Flash Equity Report /
Global

Will Uber's bid for GrubHub deliver for e-commerce in emerging markets?

  • The marriage between ride hailing and food delivery is made in heaven

  • Food delivery apps in EM hold a treasure trove of information

  • EM e-commerce is on the rise, but watch out for the cash burn

Will Uber's bid for GrubHub deliver for e-commerce in emerging markets?
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Follow
Tellimer Research
13 May 2020
Published byTellimer Research

Though the crisis brought on by Covid-19 has brought misery for many, it has been a godsend for the food delivery business. There has been a surge in demand for meal delivery during lockdowns.

Uber Technologies Inc. (UBER US), the ride-hailing behemoth, is about to make an all-share bid for Grubhub, the food delivery company, according to media reports. Uber would integrate Grubhub (GRUB US), which is valued at US$4.5 billion. Under the terms reported in the Wall Street Journal, Grubhub shareholders would receive 2.15 Uber shares for each share. Grubhub rose 29% on the news. Uber was up 2%.

Uber has its own food delivery arm – Uber Eats. DoorDash Inc is the market leader in the US with 35% share and is also the fastest growing. Grubhub and Uber Easts are in second and third, both in terms of market share and growth.

Figure 1: Food delivery market share in US (%)

Source: Statista.com


This deal is a pathbreaker in the post Covid-19 world. EM Investors would be well-served to heed the following lessons:

(1) The marriage between ride-hailing and food delivery is a match made in heaven.

It is hard to find two businesses with a more compelling reason to collaborate. Just as food delivery has boomed, ride-hailing has collapsed. Uber's rides were down 80% in April, ravaging Uber's core business. It recorded US$2.9 billion of net losses in 1Q20, with writedowns in its EM investments. 

Even after global lockdowns ease, there is likely to be ongoing aversion to social gatherings and working from the office. Social distancing could linger for many months and potentially years. A permanent shift to widespread home working would vastly reduce the need to hail rides. 

In contrast, food delivery has become almost a necessity in lockdown, and the need for many months of social distancing could increase demand further. 

There are vast differences in profitability. Ride-hailing burns cash in the hope of growth. Uber has never been profitable and has lost more money than any transport company in the world. GrubHub has been profitable for the past three years. 

But, there is much replication of technology and manpower between the industries. Both have vast databases of customer addresses and preferences. Both have drivers that are motivated and paid through similar types of incentives. An alliance between the two industries seems a natural fit. 

In emerging markets there are dominant ride-hailing companies that are ripe for an alliance with fledging food delivery players. 

Table 1: Select EM ride-hailing and food delivery players

Ride Hailing

Food Delivery

IndiaUber, Ola, Saavari Car Rentals, CarzonrenetSwiggy, Foodpanda, Zomato
ChinaDidi, Yidao, Shenzhou ZhuancheEle.me, Meituan Waiman, Enjoy
IndonesiaGrab, Go-JekKlik-Eat, Gorry Gourmet, Kulina
Sub-Saharan AfricaUber, Bolt, inDriver (Taxify) Jumia Food, Uber Eats, Yum Deliveries
MENAUber, CareemMathaqi, Zomato, Careem Now, Deliveroo
Source: Tellimer
 

(2) Food delivery apps in EM hold a treasure trove of information

Online food delivery is at a nascent stage in EM. The players are dispersed, without dominant players with the scale of the American companies. China is the most advanced market in this regard. The principal players in China are Ele.me and Meituan. International players such as Zomato have made advances in Mena and Asean. 

However, the great virtue of these businesses is not just their cashflow generation or revenue growth. They also provide ride-hailing and EM e-commerce with vast data on consumer choice. 

Grubhub has positioned itself as a digital marketplace. It connects customers to restaurants across many platforms. It has over 110,000 restaurant partnerships in 2,000 American cities, with about 18mn diners as users. Grubhub and its peers have data on eating habits, dietary patterns, addresses and consumer trends. 

(3) EM E-Commerce is in the ascendancy, but watch the cash burn

In the post-Covid-19 world, the market will be far less forgiving of cash-burning e-commerce ventures. Jumia, one of our top picks, is on course to deplete its cash by FY 21. 

We have collated a proprietary metric – the cash sustainability index (CSI) – that rates companies on their ability to generate cash. Those at the top of the index (shown in table 2 below) are likely to have sustainable businesses as independent entities – Argentina's MercadoLibre stands out on this metric. Those at the bottom, such as Jumia, are doomed unless a suitor with deep pockets comes around. 

The food delivery businesses are less depletive of cash than mainstream E-commerce players. Grubhub has been cashflow positive for the past three years, as are other players such as DoorDash. They do not have to procure and store inventory like a retailer, and their products are perishable and quickly consumed. Cash collection is also better. Watch out for more action in this space in the new paradigm. 

Table 2: Tellimer's cash sustainability index (CSI) (positive = cash-generative; negative = cash-burning)
StockIndex rating

BABA US Equity

42.2

EBAY US Equity

37.3

MELI US Equity

20.8

CTRP US Equity

17.2

AMZN US Equity

7.8

BOO LN Equity

8.1

MAN FP Equity

6.4

ASC LN Equity

5.6

SHP SJ Equity

4.3

DUST SS Equity

3.9

DPEU LN Equity

2.9

PIK SJ Equity

2.7

ZAL GR Equity

2.7

CNV FP Equity

-5.0

MMYT US Equity

-14.5

FTCH US Equity

-19.3

3690 HK Equity

-37.1

SE UA Equity

-44.5

JMIA US Equity

-74.5

Source: Tellimer Research