Food apps provide slim
pickings for investors

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

The online food delivery industry may be booming but just like anything new, there is a caveat for investors who wish to access it, according to Maria Toneva, global research analyst at Newton.

An influx of new mobile apps, which do everything from helping users with workout plans to providing hints and tips on how to survive an apocalypse, have created substantial changes to investment sectors just as the gig economy1 has formed ripples in the nature of employment. Together the two have made things more convenient for consumers. Case in point: the world of food.

One of the most globally favored ways to access food online, from millennials to Generation X, is through the use of instant food delivery apps. Many may recognize the names of popular services such as UberEats, Seamless and Grubhub, while one of the leading online food delivery marketplaces in the US is DoorDash.2

These services are accessible via apps and enable consumers to order food from hundreds of restaurants in proximity of their location for a small fee— expanding meal deliveries beyond the traditional pizza and Chinese delivery services which gained popularity in the 1990s.

Such is the rising popularity of these services— online food delivery is set to become a US$200bn industry by 2025.3 However, Maria Toneva, global research analyst at Newton, says with new entrants constantly trying to enter this space and all the additional costs associated, it may make the industry convoluted in the eyes of an investor.

“There’s huge uncertainty as to how investors would make money. These companies can generate a lot of money from consumers but when you add in the other additional costs of pay-out to the deliverers and restaurants, their platform revenue becomes eroded,” she says.

“Another implication to consider is that there’s a lot of private equity4 money out there. This is a highly competitive market and a lot of the big players are subsidizing the delivery aspect of it,” she continues.

For example, one popular delivery app offers a subscription program to its customers. For a set amount each month customers get unlimited free delivery on orders, along with other discounts and offers.5 With perks like that, consumers win by getting to order as much as they want, whenever they want throughout the month. However, according to Toneva, the company may struggle with future profitability as they still need to pay the ‘deliverer’ hourly wages and pay out a portion of the sales to the restaurant.

“Reminiscent of the dot.com boom of the late 90s, the cash burn of such businesses is high and a winning or dominant business model has yet to emerge,” says Toneva. “Complicating matters is the fact that many such companies feature delivery staff that epitomize the downside of the gig economy,” she continues. This has resulted in criticism being leveled at such services over the lack of job security and benefits.

Foodora, a food app popular in Canada, Norway and The Philippines, was recently forced to implement a new contract for 600 Nordic employees after they went on strike. The new contract guarantees compensation for equipment used on the job, which include bikes, clothes and smartphones (which are usually supplied by the employee) as well as an annual pay increase for full time workers. It is considered one of the first successful collective bargaining agreements between a global food delivery platform and a trade union.6

Despite the attractiveness to consumers of the food industry, the question remains, is the food app marketplace mature enough for investors to generate returns? According to Toneva, the only way profit would seem achievable at this stage would be through consolidation. “That’s the only way we’re going to see a change in this industry. Otherwise the delivery fee would need to increase significantly but even if that were to happen, it could make customers lose interest and order less,” says Toneva.

UK-based JustEat and its former rival Netherlands-basedTakeaway.com recently agreed a £9bn ($11.6bn) merger, which would make them one the world’s largest online food companies, but the deal is yet to be finalized. With talks of the deal officially being in action by the end of the year, the merger would make the enlarged company UberEats’ biggest competitor.7

“In our view the market needs to consolidate. It needs to become less competitive in order for investors to really make a profit, but at this stage globally, the big companies are still interested in competing with one another,” she concludes.

1 Gig economy: A gig economy is a free market system in which temporary positions are common and organizations contract with independent workers for short-term engagements. www.techtarget.com

2 Sensortower.com: Top Food Delivery Apps in the US for Q2 2019 by Downloads. July 12, 2019

3 Forbes: ‘The Soon To Be $200B Online Food Delivery is Rapidly Changing The Global Food Industry’, October 24, 2019

4 Private equity: an alternative investment class and consists of capital that is not listed on a public exchange. www.investopedia.com

5 Deliveroo.com: Deliveroo Plus, October 24, 2019

6 Vice.com: ‘Gig Workers Are Forming the World’s First Food Delivery App Unions’, 24 October 2019

7 The Independent: ‘Just Eat in £9bn merger with Takeaway.com to create global food delivery giant’ 7 November 2019

 

 

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

BNY Mellon Investment Management is one of the world’s leading investment organizations and one of the top U.S. wealth managers encompassing BNY Mellon’s affiliated investment management firms, wealth management organizations and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited and Newton Investment Management (North America) Limited (NIMNA Ltd). In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.

Views expressed are those of the manager stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Newton and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. ©2019 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.

MARK-89360-2019-11-21