For as many stocks and industries that I love to write about and invest in, there are just as many that I try to avoid. I don’t like the oil industry because of its detrimental environmental impact and the limited future it has in the face of a swathe of new renewable technologies. I dislike airlines because I think that the industry has permanently diminished and business travel will never return to its former highs. The debt that some of the big players like United (NASDAQ:UAL), Delta (NYSE:DAL), and American (NASDAQ:AAL) have taken on to get through the pandemic is also a massive deterrent. And I dislike the food-delivery industry because it’s an unprofitable, predatory animal that inspires no brand loyalty from its customers while treating both its workers and merchants terribly. Which brings us on to today’s acquisition.
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Uber acquire Postmates for $2.65 billion in an all-stock deal
The acquisition was reported by Bloomberg and is expected to be announced this morning. The deal seems like a consolation prize for Uber (NYSE: UBER), whose attempted acquisition of Grubhub (NYSE: GRUB) — a significantly larger business than Postmates — fell to the wayside. Grubhub would go on to be bought by Dutch delivery company Just Eat (AMS: TKWY) in a deal worth $7.3 billion.
In acquiring Postmates, Uber will gain ground on the domestic leader in the industry, privately-owned Doordash, in key areas like Los Angeles and the South West. The move will also narrow the competition in the U.S., making it essentially a three-horse race between Uber Eats, Doordash, and Grubhub. The combined market share of Uber Eats and Postmates will come to 37%, compared to Doordash’s 45% and Grubub’s 17%.
This is important because the nature of the industry is bereft of any brand-loyalty amongst competitors. Apart from exclusive deals with restaurants — as Uber had with McDonald’s (NYSE: MCD) up until last year — there is little to no differentiation between the products on offer, with customers flip-flopping from one app to the other in search of the best deal. The same behavior can be seen in the ride-hailing industry between Uber and rival Lyft (NASDAQ: LYFT). By growth through acquisition, a tactic used by Uber CEO Dara Khosrowshahi successfully in the past, Uber is both taking control of its former competitors’ market share while also reducing the number of options available to customers.
What’s next for food delivery?
The story that came out at the start of the year concerning Domino’s Pizza (NYSE: DPZ) outperforming Google (NASDAQ: GOOG) since their respective IPOs back in 2004 shows that food delivery can work. However, Domino’s is a very different animal and I just don’t think that the current app-battle for delivery supremacy we are witnessing has any real longevity. The growth at all costs strategy has led to a number of concerning behavior patterns in the industry, including this case of pizza arbitrage by Doordash, and some sinister, predatory behavior by Grubhub. There is also the additional cost passed on to the consumer to be taken into consideration. Oh, and to add the cherry on top, none of these companies are actually making a profit.
So let’s break it down:
- The companies are unprofitable.
- The workers are treated as contractors rather than employees, with no rights to speak of.
- The restaurants are put under immense operational and financial pressure to meet demand on much shorter margins.
- The customers pay significantly over-the-odds.
It’s unsurprising after reading all that to find that Softbank (TYO: 9984) has a significant stake in both Doordash and Uber, as well as backing a number of international food delivery services as well. Based on its recent history, when Softbank zigs, you should most definitely zag, which is what Amazon (NASDAQ:AMZN) did last year, shutting down Amazon Restaurants. Looking at the state of the industry now, I feel Bezos made a prudent decision, even if he still holds a stake in London-based Deliveroo.
While the future of the food delivery industry is as murky as the business practices of the companies who lead it, it’s hard to imagine a world without this bastion of convenience. I think a serious shake-up is coming, and perhaps Postmates will be the first domino to fall in a wide-spread consolidation. Whether this will be for the good of any of the stakeholders involved is highly doubtful considering the industry’s track record.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.