-house restaurant alternative.
Initially, Amsterdam-based Takeaway.com acquired London-based Just Eat in April 2020 in an all-stock transaction of 7.6 billion USD, to form Just Eat Takeaway. The acquisition aimed to increase Takeaway.com’s market share in the UK while creating cost synergies of 25 million USD by centralizing customer acquisition and restaurant partnership processes.
Secondly, in March 2020, Uber sought to acquire Grubhub, with the intention of positioning itself as the leader in the US food delivery industry by securing a 48% market share. Considering that COVID-19 has caused a vast decline in ridesharing, focusing on the food-delivery side of its franchise seemed an astute strategy. However, this acquisition fell through because of a combination of cultural incompatibility, antitrust issues and the failure to agree on a price. Nevertheless, the newly formed Just Eat Takeaway capitalised on this breakdown to instead acquire Grubhub in an all-stock deal worth 7.3 billion USD, enabling the new company to penetrate the North American market and establish itself as a global leader.
Finally, Uber, eager to remain competitive, acquired Postmates in July 2020 in a deal that valued the company at 2.65 billion USD. Uber named revenue synergies stemming from complementary strengths in customer geographies and restaurant partners as the reasoning behind the acquisition. The UK-based Deliveroo (which notably features Amazon as a 16% stakeholder) and the US-based Doordash (which filed to go public last February valuing the company at 32.4 billion USD) are the two other major food-delivery services occupying the space.
Figure 1. Visual Representation of shifts in market share of Food Delivery Services in U.S. Edison Trends.
A number of central factors have caused this relatively recent consolidation in the food delivery space. COVID-19 is inevitably causing uncertainty so leading players are prioritizing liquidity and the conservation of cash – hence all the aforementioned transactions took place as all-stock transactions. Additionally, since margins in the food delivery industry are so competitive, if companies can acquire a larger customer base – a recurring synergy arising from these deals – companies can reduce their delivery fees charged per customer and offer a more desirable service. Due to the fierce competition in the industry, firms would have to invest heavily in attempting to garner a larger customer base- JustEat spent a huge 35% of revenues in 2019 on marketing, and the consolidations thus far have all featured huge synergies in this area. Most importantly, the pandemic has caused the vast majority of restaurants globally to shift to a ‘delivery-first’ model. This model relies heavily on orders being placed on food delivery apps. Food delivery companies are therefore competing to capitalise most effectively on this surge in demand by eliminating delivery and commission fees.
A potential strategy that the leading food delivery companies may seek to adopt in response to this trend is the acquisition of ghost kitchens. As seen in Figure 2- Ghost kitchens are takeaway suppliers that operate uniquely through takeaway services and do not offer an in-house restaurant alternative. There are currently over 1,200 ghost kitchens globally, and they are largely concentrated in urban areas in order to reduce delivery costs. Ghost kitchens are the direct product of the rise of technology-based delivery solutions, the increasing cost of running a restaurant and the constantly changing customer demand. Ghost kitchens focus exclusively on this delivery-only model at specific locations that minimize distance to customers – some providers have even gone as far as to build ‘pods’, which are mobile sites converted into kitchens that can be moved to wherever demand is greatest.
Figure 2. An illustration to show the difference in order fulfilment between Ghost Kitchens and traditional takeaway routes.
The greatest appeal of the ghost kitchen is no doubt its ability to reduce costs. Rent averages about 25 times less expensive for these providers, as they do not need large premises to accommodate for diners (which is an increasingly attractive proposition as the two-meter social distancing rule demands an even larger property) and they can operate in less competitive locations without the reliance on walk-in customers. Ghost kitchens can further expand into markets that might be financially infeasible for ‘traditional’ takeaway services and also adapt their menu offerings based on changing demand and customer feedback with low initial investment.
By reducing delivery fees and expenses, streamlining the takeaway process and being able to adapt quickly to constantly changing environments, ghost kitchens offer added value for both the customers and the chefs that run them. However, it can be difficult for these kitchens to establish a strong reputation amongst customers who will never be able to interact with a physical restaurant.
The majority of food delivery platforms are cash flow negative because competition for market share is so fierce and ghost kitchens would enable these platforms to make a unique value proposition to their customers, allowing providers to access a much wider client base.
Strategic consolidations and the rise of ghost kitchens are not only reflective of how competitive the industry is, as platforms are constantly seeking to reduce their margin to appeal to customers, but it also shows how the restaurant industry can overcome adversity through a shift to technology-focused solutions.
By Toby Pallister
Sector Head: Daniel Regan