value and opportunity

Intro/Background:

JustEat Takeaway.com (JET) is one of my riskier bets as I outlined in my initial post from January. In a nutshell, the thesis was that JET has reached a dominating position in running a food delivery market place in many countries (among them Germany, UK, Canada etc.), has got an extra kick from Covid-19 lock downs and will begin to make money soon, similar to their home market Netherlands. Within JET’s business, Germany clearly looked like the most promising market as it is a big and growing market and they are the only player left.

This is supported by the assumption that JET’s main competitors (Uber, Deliveroo, DoorDash) are now stock listed and need to stop burning money. The assumption was also, that despite offering own delivery as a feature, in the long run JET will manage to dominate the Market place business model which is more profitable than actually employing drivers.

Since then, the stock hasn’t done that well, despite having released very encouraging top line growth numbers which motivated me to even increase the position from 2% of the portfolio to 3% (at cost).

With today’s closing of the Grubhub deal I think it is worth trying to do a quick update.

What changed

New competitors – It’s getting crowded 

In January, I mentioned that the food delivery market place sector is not that well protected against new entrants (city by city approach) and that in Germany, the biggest current market for JET, a Finish start up called Wolt started operating. In the mean time, Uber Eats started operating in Berlin and Door Dash is hiring people for a European market entry and Delivery Hero announced to re-enter Germany with their Foodpanda brand after selling out to JET two years ago.

However directly attacking JET will not be that easy. The restaurants on one side are clearly eager to have competing platforms where they can list,as this increases their negotiation power. However from an end user perspective, it is not so easy to motivate consumers to install yet another food ordering app.

So as a new competitor you need to be able to attract customers differently than just to offer the same. Uber is a good example: Uber Eats will be automatically offered to all Uber users and many Uber users might be potential food delivery customers.

So their the acquisition cost (in theory) is a lot lower for Uber than for a competitor without a customer base and that is one of the reasons why Uber has been doing relatively well during the pandemic. In Uber’s case it is also a benefit for the drivers who can get business at times that are normally slow (lunch time).

The “Attack of the 10 minute delivery” model – Gorillas & Co

Another development that surprised me is the ultra rapid scale up of “10 minute delivery apps” like Gorillas, Flink, the Turkish company Getir or the US version called “GoPuff” (which in German would mean something VERY different).

The business model of these companies is quite simple but interesting: They establish depots with a limited choice of mostly “Convenience food” items around the city and then deliver them via a fleet of E-bike riders rapidly to their customers. The products as such are bought “wholesale”, i.e. directly from manufacturers.

These companies are currently one of the biggest “hypes” in the VC scene. Gorillas for instance is a company that is as of the time of writing is only one year old and had reached unicorn status after 8 months which in Germany is very remarkable or “unprecendet”. 3 months later they are rumored to do the next round a 6 bn.

GoPuff has recently  raised more than 1 bn at a valuation of 9 bn USD and Getir just raised at 7,5 bn which for a Turkish company is very remarkable.

Of course there is a lot of hot air in the sector but the business model as such is an interesting one

• As they buy wholesale, there is no crowding out effect vs. a service that picks stuff from local shops
• Buying wholesale and renting small spaces in locations that don’t work for retail is a lot cheaper than running a store
• Commissioning is a lot faster and cheaper compared to normal grocery delivery models where a guy needs to run around in a real store
• The focus on convenience also moves the price point for many customers as you compare their offering not to Aldi but to the convenience store or in Germany to the gas stations prices, especially for evening or Sunday deliveries in Germany when the only other option is a filling station with prices at 200% of a normal grocery store
• The 10 minute delivery is also a typical 10x product: Normal food delivery at least in Germany is at best same day but usually you have to order 1 or 2 days in advance.
• In my home tome Munich they have been rolling out through out the city at ultra rapid scale. Where I live, there is no Lieferando but a 15 minute Gorrilas offering since the end of last week. Prices are at the moment super competitive at super market level
• Another interesting aspect that Gorillas managed is the fact that they try to create an “image of cool” for their drivers. From the black clothes to the relatively unique e-bikes, they are trying to set apart their drivers from the rest, although they ran into problems with drivers in Berlin already. The flink or Lieferando riders look pretty lame compare to the Gorillas guys.

I took me a while, but in summary summary I believe that the Gorillas model could be a game changer from a customer perspective which means that this offering is becoming viral, i.e. they reach a lot of customers with relatively little effort as everyone wants to try out this unbelievable service.

Now a lot of very smart investors will tell you that it will be very hard to maintain the  business model on a stand-alone basis. I think this is true but I think they are missing one point: If you have a lot of customers, good logistics and a fleet of fast cyclists, you can deliver other stuff as well very easily.

And I think the end game is pretty clear here: Each of these players aims to become the ultimate “On demand delivery service platform” or “super app” for anything that can be transported within a short period in time within a relatively dense urban area.

It took my some time to understand this but in my opinion the following is very likely:

• the new rapid delivery platforms will become competitors for JET, Uber, Deliveroo etc. very soon
• offering delivery is not “transitory”, the pure platform play will not be an option
• there will be consolidation into fewer platforms that each offer very different services

Interestingly, especially in less developed markets, this development has already happened. Delivery Hero for instance sold their Eastern European operations to Glovo which is one of the early European rapid delivery players.

Delivery Hero itself attacks in Germany as mentioned with Foodpanda which is not a restaurant delivery platform but a 7 Minute Gorillas clone. It is pretty clear that this is not their endgame in Germany but an attempt to quickly build a customer base. And in Asia, the super apps like Grab or Go-Jek have been leaving very little space for “single use” competitors since their beginning.

To the credit of Jitse Groen, I do think that he understands this much better than I do and already announced to implement a grocery delivery business in Germany and aims to deliver in 20-30 minutes. Intitially I have wondered why JET had raised a hefty 1,1 EUR bn via a convertible bond in February but now I understand a little bit better the motivation…..

It will be seen if this is enough in order to defeat Gorillas & Co. A big wild card is in my opinion what Amazon will do. So far they have not tried to upgrade their “Fresh” offering. In my opinion, they will either close it or upgrade it massively. In Germany they have just announced to upgrade to a 3 hour service which in my opinion will most likely not be sustainable.

Summary:

Overall, I do think my first analysis was not complete. I have clearly underestimated the “new” competition and the assumption that JET will be able to run a high margin platform model without delivery in the future is unrealistic.

They will be forced to offer delivery options and a competitive convenience offering, otherwise they open the door for some very aggressive new competitors.

I also wonder how many bike couriers are actually available and when wage increases will eat into margins even further. Although I have not given up on JET altogether, I will actually reverse my position increase and scale back the position to the initial size (in number of shares) in the coming days.

Also the status for the remaining position is now “must watch really carefully”…..

P.S.: If any of the readers has access to a pitch deck of Gorillas or Getir, please E-Mail me. I would love to know what they assume as CAC and how their margins look like.