Description

Just Eat Takeaway has been written up nicely three times, but the share price has languished considerably. I believe there is some saying about the fourth time being the charm…

Those familiar with the history of food delivery and the investment case more broadly (much of which was shared in the previous write-ups) can feel free to skip to the summary at the end.

Very early food delivery

              Although the proliferation of delivery apps is a recent phenomenon, the food delivery industry traces its roots over hundreds of years. As early as the 14^th century, Parisian butchers were known to deliver meat to their wealthy customers. In 1785, home milk delivery began in rural Vermont. In 1889, the first recorded pizza delivery took place, when a Neapolitan chef delivered a tomato, mozzarella, and basil pizza to King Umberto and Queen Margherita (hence the namesake pizza). A year later, the “dabbawala” food delivery system was created in India to deliver lunch boxes to businessmen at work. In 1922, thanks to the advent of the telephone, the first Chinese restaurant began to make deliveries to its customers in the US. In the 1940s, pizza entered the American cuisine (after initially being considered a repulsive combination of garlic and cheese), and the 1960s marked the beginning of modern pizza delivery as we know it. Consumers would simply order by phone, and a pizza would arrive to their door shortly thereafter (between 1973 and 1992, Domino’s Pizza guaranteed delivery in under 30 minutes or the pizza was free, a promotion that was halted following injuries and fatalities caused by speeding drivers).

Modern food delivery

The mechanism by which these orders took place began to change around 20 years ago, when internet companies emerged to replace the analog transaction (a phone call) with a digital one (an online order). Instead of directly calling a restaurant, consumers began to place delivery orders through internet marketplaces that matched supply (restaurants) with demand (consumers). For consumers, the benefit was a greater choice of restaurants and a more seamless transaction. With only a few clicks, a consumer could quickly order food without having to call a busy restaurant and verbally dictate a food order along with delivery instructions. For restaurants, many of which were independent and relied on distributing promotional flyers, aggregators provided them a new channel to generate demand. Of course, some orders on the marketplace cannibalized orders that otherwise would have been made by phone, but overall, aggregators expanded the market and attracted new customers to the restaurants (in addition to freeing up the staff’s time from taking orders by phone). In exchange, the restaurants paid the aggregators a commission for each order and sometimes paid additional fees for higher placement on the websites. The restaurants continued to make their own deliveries (as they had for the phone orders), and customers rarely paid any fee for that luxury.

As more restaurants joined the platforms, the platforms became more attractive to customers. And as more customers ordered food, the platforms became more attractive to restaurants. Once there was enough liquidity, there was little reason for a restaurant or customer to look elsewhere. In addition, these platforms benefited from economies of scale thanks to substantial fixed technology costs relative to the variable costs (marketing, payment processing, and customer support). As the number of orders going through the system increased, the fixed cost per order declined – further cementing the incumbent’s advantage. Given a similar level of development costs, new entrants starting from scratch would incur a much higher cost per order until they reached a similar size as the incumbent – no small feat given the existing network effects.

These network effects led a number of aggregators around the world to become locally dominant, including Seamless in New York (1999), Thuisbezorgd in the Netherlands (2000), Just Eat in Denmark (2001), and Grubhub in Chicago (2004). For more than a decade, these marketplaces successfully fended off competitors and enjoyed the fruits of a “winner-take-most” market. But beginning around 2011, a new type of food delivery company began to emerge. These companies recognized that the existing food delivery proposition was limited only to restaurants with an existing delivery staff, which typically meant a particular “style” of food: pizza, kebab, Chinese, Indian, etc. In contrast, the new breed of food delivery company would perform the logistics themselves, allowing any restaurant to join the platform and giving customers a greater choice of cuisine. For the first time, customers could easily order salads, sushi, or fast food all from one place.

Most of the existing marketplaces initially downplayed the threat from the logistics companies. It was one matter to create a website where consumers could choose among listed restaurants and an entirely different optimization exercise to create a three-sided network and actually perform the deliveries (consider the most basic trade-off: if a delivery company has too few couriers, they will be fully utilized and earn a lot of money, but delivery times will be long and customers will be unhappy. On the other hand, an abundance of couriers results in quick delivery and happy customers but couriers with lower utilization and lower earnings). The cost of doing these deliveries meant they would have to charge higher commissions to the restaurants and introduce delivery fees to consumers who were not accustomed to paying them. In order to build liquidity and network effects, the logistics companies initially attracted consumers by offering free or subsidized delivery, a strategy made possible thanks only to billions of dollars in venture capital funding. During its infancy, the unit economics of this model were not entirely clear. But it was clear that the logistics companies were growing rapidly. They had created a new market by offering delivery to restaurants that didn’t have their own delivery staff, and they gave customers a better experience by offering access to these restaurants and allowing them to track their orders, something they were not able to do in the marketplace. The incumbents faced a conundrum. Should they continue to reap the profits from the marketplace? Or should they re-invest these profits into building a logistics network? The latter would require time and capital but was not guaranteed to succeed. With this industry background in mind, I present the case for an investment in Just Eat Takeaway.com.

Takeaway history

In 1999, Jitse Groen was a 21-year-old student of business information technology at the University of Twente in the Netherlands. At the time, according to an interview with Emerce.nl, he had no intention to become an entrepreneur until he saw three of his fellow students’ startup companies featured by a Dutch public television broadcaster and decided it would be admirable to create his own. Initially, he was not sure what sort of company to create but ended up founding a website development company and convinced a local liquor store to become his first client. The only problem? He didn’t know how to make websites. So, Jitse began to learn programming from scratch and delivered the website one year later, in the process realizing that web development was not his calling.

Some months later, while at a family party, Jitse called a Chinese restaurant to order food for the gathering. At the same time, his university was beginning to offer internet access as a research tool, and Jitse wondered why he couldn’t place the order online instead of by phone. He discovered a couple websites offering pizza delivery in Amsterdam, but thought there should be a website that offered more comprehensive delivery. Six months later, he paid 100 Dutch guilders (equivalent to €50) to register the domain Thuisbezorgd.nl – Dutch for “home delivery” – and began to offer delivery of food, flowers, CDs, and more. Food proved to be the most successful category, but even that grew slowly, and Jitse recalls having to “beg” the first 700 restaurants to join the platform. After two long years, Thuisbezorgd was aggregating only 200 orders per day, and it was not until the penetration of broadband internet began to increase across the country in 2003 that the business began to accelerate.

Over the following years, Thuisbezorgd faced competition from nearly 40 different companies, the most significant of which was Just Eat, a Danish company that entered the Netherlands in 2007 by acquiring one of Thuisbezorgd’s main competitors. Prior to Just Eat’s entrance, Thuisbezorgd was charging restaurants a fixed half euro per order that went through its platform. Just Eat, on the other hand, charged restaurants a percentage commission based on the value of the food – an approach that resulted in much higher revenues. Jitse emulated the model and Thuisbezorgd’s revenues increased significantly. Ultimately, Thuisbezorgd vanquished Just Eat and all other competitors in the Netherlands, a success which Jitse ascribes to two reasons: first, that neither he nor his competitors had any money in the early days (in contrast to the venture capital-fueled spending today which can disproportionately influence outcomes), and second, that the winner in any business or sport is the one that wants to win most (Just Eat and Takeaway competed aggressively in the Netherlands, Belgium, and the UK until 2016, when Takeaway acquired Just Eat’s operations in Belgium and the Netherlands and Just Eat acquired Takeaway’s operation in the UK).

And Thuisbezorgd was fanatical about winning. Jitse drove around the country relentlessly to sign up restaurants, and according to a Bloomberg interview with a former employee, his team would click on Just Eat’s Google ads until they exhausted the company’s marketing budget and even went door-to-door to remove Just Eat’s stickers from restaurant windows while using super glue to ensure their own remained untouched. The early founding and hard work of the Thuisbezorgd employees resulted in a network effect in the Netherlands that to this day remains impervious to competition. With the most restaurants and the most diners, there was little reason for either party to look elsewhere.

Following his success in the Netherlands, Jitse set his sights on international expansion and began to re-invest the Dutch profits into neighboring Belgium (Pizza.be) and Germany (Lieferservice.de) in 2007, Austria (Lieferservice.at) in 2008, and the United Kingdom (Takeaway.com) in 2011. At the time, the Netherlands had a population of 16 million people, and the four new countries added more than 160 million potential customers to the addressable market. But what Jitse quickly discovered when he entered these new markets was that his success in the Netherlands – aside from the capital it provided for expansion – was entirely irrelevant. It didn’t matter that the Netherlands and Belgium shared a 450-kilometer border or that the Belgian population in Flanders spoke Dutch. Network effects were local, not global. Across the border, the supply of restaurants and brand awareness simply did not exist. Even a platform like Facebook – which is almost universally successful – exists because of a series of local network effects. People in Indonesia join Facebook because other people they know in Indonesia are on Facebook, not because the site has billions of other users around the world. So, the Thuisbezorgd team began creating the network effect from scratch in each of its new markets.

Given the size of the market, Germany proved to be the most competitive and Jitse realized that capital was essential for victory. In 2012, after more than ten years in operation, Takeaway accepted external capital for the first time, raising €13 million from Prime Ventures, a Dutch-based venture capital firm. Two years later, in 2014, the company raised an additional €72 million from Prime Ventures and Macquarie Capital, funding that allowed it to acquire Yourdelivery (comprising Lieferando.de in Germany and Pyszne.pl in Poland) for €63 million and merge Lieferando with its existing Lieferservice business in Germany. Nevertheless, Takeaway continued to face substantial competition in Germany from Lieferheld, pizza.de, and Foodora, three companies acquired by Delivery Hero, a global food delivery business headquartered in Germany. In September 2016, Takeaway filed for an IPO on the Amsterdam Stock Exchange and raised €180 million, which allowed Jitse to continue his aggressive investment in the country. In 2018, Delivery Hero finally conceded and sold its three brands to Takeaway for approximately €1 billion – €450 million in cash and the balance in 9.5 million shares of Takeaway stock – a transaction that eliminated the majority of competition in Germany.

Just Eat combination

              In 2019, Takeaway announced the biggest transaction in its history: the acquisition of the entire share capital of Just Eat for €7.4 billion worth of shares in Takeaway. The rivalry between the two companies had started in 2007 when Just Eat entered the Netherlands but it was not until twelve years later that their competition would finally end and the combined company would be renamed Just Eat Takeaway (JET). Both companies operated in Switzerland, and the Just Eat acquisition added Denmark, France, Italy, Spain, the UK, Ireland, Canada (SkipTheDishes), Mexico and Brazil (iFood), and Australia and New Zealand (Menulog) to Takeaway’s existing business in Norway, the Netherlands, Belgium, Luxembourg, Germany, Austria, Poland, Bulgaria, Romania, Portugal, and Israel.

Outside of Just Eat’s own management, there was perhaps nobody that understood the Just Eat business better than Jitse. As a food delivery pioneer, he had competed with Just Eat in five different countries over the years, and his rationale for the acquisition was convincing. First, the combination would create a strong player across Europe with a market leading position in thirteen different countries. Second, there would be a significant reduction in duplicate costs, in particular across Just Eat’s five different IT platforms that could be consolidated with Takeaway’s. Third, Just Eat had historically underinvested in its logistics infrastructure, which created a significant future opportunity to both defend and expand its markets. Like Takeaway, Just Eat was originally a pure marketplace business. But unlike Takeaway, which recognized the importance of building a logistics network and launched its “Scoober” logistics model in February 2016, Just Eat did not meaningfully invest in logistics. Jitse believed that an aggressive investment was necessary to protect Just Eat from competition and expand the business, something that could be done under his ownership.

Grubhub combination

              One year later, in 2020, a similar logic led to the surprising announcement that Just Eat Takeaway would enter the US market by acquiring Grubhub, a company itself formed by the merger of Seamless and Grubhub. Years ago, Grubhub had been the market leader in the US thanks to dominant positions in cities like New York, Boston, Philadelphia, and Chicago. But management had paid little attention to the suburbs and ignored the growing threat from the logistics companies, which allowed new competitors like Uber and DoorDash to flourish and overtake it in size. In May 2020, Uber offered $6.5 billion for Grubhub, but JET countered with an offer of $7.3 billion in shares to win the transaction (Uber instead spent $2.7 billion to acquire Postmates). For Uber, an acquisition would have made perfect sense: by acquiring a large competitor in the same market, Uber would strengthen its existing network effects, remove substantial duplicate costs, and significantly improve its profitability.

In contrast, JET had no presence in the US and therefore little synergies from the merger. Investors were disappointed with the transaction, concerned that management already had a large company to integrate (Just Eat), and feared that Jitse had fallen prey to a mindset of empire building. Others surmised that the move was a defensive one to block Uber from generating significant profits in the US that it could later use to attack JET in Europe. But Jitse defended the acquisition by arguing that the US was not a monolith and food delivery was a local business. Although Grubhub had lost significant market share (on a relative basis), the company was still increasing its orders (on an absolute basis). It also continued to dominate certain cities such as New York City (in particular Manhattan, the world’s best delivery market) and had the opportunity to become stronger by investing in logistics, as Takeaway itself had done in 2016, and as Takeaway management began to do with Just Eat. Nevertheless, JET’s stock languished significantly following the announcement.

Investment in logistics & where we are today

              Over the following year and a half, JET invested significantly to grow its logistics infrastructure across three businesses – Takeaway, Just Eat, and Grubhub – effectively building a brand-new business from scratch with all its associated inefficiency. The investment required in both marketing and logistics was much higher than management had initially communicated, and JET’s losses ballooned. According to food delivery skeptics, these losses indicated a race to the bottom in a hypercompetitive industry with no potential for profits.

I have a different hypothesis, which rests on two central assumptions. The first is that the majority of the value in the food delivery industry in JET’s markets is not in the actual delivery logistics but in the aggregation (in particular outside the US). The second is that competitive advantages – in the form of network effects and economies of scale - are inherently local. The fact that JET served more than 1 billion orders and lost €1 billion in 2021 tells us nothing about the company’s true underlying profitability or its value. To understand that, we must analyze each market individually.

The Netherlands

Consider JET’s home market of the Netherlands. In 2016, Takeaway (as it was then known) earned approximately €1.75 of pre-tax profit per order on the marketplace (the EBITDA/order in 2016 - prior to the introduction of logistics in 2017 - was €1.65, a figure that included an allocation of central costs to the Netherlands - which Takeaway later disclosed as a separate line item). Since then, the average order value has increased and the marketing cost per order has decreased, meaning JET today is likely earning more per order, but we can assume the same figure to be conservative. In 2021, JET served more than 55 million through the marketplace and nearly 6.5 million through its own Scoober delivery, for a total of nearly 62 million orders. In the first half of 2021, JET reported a pre-tax profit of €40 million. Given a slightly smaller number of orders in the second half of the year (and because JET now discloses profitability by region instead of by country), we can assume that full year pre-tax profit was likely around €75 million. By multiplying the 55 million marketplace orders by €1.75 euros, we can assume that JET generated more than €95 million in pre-tax profit from the marketplace, which would imply a loss of €20 million or so from its logistics operation (around €3 per order). Note: I care about profits, not pre-tax profits. However, the reason I mention pre-tax profits is that the company is currently able to offset its pre-tax income with losses elsewhere and therefore has a minimal tax liability.

Although these losses are significant, Jitse understood the importance of giving customers the widest choice of restaurants. At the time JET was exclusively a marketplace business, it could not offer food from restaurants that didn’t do their own delivery. A customer craving food from such a restaurant would likely turn to competing platforms like Uber Eats or Deliveroo that offered a delivery service to restaurants in the Netherlands. But because these competitors have very little marketplace business to rely on (given the difficulty of disrupting JET’s existing network effect), they cannot make money without charging delivery fees to customers. In such a scenario, JET can react in two ways: one, match their delivery fees, or two, undercut them. JET has chosen the latter, which allows it to use the marketplace profits to subsidize the logistics business and offer a restaurant supply similar to the one offered by competitors (though in some areas they are not quite equivalent) – but with a lower delivery fee to consumers. Consumers therefore would have little reason to use a competing platform, and JET can enhance the network effects in its existing business.

Mathematically, the state of competitive affairs becomes yet more apparent. In the Netherlands, JET’s logistics business alone (which represents 10% of the company’s total orders in the country) is likely larger than the entire Dutch business of either Uber Eats or Deliveroo (neither company discloses its Dutch orders). If JET lost more than €20 million to serve its logistics orders, it is unlikely that either competitor could earn any significant money on a smaller base of orders (despite having higher delivery fees). Furthermore, given JET’s strong network effects and economies of scale, the company can emulate any action from competitors. Should Uber decide to spend an extra €6 million on marketing, JET can do the same. But such a strategy would cost JET only €0.10 per order (on its 60+ million orders) and Uber €1-2 per order (on its estimated 3-6 million orders – but I admit this figure could be wrong). JET’s position in the Netherlands as the low-cost operator with significant network effects is likely unassailable.

Germany

              In Germany, the story is similar. In 2019, after four unprofitable years, Deliveroo announced its exit from the German market and effectively conceded the country’s food delivery monopoly to JET. In 2021, JET served 147 million orders on its German marketplace and nearly 13 million logistics orders for a total of 160 million orders. I estimate that the company earned a pre-tax profit of nearly €1.50 on each marketplace order (for a total of €220 million) and lost around €2.50 on each logistics order (for a loss exceeding €30 million). Over time, the profits from the marketplace will continue to increase, and the logistics operation will reach break-even or even earn a small profit as the network becomes more efficient (though as discussed, JET’s objective is not necessarily to profit from logistics but to maintain the network effects in the overall business).

Attracted by these uncontested profits, a litany of logistics-focused competitors recently announced an entry into the German market. First was Wolt in August 2020, followed by Uber Eats in April 2021, then Delivery Hero in August 2021 (following their exit in 2018 to JET), and finally DoorDash in November 2021. These announcements caused JET’s stock price to fall yet further as investors feared competition in Germany would erode the company’s dominance. And while these announcements indicated that the German market was indeed attractive, I did not think there was a significant profit opportunity for new entrants. Not only is Germany dominated by a player already doing 160 million orders each year (and growing), but the market has complicated labor laws, low penetration of quick service restaurants (and therefore less demand for logistics, given that QSRs don’t do their own deliveries), and last of all – a price-sensitive population that has little appetite for high delivery fees (which are low or nonexistent in the marketplace).

If indeed there had been room for a logistics competitor (or four) in Germany, why did Deliveroo - which is a good operator - exit in 2019 at a time when JET was doing fewer than half the orders it is doing today? Delivery Hero too realized its mistake and announced an exit from Germany in December 2021, only five months after re-entering the country. In November, DoorDash acquired Wolt, and JET was therefore left with two competitors in Germany: the merged DoorDash/Wolt and Uber Eats. Combined, they have achieved a market share of approximately 2%, representing 3 million or so of the country’s 163 million online orders. Just as in the case of the Netherlands, a quick mathematical example can bring the German competitive position to light. If JET grows its orders by merely 5% in 2022 (representing 8 million new orders), competitors must grow by 250% to match JET’s growth. With each passing year, JET generates more absolute orders, more absolute profits, and further extends its advantage vis-à-vis competitors. Just as in the Netherlands, I expect nearly all the profits in Germany to accrue to JET over time.

The UK

Historically, the UK looked a lot like Germany does today, but the entrance of Deliveroo (founded in 2013) and Uber Eats (entered the UK in 2016) and the reluctance of Just Eat to invest in logistics all put pressure on JET’s market share. Although JET continued to grow its absolute number of orders, Deliveroo and Uber Eats grew faster as they signed up restaurants that historically had no delivery capability. Nevertheless, the persistent network effects in the marketplace business meant that in 2019, JET still earned €213 million of pre-tax profits in the UK. Following the acquisition by Takeaway, the equivalent figure was a loss of more than €100 million in 2021 despite a 33% increase in the number of marketplace orders. Including the contribution from these orders, more than €400 million of profits had evaporated in two years, which spooked investors and contributed to Takeaway’s lagging valuation.

But by now, it should be clear what Jitse was doing and why the UK’s profits suddenly disappeared. JET was re-investing all the marketplace profits to build a logistics network to compete with Deliveroo and Uber Eats. As explained, this requires significant resources in the short run but protects the marketplace profits in the long run by retaining customers and offering them the same restaurants as competitors at a lower price. Prior to the Takeaway acquisition in 2019, Just Eat did 10 million delivery orders in the UK (in addition to more than 120 million marketplace orders). By 2021, under Jitse’s leadership, that number had increased to more than 110 million delivery orders (in addition to more than 160 million marketplace orders). Because JET’s reported earnings combine the marketplace and logistics, it is not clear to investors how profitable the JET marketplace in the UK remains. But we can look back to the years when Just Eat had either no delivery business or a nascent delivery business, and we can estimate that the company was likely earning nearly €2 per order, which would indicate €300-350 million of pre-tax profits in the UK marketplace in 2021. Nevertheless, some believe that logistics will never become profitable and will forever detract from the marketplace’s profits. But if that were the case, JET’s logistics competitors (which are unprofitable) would either shrink or go out of business, and JET could either charge higher delivery fees or simply shut down its logistics segment. Over time, logistics will likely become break-even or profitable in the UK and JET’s profits will exceed those in 2020 given the growth in its total orders.

International markets

Across the Atlantic, JET operates in Canada, the US, and Brazil. In Canada, JET’s SkipTheDishes brand delivered more than 110 million orders in 2021 and is the market leader with 40-50% market share. Unlike the rest of JET’s markets, Skip was founded in 2012 as a pure logistics business and made the intentional decision to become the first profitable food delivery network in the world. The company’s strategy was to offer delivery for restaurants in smaller cities or suburbs – the same playbook that DoorDash would later use to achieve enormous growth in the US. Because Skip was the first mover in Canada, it built significant network effects in these cities that remained resilient to competition from Uber Eats and DoorDash, both of whom entered the market in 2015 and focused most of their attention on larger cities. During the pandemic, various provincial governments placed caps on the fees Skip could charge restaurants, causing a temporary reduction in profits. Outside of Nova Scotia (where Skip’s business is immaterial) and British Colombia, the fee caps have expired, and Skip should earn more than €80 million in annual pre-tax profit.

In the US, as previously discussed, Grubhub lost significant market share over the years, but it continues to grow its orders and is improving under JET’s leadership. For instance, the company has recently instituted a loyalty program (with great results) and has been refocusing its marketing and logistics investments into fewer geographies. Being dominant in Boston (due to strong network effects between restaurants in Boston and customers in Boston) has no relevance to a company’s position in Seattle or Los Angeles. By focusing its logistical offering on suburban areas around cities where it is already the market leader, as well as more properly targeting its $500 million of annual marketing expenditure, Grubhub can potentially strengthen its network effects and increase its profitability over time.

As in Canada, several local US governments instituted fee caps during the pandemic, and laws have been recently passed in San Francisco and New York to make them permanent. New York was Grubhub’s most valuable market, and the fee caps reduced the company’s pre-tax profit by nearly $160 million in 2021. While it certainly isn’t very “American” for the government to interfere in the private contracts of two consenting parties (a restaurant and a delivery platform, each of which operates in a competitive industry), Grubhub’s profits and valuation will be severely hampered if the fee caps are not reversed. Nevertheless, Grubhub has some value and JET has announced that the company is in discussions with both private equity firms and strategic investors for a potential transaction to strengthen the business.

In Brazil, JET owns 33% of iFood, the leading food delivery company in the country (Prosus/Movile own 67%). Today, iFood competes only with Rappi following Uber Eats’ recently announced departure. As in other countries, iFood was a profitable marketplace before starting its own logistics operation to expand the market for food delivery. The decision was a smart one, and today the company generates nearly 760 million orders annually, 10x more than Rappi. JET recently declined a €2.3 billion offer to sell its iFood stake – and (perhaps) rightfully so given iFood’s position (in theory, the company could sell the stake at a discount and buy back JET shares at an even greater discount – but in practice, such an announcement would close that gap without creating the value suggested by the exercise). Similar to Germany and the Netherlands, the company is the clear market leader in a country where food delivery penetration and frequency are both increasing significantly over time.

The aforementioned countries are JET’s largest sources of value, but the company also has valuable marketplace positions in a number of countries such as Austria, Belgium, Denmark, Ireland, Israel, Italy, Luxembourg, Poland, Slovakia, Switzerland, and Spain. It is true that in some of these markets the logistics operators are increasing their presence and taking market share, but my argument about the value of the marketplace profits in building out the logistics remains.

Valuation

I have made the argument (and perhaps I am wrong) that food delivery (and in particular the marketplace) can indeed be a good business. There are better businesses out there (and the current environment has created more bargains), but there is also a price for everything and I believe the current market cap (€2.9 billion) and enterprise value of Takeaway (€3.8 billion) are unjustifiably low relative to the true value of the business.

Germany alone earns nearly €220 million of profits in its marketplace each year, a figure that will likely be much higher in the upcoming years. Fewer than 20% of Germans aged 15 and older are ordering food online (compared to nearly 40% in the Netherlands – which is obviously a different market), and the order frequency per customer is increasing. Because JET is already established in Germany, the additional marketplace orders generate high margins with little incremental cost (payment processing, marketing, and customer support) and therefore a pre-tax profit approaching €2 per order. With nearly 150 million annual orders today, growth of 10% per year (via a mix of customer growth and frequency growth) would result in double the marketplace orders in seven years and an additional €300 million of pre-tax profit. By then, the number of logistics orders will also be higher, and the losses will have likely disappeared. At that point, Germany could be earning more than €500 million before taxes each year, which would imply a recurring, monopoly earnings stream worth more than €3 billion today (today’s market cap).

As a sanity check, consider that Prosus, one of the world’s most specialized food delivery investors, offered €6.5 billion for Just Eat alone in 2019 (prior to being outbid by Takeaway) – more than 2x the market cap today. This offer included neither Grubhub nor any of Takeaway’s European markets (excluding Switzerland) and took place prior to the food delivery boom since COVID-19. It is also worth repeating that Uber bid $6.5 billion for Grubhub alone in 2020 (after fee caps had been imposed but before they were made permanent). Competition in the US has since increased, but a combination there or more broadly could still make sense for Uber (the combined business would be smaller than DoorDash but anti-trust considerations are still relevant). In that vein, a risk of an unwanted takeover could catalyze a transaction involving iFood, Grubhub, or even Menulog – but hopefully at the right prices.

JET’s management believes that five years from now, the company will process more than €60 billion worth of food through its platform (a lofty goal implying 15% growth per annum) and over the long term will earn an EBITDA margin higher than 5% on this volume, translating to a net profit exceeding 3.5% of volume. This represents a blend of higher margin marketplace orders and lower margin logistics orders (resulting from a combination of significant order growth, higher average order values, increased efficiency in delivery, higher delivery fees, and lower marketing and other operating costs per order due to scale). If management’s estimates are correct, JET would be earning more than €2 billion in annual profits, which should be worth anywhere between €20-40 billion (10-20x earnings depending on inflation and the economic environment). Including the cash generated in the interim period and the value of iFood, in a best-case scenario JET could be worth €45-50 billion in the medium-term – representing a return of more than 15x from today. Meanwhile, the significant marketplace profits mentioned above should in theory place a floor on the downside at prices above today’s market cap.

The risks

As always, there are risks to each investment we make. DoorDash has $3.6 billion of cash thanks to its recent IPO (and an abundance of stock-based compensation) and Deliveroo has $1.6bn (while Uber has $5 billion of net debt excluding long-term investments) which could mean a protracted fight for customers. Although JET is dominant in places like Germany, the country is not a closed economy and significant cash from outside the country can be invested to gnaw at JET’s dominance (though I argue that such investment would be highly uneconomic, and the era of profligate spending appears to be nearing its end as the cost of capital rises and the pace of consolidation/exits accelerates). Some of this investment has arrived in the form of “quick commerce,” where dark store operators deliver groceries within 10-15 minutes – forcing JET and other food delivery companies to continue investing to expand their services. There is some risk that this investment never becomes profitable and instead consumes the profits from the marketplace. However, I do believe this is unlikely; as previously discussed, if the pure logistics companies can break-even or become profitable in the future, then so too can JET’s own logistics business. Otherwise, they would no longer exist, and neither would JET’s logistics business. But the risk here is that it takes many years to reach that point.

In terms of regulation, it is important to consider that the number of restaurants and delivery couriers in the world far exceeds the number of food delivery platforms, and both restaurant owners and delivery couriers are important constituents for politicians (more so than shareholders of food delivery platforms). It is therefore possible that government regulation becomes more pervasive and acts to limit the profitability of the platforms. JET is aware of such risks and is more focused than its peers on building its business sustainably. The company is careful about exercising its market dominance toward restaurants (though it recently announced price increases in Europe ex-UK) and offers many of its couriers full employment with all its associated benefits – a minimum wage, health insurance, and paid vacation (this also gives JET a marketing advantage as couriers zip around town on bikes covered in the company’s orange logo). While investor analysis is often limited to the supply and demand sides of the network (restaurants and consumers), it is equally important to pay attention to courier satisfaction and retention.

The final risk worth mentioning is macroeconomic in nature: inflation. Although significant inflation would likely reduce the demand for all food delivery services, the effect on the logistics operators would be far more deleterious. For the marketplace, higher average order values (due to higher food prices) and a shift from higher-cost logistics orders would increase JET’s revenues while having little effect on its costs since JET does not perform the deliveries. At the same time, the logistics operators would face higher wage pressures relative to JET (given that they deliver all their orders) and a bigger reduction in demand (because consumers would be forced to pay higher delivery fees).

In summary, I believe the sum of the parts is currently greater than the company’s market cap or EV. Marketplace profits of €300m+ in UK, €200m+ in Germany, €100m+ in the Netherlands, €80m+ in Canada, etc. are sustainable and can finance the buildout of the company’s logistics capabilities. These logistics capabilities take time to reach efficiency, and if competitors can successfully do it, then so can JET more broadly (as it has done in Canada). If competitors fail (because of poor economics), then so will JET, leaving the luxury of the marketplace business. Fortunately, all the separate countries do not need to exist in tandem, and I view JET as a holding company that can therefore discard discrete assets as needed.

SUMMARY:

The marketplace is a great business

Managing a 2-sided marketplace (diners and restaurants) is much simpler than managing a 3-sided marketplace (diners, restaurants, and couriers). It is a fixed cost business with very little incremental cost, while the delivery model introduces a lot of cost, complication, and competition. The vast majority of marketplace restaurants will not partner with a logistics provider such as Deliveroo or Uber. Some of these restaurants are doing dozens of orders per hour at peak times and by using their own staff and batching the orders, they can offer the customer a satisfactory experience without paying 25-30% of their order value to the logistics companies.

But won’t the 1P companies attack the marketplace?

They have tried for 10 years without success. One reason is that the delivery model would actually introduce an inefficiency for many of these restaurants (and they therefore would rather remain on the marketplace with the existing network effects from the loyal customers), but the other is that the marketplace is simply not the model of the 1P providers that aim to provide a better customer experience by controlling everything (in most cases, aside from cooking the food!).

But what if 1P delivery is a much better business than marketplace …

If 1P delivery is a great business, then the investments JET is currently making in 1P should eventually bear fruit.

But what if TKWY’s 1P/tech is not as good as others such as Uber or DoorDash?

If that were the case, JET (SkipTheDishes) likely wouldn't be the #1 player in Canada with a pure-1P business. I believe the 1P in other countries takes time to reach maturity/scale and demonstrate the proper unit economics.

But actually, maybe 1P is an awful business…

JET is doing 3P and 1P. The competitors are only doing 1P. If 1P is an awful business that is a “race to the bottom” then the pure 1P operators should suffer, face a huge cost of capital, and eventually shrink/exit in geography. The competitive intensity (and therefore the capital required from JET’s 1P business) would therefore decline and JET would win.

But isn’t Jitse Groen (the CEO) a crazy empire builder?

Jitse has built a very impressive business over the past two decades – and the majority of it in a highly capital-effective manner. The greatest headwind to his success has been one of the greatest venture capital bubbles of all time which allowed new competitors to grow via financing cash flows as opposed to operating cash flows – which is what Jitse utilized for the first decade of his company’s growth.

Shareholders currently lament the Grubhub transaction, but they are confusing process with outcome. NYC is the best food delivery market in the world, and it was not expected that fee caps would be made permanent. Existing Grubhub management did not sufficiently protect the NYC market by building a logistics business in NYC and the surrounding suburbs, and Jitse wanted to rectify that. It is worth noting that shareholders approved the Grubhub transaction at the time.

And isn’t Jitse arrogant? In a radio interview he said he doesn’t seek advice in food delivery…

He is Dutch and is direct. It’s not exactly arrogance to say that you don’t call up people for advice in an industry you helped create two decades ago…

A German bank recently argued that JET has a funding gap. Is that so?

Cash at year-end 2021 was €1.3bn. Cash burn in 2022 will likely not exceed €350m (EBITDA of -0.6% of GTV of €28bn = -€170m; not sure if this already incorporates price increases in Europe ex-UK which should increase 2H EBITDA by €40m; capex may be around €150-200m), leaving close to €1bn at year-end 2022. 2023 will be “EBITDA profitable” according to management. There will still be capex and perhaps a capital call at iFood, but still enough to repay/refinance €550m of debt that matures in 1.5 years (end 2023 / beginning 2024). In addition to pre-existing credit facilities, there are also several non-core assets that can be sold (USA, Brazil, ANZ). I don’t think there is a funding gap.

Summary

JET’s competitors have built 1P businesses thanks to massive amounts of venture capital funding. JET is instead building these businesses from scratch using its substantial operating cash flows from the marketplace. This operating cash flow is a long-term competitive advantage because it gives JET staying power and allows the company to subsidize the 1P/logistics business where needed to fend off competitors. Meanwhile, pure 1P operators must make money (i.e., dominate certain geographies and reduce customer subsidies) or utilize financing cash flows (which has become a lot more expensive recently). While pure 1P operators need to make a lot of money in 1P, JET in theory can utilize the marketplace profits to subsidize its own 1P. There will always be some customers (e.g., fancy people in UK) that will never order from Just Eat. But for the majority of the population that would be willing to use any app, the one with the network effects and the scale (i.e., the lowest cost to serve) will ultimately win. In the long-run, that should be JET. What does long run mean? I don’t exactly know. Competitors have a lot of cash. They can continue spending for a long time and I cannot predict when the industry reaches a steady-state. But we are beginning to see layoffs, consolidation, and finally – a prioritization of profit over revenues.

Catalyst

More rational food delivery environment, asset sales