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Why GrubHub's Declining Market Share Will Start Eating Away At The Share Price

|About: GrubHub Inc. (GRUB), Includes: AMZN


After falling post earnings, GrubHub is up over 30% in the last month.

App Store data offers new insight into food delivery wars, and GrubHub is losing.

Competition is just starting paid acquisition efforts.

Expect GrubHub to slash estimates on next earnings call.

GrubHub (NYSE:GRUB) is losing market share, and its most formidable competitors are only starting to ramp up paid user acquisition efforts. As the competition continues to unfold this quarter, I expect GrubHub will slash its FY16 outlook on its next earnings call.

Rapid Ascent over the Last 16 Trading Days

GrubHub's stock has been on a tear of late. From its intraday low of $21.41 on May 19 to its close of $28.25 on June 13, GrubHub jumped nearly 32%. This came on the back of Goldman Sachs reaffirming its "buy" rating on May 31, Citigroup reaffirming its "buy" rating on June 2, Maxim Group beginning coverage with a "buy" rating on June 3, and an upgrade by Monness Crespi & Hardt from a "neutral" rating to a "buy" rating on June 6. All of this has happened despite Amazon's (NASDAQ:AMZN) announcements that it continues expanding its restaurant delivery service into markets in direct competition with GrubHub. Given the recent jump in the stock price, prudent investors should pause to consider whether now is a good time to sell.

App Store Data Suggests GrubHub is Losing Market Share Quickly

Over the last six weeks, the total number of App Store reviews for GrubHub and Seamless (Cohort 1) increased by 2.5% compared to an increase of 7.7% for the top 8 comparable food delivery apps (Cohort 2). The full data set can be viewed here. That list includes restaurant delivery services Eat24, UberEats, DoorDash, Postmates, Favor and Caviar, as well as food delivery services Sprig and Munchery. For investors and Analysts with buy ratings on GrubHub, these numbers should be alarming, as they suggest a much steeper decline in market share than has been modeled into earnings projections. Recent projections estimated that GrubHub held 61% market share in 2014. Using the total number of App Store (iOS) reviews for GrubHub and Seamless versus "Cohort 2" food delivery apps, that figure is fairly consistent with the App Store proxy for market share at just above 60%. On Google Play (Android), the share of reviews for Cohort 1 is somewhat higher around 68.5%. Given that the demographics for people ordering food delivery services via a mobile app, it is more likely that the majority of orders come through iOS than Android. Also, it is important to note that this market proxy does not account for Amazon Prime Now or the dozens of smaller restaurant delivery services available on and off the App Store.

What is most important to note however, is the relative growth of Cohort 2 versus Cohort 1. While each of these services individually are still very small relative to GrubHub and Seamless, for the time being they appear to collectively be cutting away at GrubHub's market share by nearly 100 basis points every five to six weeks. In the last six weeks, both UberEats and DoorDash are particularly outperforming the rest of the group and could pose a serious threat as they ramp up their user acquisition efforts in the coming months. DoorDash recently closed on a $127 million funding round for expansion into new cities. At the same time, DoorDash is developing more partnerships with chains while building a logistics platform that gives more control back to restaurants. Meanwhile, UberEats promotions activity has picked up noticeably over the last few days with a 6x increase in the number of Twitter mentions. Uber starts ramping up its user acquisition efforts and expansion into new cities about 6-9 months after initial launches (when they are still working out technical bugs and figuring out the operations model). Given what we have seen from the Uber playbook before, it would not be surprising to see a major effort by UberEats to dramatically steal users and market share from GrubHub at some point this summer.

For GrubHub and the food delivery space, App Store data and feedback from restaurants is a good way to "channel check" the health of the business in between reporting periods. Obviously this is an imperfect measure as it will never perfectly correlate to order volumes, and fails to provide any insights into customer churn. Furthermore, users may be more likely to leave a rating for one app than another based on their experience and how well they liked or disliked the it. All of these factors add some noise. However, based on how well this metric correlates to other market share estimates, I would argue that this measure is a much better indicator of current market performance than the macro models and high-level competitor assumptions that most Analysts use in tweaking their forecasts. I will continue to track these and other metrics and run regressions against official user growth and order volume statistics in future periods.

To view the detailed dataset showing GrubHub's decline in the relative share of App Store reviews, please view this link.

Other Considerations

Insiders are dumping shares. In the last 30 days, executive officers have collectively sold over $16.8 million in stock, the highest monthly sales volume in over a year. This includes CEO Matthew Maloney and CFO Adam Dewitt.

Restaurants are not loyal to any single platform. In meeting with several restaurants operators in Chicago over the last few days, I asked them how happy they were with their delivery partners. Each used at least two delivery partners including GrubHub, UberEats and DoorDash. The consistent response was that they are not particularly happy with any of these "partners" and that the from the restaurant perspective, the biggest concern is with how much commission they have to pay to operate on each platform. Their second biggest concern is with drivers who show up late to pick up orders, negatively impacting the quality of the food.

During the last earnings call, Matt Maloney commented that there is no real advantage to having more drivers on the road. However, restaurant owners will tell you that driver density matters enormously to creating a fast and efficient network to get orders out. An average order takes no more than 10 minutes to prepare and many restaurants have their orders ready in 5 minutes. While Grubhub may insist that delivery companies don't win on a logistical advantage, as someone who has ordered from all of the major restaurant services, I believe that the speed and efficiency is the key to a winning delivery service. The restaurants will partner with multiple platforms and more business will ultimately go to the provider that can get the food delivered to customers the fastest. That also happens to be Uber's position and early indicators are that they deliver much faster than GrubHub.

In conclusion, GrubHub will continue to face an uncertain future in the face of intense competition over the next couple of years. It remains to be seen whether they can continue to hold onto their position as market leader. What is perhaps more clear, however, is that GrubHub earnings will decline as they spend more money to compete with an onslaught of well-funded and agile companies aiming to take away market share from GrubHub.

Disclosure: I am/we are short GRUB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.