Sectors like healthcare, video gaming and online retail have all benefited from the Covid crisis. But one area easily overlooked is food deliverym writes Artemis fund manager Kartik Kumar..
Perhaps our perception of the sector is coloured by the thought of grime-fronted pizza shops at the hinterlands of every high street and myriad Chinese takeaways and curry houses.
Yet food delivery is now big business – and set to grow. Just Eat Takeaway (JET), which entered the FTSE 100 at the end of 2017, is a €13bn (£11.9bn) company listed in Amsterdam and London. It has gobbled up earlier competitors like Hungry House, merged with Takeaway.com and is now tucking into Grubhub. Its £5.8bn deal with the US company will leave it with over 70 million active customers.
Germany’s Delivery Hero (DHER.DE) is even bigger – it has an €18bn market value and has been expanding its waistline across emerging markets. Others in the sector include China’s Meituan (3690.HK), Softbank-backed Doordash and Uber Eats (both private companies in the US) and Deliveroo (unlisted in the UK).
At around 13% of the Artemis Alpha Trust (ATS) portfolio, food delivery is our largest sector exposure. We own both Delivery Hero and Just Eat.
I am not suggesting either as a stock recommendation. Disruptors can unsettle investors as much as competitors. Take Netflix as an example. Its share price has increased over 60-fold since 2002, but it has lost 25% of its value in a single day four times, fallen 41% on its worst day and had one four-month stretch when it fell 80%.
I think it is interesting, though, to explore the food delivery market and its potential to revolutionise the way we consume food.
At their core, food delivery companies are technology businesses, providing restaurants and consumers a platform to transact. The fee to consumers varies by market, and the fee to restaurants ranges from 10% to 30% of the order value – depending on whether the restaurant or platform provides the delivery service. Just Eat charges an average 12% commission to its 360,000 restaurants.
The offering in any platform business typically improves as scale is achieved. More consumers generate higher orders per restaurant. More restaurants create greater choice and convenience for consumers. The typical restaurant on Just Eat’s platform received just under 1,800 orders in 2016. Last year it was 3,000.
Building scale comes at a cost initially. To become a household name, Just Eat has sponsored ITV’s Love Island and The X-Factor. Deliveroo sponsors the England football team and the FA Cup. But there is only so much recurring spend that is required to build a brand. In established markets such as Holland, food delivery platforms now make profit margins of over 40%.
A coronavirus beneficiary
Just Eat’s UK business saw 33% year-on-year growth in April and May – generating 29m orders. Average order values have risen as whole families have had to stay at home. This growth will have come with limited incremental costs. Tesco, by comparison, has grown revenues by 10% through the crisis but has incurred about an extra £840m as it had to hire an additional 48,000 employees.
High-end restaurants that would never consider takeaways were forced to innovate during lockdown. Londoners can now find Nobu delivering sushi on Deliveroo. Many of these restaurants have experimented with platforms and will be permanent converts. With profit margins on delivered food over 40%, this is a way to increase your ‘covers’ without hiring more waiters and renting more space.
The key question for any investor is how much further can the industry grow and can you be sure of it? The ability to order and pay in one simple app transaction has a lot of appeal to customers – even more so in a socially distanced world – but the ripple effect of being able to order from dozens of restaurants and receive a meal faster than you would from a hotel’s room service has yet to be felt.
In many countries the biggest competitor for food delivery platforms is still the telephone. Just Eat’s customers account for only 15% of the total UK market. In mature markets the figure is 25-30%. Consumers are still using paper menus to order takeaways, in the way they once used Yellow Pages to find a telephone number.
But the long-term case is about market expansion. The average Just Eat customer orders about once a month – out of 90 meals consumed (or 60 if we exclude breakfast). In mature markets the order frequency is three times that. In Nanjing, a city in China, each inhabitant – yes, each inhabitant – is ordering on average over 36 times a year. This means that a city of eight million people is likely to be generating more orders than the whole of the UK.
Innovation is one reason to expect expansion. Delivery Hero and Deliveroo (under its ‘Deliveroo Editions’ brand) are developing ‘dark’ or ‘ghost kitchens’. These are restaurants built exclusively for online delivery. As they don’t need a visible presence – they can be in converted shipping containers on industrial estates, lowering occupancy costs. Using data from past orders, restaurants can predict peak demand and minimise food wastage. Both factors should reduce prices to consumers and increase demand.
Technological advancements continue to improve the service for consumers. GPS tracking was an early development that has reduced delivery times. Deliveroo’s mapping technology guides idle drivers to wait at a location that would be optimum to minimise the drive time to where the next order is most likely to come from. Technology investor Prosus thinks that artificial intelligence is reducing the cost of fulfilling orders by 40%.
Over the very long term, these initiatives could mean that the market becomes significantly bigger than it is today. Prosus goes as far to say: ‘The notion that people gather a bunch of ingredients from a shop and put them together three times a day, 30 times a month – that’s not the way things are going to work anymore.’
The domestic kitchen is not redundant yet, but I am inclined to agree with those who see online food at the stage where Amazon was in the early 2000s. This an industry that could revolutionise the way we eat, as Amazon has revolutionised the way we shop.