Food Delivery Industry – The Struggle for Market Share
The Background:
About two decades ago, the first online food delivery companies were set up; initially, they lost much more than they earned. However, times have changed significantly since then. In 2019, Forbes predicted that the online food delivery industry will ‘supersize’ to a huge $200 billion by the end of 2025. These outstanding predictions of growth have led to investors being bullish and the pandemic has further reaffirmed this view. A study by Citigroup noted that COVID-19 has had a net positive impact on frequency and spending on online food delivery with the majority of new users (estimated at 57%) being likely to use the service again. As a result, the food delivery industry appears to be hugely profitable and is definitely one to watch in the future. Therefore, it comes as no surprise that there has been much ‘in-market consolidation’ within the industry. In the food delivery industry, aggressive marketing can be seen to be detrimental; it makes it overwhelmingly tough for companies to earn money. As a result, ‘in-market consolidation’, where competing companies merge together, becomes a much more viable option. Following a merger, the newly combined company will benefit from an improved bottom line through cutting its marketing spend to grow its revenue much faster than its costs, whilst simultaneously benefiting from economies of scale. Thus, businesses within the food delivery industry have been exploiting these economies of scale for a while now. However, the competition is about to get even more fierce.
What’s Happening?
In 2018, the Dutch company Takeaway.com, established itself as an aggressive expansionist by acquiring Delivery Hero for $1.1 billion. In February 2020, Takeaway.com took it even further by merging with the British giant Just Eat for £6.2 billion. Moreover, as of 10th June 2020, Just Eat Takeaway.com is combining with Grubhub for $7.3 billion to become a leading global food delivery player. From this perspective, it seems as though Just Eat Takeaway.com has begun to dominate the market entirely.
However, this is not entirely the case. Based in Silicon Valley, there are two more rivals within the industry – DoorDash and UberEats – with the latter attempting to reassert themselves within the industry. Having lost out on buying Grubhub to Just Eat Takeaway.com, UberEats has recently placed an order to buy Postmates for $2.6 billion. A combined UberEats and Postmates would result in a company with the second largest in market share in the US. Furthermore, a merger between these two would mitigate the losses that UberEats has been experiencing in recent quarters.
Therefore, it is evident that the competition within the industry is becoming increasingly fierce with each company attempting to gain market share through horizontal integration. As a result, M&A activity within the industry has been booming.
The Legal Implications:
There have been many legal implications as a result of these large scale mergers within the industry with concerns about the potential formation of an oligopoly. Thus, it is an imperative that competition laws are abided by. Initially, in light of the merger announcement of Just Eat and Takeaway.com, the U.K. Competition and Markets Authority opened an inquiry into the deal leading to an issuance of an initial enforcement order. Hence, the concern for these high-profile transactions potentially lessening market competition can be seen as rather significant.
Nevertheless, especially in the current climate, law firms can be seen to be benefitting hugely from the work. With the pandemic causing an economic downturn, law firms can be seen to be capitalising upon these M&A deals to get back on their feet and continue making profit. The raft of firms advising on Just Eat Takeaway.com’s latest merger with Grubhub include Kirkland and Ellis and Slaughter and May. With this in mind, the fact that these M&A deals are still very much going ahead and in demand is beneficial for both law firms and the economy.
by Bobby Zhu