Introduction
Just Eat Takeaway.com N.V. (XAMS:TKWY, Financial) (TKAYY, Financial) is a food delivery company. It is the product of a recent merger between Takeaway.com N.V. and Just Eat plc, both of which had already a leading position in the European food delivery market. The deal was announced in August 2019 and closed in the first half of 2020. Under the terms of the deal, Just Eat shareholders received 0.09744 new Just Eat Takeaway shares.
Takeaway.com was founded in 2000 in the Netherlands by Jitse Groen, after he observed how hard it was to find local restaurant menus online. One of the best deals struck by Takeaway is the acquisition of the Berlin-based Lieferando.com for only $103 million (the company was already active in Germany with its Lieferservice branch). Lieferando is today the #1 food delivery player in Germany.
Just Eat was founded in 2000 by five Danish entrepreneurs. Subsequently the company was incorporated in the U.K. The company acquired small food delivery online companies over the years, expanding and reaching leading market positions in the U.K, Canada, Australia and West Europe.
At the time of the merger, the combined company had a #1 market position in 15 countries, received around 355 million orders per year, served more than 155.000 restaurants, with revenues of €1.2 billion, and a total GMV (Gross Merchandise Value) of €7.3 billion.
The company has also a 33% stake in iFood, a Brazilian food delivery company. Just Eat has already received offers as high as €2.3 billion for its share of iFood, but the management thinks that the value is significantly higher.
This year proved to be extremely positive for the company, especially because of the pandemic-related push, as it reached 60 million active users, 588 million orders revenues of €2.4 billion and a total GMV of €12.9 billion. Just Eat Takeaway is today the biggest ex-China food-delivery company in the world (Uber Eats is the second).
The Grubhub deal
The food-delivery market is clearly expanding and everyone wants a piece of the cake. The biggest competitors are Uber Eats (UBER, Financial), Delivery Hero, Deliveroo and Doordash (DASH, Financial) (which holds the biggest chunk of market share in the U.S), and, of course, Grubhub (GRUB, Financial).
As this kind of business does not require highly specialized skills, one of the best ways to fend off competition is to reach global scale and grow its network.
In order to enter the U.S. market and grow global presence, in June 2020 Just Eat Takeaway announced the intention of acquiring U.S.-based Grubhub. Under the terms of the Transaction, Grubhub shareholders will be entitled to receive American depositary receipts ("ADRs") representing 0.6710 Just Eat Takeaway.com ordinary shares in exchange for each Grubhub share, representing an implied value of $75.15 for each Grubhub share (at the time of announcement).
Even if the food-delivery market is expanding and revenues have been raising recently, GrubHub has actually been slightly losing market share and, more importantly, has not gained as much of it as his competitors Doordash and Uber Eats did.
(Source: Second Measure)
As for Just Eat Takeaway, it would have been really difficult to design a deal with the Uber and/or Doordash, they are clearly trying to simply enter the U.S. market by acquiring one of the main players and then apply their long experience in the sector to make it a winner. One positive aspect of the deal is the fact that, even if it has a smaller market share, Grubhub is well managed and is currently the only company of its kind in the U.S. which is not in negative territory. Uber Eats is the one which is spending the most related to revenues in order to gain market share.
Building the moat
But what is Just Eat Takeaway exactly trying to achieve with its inorganic expansion strategy? Of course the company hopes to build a strong moat around the castle, in order to protect the business from fierce competition and finally increase margins.
This can be done in different ways, but there's one type of competitive advantage that is going to produce the best results, considered the market in which the company operates: a network effect.
Let's have a look at the next picture, which clearly shows the company's business model:
(Source: Just Eat March 2021 company update presentation)
Expanding the network by acquiring a competitor means adding both more restaurants and more consumers. Both types of additions are going to produce a "compounding" effect.
Adding, for example, more consumers to the network means adding more orders. More orders will attract more restaurants, which are willing to increase that number to have larger traffic. More restaurants will, in turn, attract more customers, who like to have more options available. This will also lead to more orders per consumer, as they won't need to use different platforms if they can get everything they want on one platform. As you can see, this is a self-perpetuating cycle. This is the power of the network effect.
Conclusion
The recent merger between food-delivery companies Just Eat and Takeaway.com has created an European food-delivery behemoth, with operations in Europe, Canada, Australia and equity participations in Brazil and Colombia.
The company intends to become the world leading food-delivery player (ex-China). With the acquisition of Grubhub, Just Eat Takeaway will enter the (competitive) U.S. market, with the hope to steal market share from the biggest players.
The move makes total sense, as it's aimed at building a competitive advantage over its competitors in the form of a network effect. However, the investment proposition has its risks, as this kind of business has small margins, so the only way to win in the long term is to become the number one.
This year will prove to be an inflection point for the company, which is still busy with the integration of Just Eat (and potentially with the Grubhub one). The next quarters will show if the strategy is working as expected.
Disclosure: The author does not own shares in any of the mentioned companies
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