On July 6, huge news reverberated across the food-delivery industry when Amazon (AMZN +3.49%) announced a partnership with Grubhub, a subsidiary of Just Eat Takeaway (JTKWY +0.00%). As a part of the deal, Amazon Prime members have the ability to get Grubhub+ -- the company's premium subscription service -- for free in the United States. Given the huge prominence of Amazon Prime, Grubhub competitors Uber and Doordash saw their stocks sell off sharply the day of the announcement.
Let's check out what this partnership means for Grubhub and the entire food-delivery market.
Free Grubhub+ for a year
The main announcement from Grubhub was that existing Amazon Prime members can try Grubhub+ for free for an entire year. Grubhub+ typically costs $9.99 a month, so this is a huge bargain for food-delivery users. With over 150 million estimated Prime accounts in the United States, Grubhub can target virtually the entire country with this offer. (Remember, a lot of Prime accounts have multiple users.)
On top of the partnership, Amazon agreed to acquire a 2% stake in Grubhub with the option of increasing it to 15% in the future. Since Grubhub is a subsidiary of Just Eat Takeaway, it's hard to calculate how much this stake is worth, but it's likely a key reason Amazon agreed to the deal. If things go well for Grubhub, it will be able to share in the upside.
How this hurts Doordash and Uber
DoorDash and Uber are the kings of food delivery in the United States. In May of 2022, third-party analysts estimated that DoorDash had a 59% market share of monthly sales and Uber had 27% (combining Uber Eats and Postmates). These market shares have grown over the past few years at the expense of Grubhub, which only had an estimated 13% market share in May.
It's pretty obvious how this Amazon partnership could hurt Doordash and Uber. Food delivery is almost entirely a commodity business, and if Grubhub can offer a better price to consumers, subsidized by one of the largest companies in the world, it's likely many customers will switch providers.
We can already see this happening, with Grubhub's mobile application shooting up the app-store rankings in the United States. If I were an investor in Uber or Doordash, I would be watching this Amazon partnership with great interest as it could be a huge threat to the long-term value of my shares.
There's a ton on the line here. Doordash generated almost $5 billion in revenue in 2021. With food-delivery sales growing at 8% a year right now, this could be a huge opportunity for both Grubhub and Amazon if they can win back significant market share from these delivery rivals.
OTC: JTKWY
Key Data Points
Why it doesn't matter
While there's a large revenue opportunity for Amazon and Grubhub to go after with this partnership, food delivery is a tough business to make money in. DoorDash had huge operating losses in 2020 and 2021, even though it gained market share and had an ideal operating environment during the COVID-19 lockdowns. Uber has never generated a positive operating profit.
Amazon will obviously be fine, as this is only a small part of its overall business. But if you're thinking of investing in Just Eat Takeaway because of this Grubhub deal, you should evaluate whether these business models are financially sustainable over the long haul. If not, then it's best to avoid the food-delivery space altogether.
