The third-party food delivery business still has room for near-20% growth over the next few years, driven by a few big players, Morgan Stanley said Tuesday.
But more rational pricing is needed, and some consolidation may be coming, analyst Brian Nowak said in a look at the burgeoning restaurant-to-door sector.
The rise of the new food delivery aggregator business, where companies like Uber Technologies Inc. (NYSE: UBER)’s Uber Eats, GrubHub Inc (NYSE: GRUB) and startup DoorDash, which is planning a 2020 IPO, deliver food from multiple restaurants, is one of the biggest stories in the restaurant industry over the last few years.
Big Total Market
Even with the sudden emergence of the companies in several American cities, Nowak said the food delivery aggregator business has plenty of room to grow. (See his track record here.)
Morgan Stanley sees a $350-billion addressable market for food delivery, but current online delivery penetration is only at about 8%, the analyst said.
Given that, Nowak said the firm is modeling an online delivery compounded annual growth rate of 18% through 2025.
At some point, there's a limit to the expansion, he said.
The reason: the biggest segment of the restaurant industry is at the cheap end — fast food outlets — which limits how much delivery companies can make.
GrubHub Less Bullish
GrubHub recently took a more bearish outlook, lowering revenue and earnings guidance for the fourth quarter, citing competition and a maturing market in the wake of disappointing third-quarter earnings. Its shares plunged more than 40% after its third-quarter results and lower guidance.
Uber, GrubHub, DoorDash Should Deliver Growth
GrubHub is likely to be among a trio of companies benefiting from online delivery growth, Nowak said.
About 95% of the growth in the market is likely to come from the big three aggregators, the analyst said.
While business growth opportunities have been great for food delivery companies, there is a problem in the nascent model, Nowak said.
"This large market has led to cash-burning competition" as the companies seek to expand their reach, the analyst said.
The companies are using aggressive discounts and free delivery to win customers, and while data show promotions entice customers, the cash burn is causing earnings pressure, he said.
More Rational Environment?
Morgan Stanley doesn't have any knowledge of any consolidation talks, but Nowal said a combination of Uber Eats and DoorDash would be a problem for GrubHub.
Restaurant chains haven't yet seen a material sales bump from the growth of delivery, the analyst said, although a few have seen a bump.
Pizza: Still Good
One restaurant food segment went heavily in on delivery a generation ago: pizza.
And despite a small bit of incursion from the aggregators, that business needn't worry, Nowak said.
"Despite aggregator pressures today, high customer scores and balanced demographic exposure for pizza delivery (DPZ most notably), the business model can withstand this incursion."
GrubHub stock was down 0.57% at $36.94 at the time of publication, while Uber was trading down 0.96% at $26.87.
Photo courtesy of Uber.