Food delivery has not been a very profitable business in the past. In fact, net income has been elusive. Laura Forman reports in The Wall Street Journal on the plan to change that, eventually. She writes:
They say those who don’t learn from history are doomed to repeat it. But in food delivery, DoorDash DASH -4.10% and Uber Eats are trying to avoid repetition.
Last month, Grubhub GRUB -1.91% Chief Executive Matt Maloney called food delivery a “crummy business” in an interview with The Wall Street Journal, something he has been quoted as saying in cruder terms years earlier. Grubhub was founded as an online marketplace, and its then marketing-only business was generating margins of 35% before interest, taxes, depreciation and amortization, Forbes reported. Restaurants were once responsible for handling delivery on their own, and the app mainly connected them with diners. The economics of the delivery business, Mr. Maloney said at the time, were break-even at best.
Grubhub ended up investing in delivery in the face of increasing competition beginning in 2015, hoping to drive more eaters and higher ordering frequency. As of just a few years ago, Grubhub had a dominant lead in the U.S. food delivery market and figured it could use the advantage of scale to make the overall economics work. But in 2018, Grubhub lost money for the first time as a public company. It hasn’t generated annual net income since. In 2020, Grubhub agreed to combine with Dutch food delivery company Just Eat Takeaway.com in a deal that is set to close this month.
Now, the competition thinks it can sustainably do what Grubhub couldn’t: turn profits in the delivery business. They aren’t there yet. An analysis by Deutsche Bank found DoorDash pocketed an industry best of just 2.5% of a customer’s bill at the height of the pandemic, the Journal reported. DoorDash, now the U.S. food-delivery market leader by a wide margin, has posted four consecutive quarters of profits on the basis of adjusted Ebitda, but has yet to post a year of net income. Uber Technologies UBER -2.11% ’ food-delivery business, Uber Eats, isn’t even profitable on the basis of adjusted Ebitda, though the company is projecting profitability on that measure by the end of the year.
To improve their economics, DoorDash and Uber are focused on leveraging their growing scale to create a version of delivery “super apps.” Having baited consumers during the pandemic with restaurant orders, they now hope to retain them by adding delivery of higher-margin verticals such as alcohol, convenience and pharmacy products.
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