The food delivery wars are heating up, and in a move that shocked the world, Amazon (NASDAQ:AMZN), the company which is notorious for disrupting and dominating up-and-coming industries such as cloud and ecommerce has pulled out of the race. Specifically, Amazon’s food delivery business, Amazon Restaurants, shut down in the U.S. in late June after never really gaining traction against bigger and faster-growing peers. It was a missed opportunity to further grow Amazon stock.
But, this is isn’t the last chapter for Amazon in the food delivery wars. Instead, Amazon is attacking the market from a different angle, acquisitions and investments. In recent months, Amazon has lead a financing round in UK delivery startup Deliveroo, while rumors have swirled that Amazon is looking to buy Uber Eats in India .
Having a delivery presence in the UK and India is nice. But, it’s not super important. In the global food delivery market, the U.S. is the golden egg. As of today, Amazon still has no presence in that important market. That’s why Amazon should buy GrubHub (NASDAQ:GRUB). GrubHub is the leader in the U.S. food delivery market.
Sure, that leadership position has eroded over the past few years thanks to increased competition from DoorDash, Postmates, Uber Eats, and the like. But, the company is still growing very quickly, is still very large, and Amazon has all the tools they need to fix GrubHub’s share erosion problems and turn the platform into the unchallenged leader in U.S. food delivery.
Oh, and because GRUB stock has been so weak, Amazon could begin its foray into dominating the U.S. food delivery market at a discount price.
All in all, this move makes a lot of sense to me, and as someone who owns Amazon stock, I’m rooting for this deal to get pulled off.
The Two Minor Reasons Amazon Should GrubHub
Amazon should buy GrubHub for two minor reasons, and one very important reason.
The first minor reason is that GrubHub is one of the two largest food delivery players in the U.S. market, with roughly 33% market share. The other large player is DoorDash, also with around 33% share. After those two, the fall-off is steep. Uber Eats has ~17% share, Postmates has ~11% share, and everyone else combines for a whopping 6% share.
Amazon should get into the U.S. food delivery business not just to be a player in the market, but to dominate the market, much like Amazon.com dominates ecommerce and Amazon Web Services dominates cloud infrastructure. In order to dominate the market, Amazon should start from a leadership position, meaning they should acquire either GrubHub or DoorDash. DoorDash has a $12 billion valuation. GrubHub has a $7 billion valuation. Thus, buying GrubHub makes the most sense financially.
The second minor reason is that the U.S. food delivery market will become a huge and integral part of the U.S. consumer landscape one day, and if Amazon wants Prime to stay atop that landscape, Amazon needs a food delivery arm. Amazon presently dominates the U.S. consumer landscape through its Prime ecosystem, which offers consumers everything they would want – an online shopping platform, fast delivery, video and music streaming platforms, so on and so forth.
But, Amazon has no food delivery platform. Food delivery is becoming super important, and it’s growing super fast. Sales in June across the food delivery space rose 45% year-over-year. Thus, in order for Amazon Prime to maintain its leadership position in the U.S. consumer landscape, Prime needs to develop a food delivery arm, and soon. Acquiring GrubHub would give them that in bulk.
The One Big Reason Amazon Should Buy GrubHub
The biggest reason that Amazon should buy GrubHub is that Amazon has all the tools necessary to not just end GrubHub’s share erosion headaches, but also turn an Amazon-integrated GrubHub into the unchallenged leader in U.S. food delivery.
The logic is simple. Read this article from Second Spectrum. Their data corroborates a very understandable and rational observation about the U.S. food delivery market: there is no customer loyalty. Depending on the platform, customer exclusivity rates are around 30% to 60%. That’s abysmally low.
This lack of customer loyalty is because, in the absence of exclusive food vendor partnerships, the differentiating factor among these platforms is price. Price oscillates wildly. GrubHub will run a promotion one week. Postmates will run a promotion the next week. UberEats will run one the following week. In response, customers are jumping from app to app, chasing the lowest price, which has caused GrubHub to go from the unchallenged market leader to just another big delivery platform.
Amazon buying GrubHub would turn GrubHub back into the unchallenged market leader. How? By absorbing GrubHub into the Prime ecosystem.
Imagine this. Amazon buys GrubHub. GrubHub becomes a part of Amazon Prime. Now, Prime members get free delivery or discounted prices on all orders through GrubHub. Prime members will flock in droves from other platforms, to GrubHub, and they won’t leave GrubHub so long as they keep getting free delivery or lower prices. GrubHub’s market share will soar from 33%, back towards 50%-plus, since pretty much every U.S. consumer is on Amazon Prime.
Overall, then, through combining its already extensive Prime ecosystem with GrubHub’s leadership position, Amazon could turn GrubHub into the unchallenged market leader in U.S. food delivery.
Bottom Line on Amazon Stock
This deal should happen. Amazon should buy GrubHub. They have all the tools necessary to take the struggling GrubHub platform, and turn into the Amazon.com equivalent in the food delivery space.
It especially makes sense today, since the U.S. food delivery market projects to be a $30 billion-plus market in the not-too-distant future, is presently firing on all cylinders to the tune of 45% year-over-year growth, and GrubHub is trading at a multi-year low market cap of just ~$7 billion.
As an owner of Amazon stock, I’m rooting for Amazon to be aggressive here and “buy the dip” in GRUB stock.
As of this writing, Luke Lango was long AMZN.
