The online food delivery market size is over US$150 billion and the pandemic had greatly played in food delivery companies’ favour - the food delivery market more than doubled during the pandemic. Particularly between March and May 2020, when lockdowns in Europe and the United States were the most severe, the food delivery market spiked. Such a trajectory maintained and is seemingly becoming permanent as consumers developed different food habits. The online food delivery market is projected to grow at an annual rate of 7.5% over the next few years leading to the question: what market trends are we witnessing currently?

A Highly Competitive, Low Margins Sector

Despite the growing market, many firms operate with low margins, struggle to break even and experience cost-containment issues. This is primarily due to the highly competitive nature of the restaurant and food delivery market. The increasing bargaining power of buyers combined with low product differentiation results in increasing costs of logistics and constant promotional activity having to be carried out, ultimately increasing the costs of running the firm despite the relatively low capital investment needed to set up the company initially. Price competition also leads to erosion of profit margins. For example, the food delivery giant DoorDash increased its revenue by 69% to $4.88 billion in 2021, yet published an annual net loss of $468 million the same year.

The M&A Frenzy

Naturally, firms turn to other paths of profitability such as improving delivery time to complete more deliveries per hour. Consolidation becomes a key strategy - firms can benefit from economies of scale, particularly needed since food delivery is a sector with low margins that only increase as the scope of delivery increases. Consolidation and synergy implies an increased customer base and an advantage in geographic competition, attracting even more customers.

Furthermore, due to the highly saturated market, firms tend to turn to M&A to absorb competitors and increase their own market power, which can be used to command higher fees from restaurants or customers, significantly increasing their negotiating power. Let’s look at an example.

Doordash’s $8.1 bn Acquisition of Wolt

Just November last year, DoorDash announced its $8.1 billion acquisition of Wolt in an all stock deal. DoorDash is a US based platform connecting people with local restaurants, grocery stores and convenience stores. Wolt is a Finland based private food delivery firm catering to over 10 million customers across 23 countries.

Wolt was reported to have tripled their revenue to $330 million in 2020 with net loss of just $38 million, which would give it a 24.5x implied price to revenue multiple (TTM) (note that it is not common to calculate the P/E multiple for food delivery companies since frequently there are no earnings). This is quite high if we compare the multiple for similar transactions, such as Just Eat Takeaway’s acquisition of Grubhub, also in 2021, which has a 4.1x multiple.

The deal rationale was that Doordash wanted to strengthen its presence in the global online food delivery market which is expected to grow at a CAGR of 15.4% (till 2025), and acquisition of Wolt would expand its international footprint from just 4 countries to 27 countries - essential in the highly saturated food delivery market. One could argue that despite the really high multiple, the deal makes strategic sense as the growth rate of the market will likely decrease post pandemic so the network effect should be built earlier on for food delivery firms. In addition, big market players such as Uber Eats in Europe are similarly looking to consolidate so a larger deal is needed to compete.

Raised scrutiny from regulators

At the same time however, firms and investors should consider the consequences of increased consolidation. These include possible duopolies or monopolies, reduced margins for restaurants, increased competition among local delivery players, reduced service quality, fewer choices, less innovation, etc. The potential subsequent government intervention may greatly affect the market environment. For instance, during the pandemic some restaurants struggled with hefty commission fees charged by delivery companies, up to 30% of an order. As a result, Washington, Seattle and some other places placed caps on these fees. Apart from that, we also see raised scrutiny from regulators due to antitrust concerns. Uber’s plan of acquiring Grubhub was halted by such regulations. Many delivery platforms relied on the gig economy and ESG and government concerns meant that the working conditions of employees are also being inspected, possibly affecting consolidation.

To summarise, food delivery is seeing a radical change from the old simple service of delivering food to customers into a market of consolidation. It is natural to expect more M&A activity over the next few years, resulting in very few players left in the market. As firms unify their operations, we should also expect to see changes in the business structure, including a more one stop shop experience which likely calls for other forms of integration.

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