Letters

Takeaway.com Update

September 2020

Takeaway.com Update

As you may know, Takeaway.com (now Just Eat Takeaway – JET) is one of the largest and longest held long investments in the fund. There have been several developments over the past few months and we wanted to update you on our thinking: what is evolving according to our thesis, what our thesis didn’t contemplate as a base scenario and why we are still excited to be long-term shareholders of JET.

Covid-19

The pandemic has been a tailwind for JET. With restaurants opened either only for delivery or for limited seating, delivery has been restaurants’ main source of demand.

This has benefitted JET in multiple ways:

  • Acceleration in consumer demand (see Fig 1. for the Netherlands as an example);
  • Acceleration in the number of diners acquired. This includes older diners who would normally be less prone to try digital takeaway ordering;
  • Acceleration in the number of restaurants added to the platform. This includes higher-end restaurants that had previously avoided joining the platform but are currently left with no other option to capture demand;

Fig. 1
Sources: Just Eat Takeaway; Somar Analysis

The growth in diners and restaurants on the platform will boost the platform attractiveness supporting its growth and competitive position for years to come. More restaurants mean the platform is even more valuable to diners. More diners mean the platform is even more valuable to restaurants.

Germany

During the second half of 2019, JET was focused on integrating their acquisition of their main competitor in Germany: Delivery Hero. This has been achieved on time and with better than expected business results. Following the integration, one of the remaining competitors (Deliveroo) left the market while the other (Uber Eats) remains with an insignificant share. JET succeeded in building a dominant position in Germany like the one they have in the Netherlands (see Fig. 2). We expect this dominant position will translate into best-in-class profit margins above the ones currently enjoyed in the Netherlands.

 

Fig. 2
Source: Google Trends
Note: While JET provides order and revenue numbers for Germany, Uber and Deliveroo do not. Therefore, we use Google trends as a proxy. Talks with industry participants and alternative data sources corroborate that Google Trends accurately portrays the market share dynamics.

 

UK

During 2020, besides Covid-19, JET’s management has been focused on closing and integrating the Just Eat acquisition. Just Eat was the leading UK Food Delivery Marketplace with leading positions in Canada and smaller positions in some other European markets.

This was a riskier acquisition than Delivery Hero Germany given the limited geographic overlap of both companies’ operations. In addition, Just Eat UK, while enjoying a comfortable leadership position, was steadily losing market share to logistics challengers Uber Eats and Deliveroo. The market feared that it was only a matter of time until Just Eat would lose their leading position. We were encouraged by both the attractive valuation of the transaction, the strong track record of JET’s management team (of which Germany is a prime example) and the strong, mostly unchallenged leadership Just Eat enjoyed outside of London.

While still early to make final conclusions, the incoming data seems to point out to a stabilization of market share, improving financial performance and accelerating growth in the number of restaurants and diners acquired. While we can’t unequivocally call a final victory in the UK market for JET, their market share performance coupled with profitability will make it hard for its loss-making challengers to continue raising fresh capital and challenge for market leadership[1].

 

Fig. 3
Source: Google Trends

Logistics Players
Warren Buffett from Berkshire Hathaway significantly influenced Somar’s investment process. He stresses that to invest in a business we need to ensure it has a sustainable “moat”. By that he means, how defensible the business is to current and potential competition. One of the exercises he uses to test the moat of each business is to ask: “If you had $1Bn of cash could you go and build a business to compete and win against the business you are investing in?” If yes, that means the business moat is not that strong. I always use this test, among others, but luckily have never been called on it in practice.
That changed with our Takeaway.com investment. Armed with billions of dollars of fresh capital from several investors (most prominently Softbank), Uber Eats, Door Dash, Deliveroo and others have launched a heavily loss-making, land-grab campaign to take market share from incumbents by adding new popular restaurants that were not offering delivery and subsidizing the delivery cost. They have had success getting customers, bringing new restaurants (restaurant chains like McDonald’s and gourmet restaurants without self-delivery) and opening new geographies (suburbs). This development was not part of our original thesis for the industry (see August 2018 letter). At that time, we observed the incumbent competitive marketplaces behaving quite rationally by only investing in markets where they were the clear leaders or had a clear path to become one.
To execute this strategy, the logistics players have raised multiple rounds of fresh capital over the past few years. So far, they have shown no profitability or even attractive unit economics. This led us to a deep dive into their economics and strategy. Based on interviews with their current and former executives and the review of publicly available financials we see a difficult path for their viability in Europe:

  • In the Netherlands and Germany, JET has such a commanding lead that their customer acquisition costs are prohibitively high. Deliveroo leaving Germany is a good proof point of this;
  • In the UK, Deliveroo was able to carve a niche in London with non-delivery restaurants, while Uber Eats had an exclusive contract with McDonald’s. JET is now able to deliver McDonalds and is also adding delivery of restaurants that were exclusive to Deliveroo. While, it is unrealistic to expect both Deliveroo and Uber Eats to exit the market, our checks indicate they enjoy low to negative margins and will be unable to market aggressively for greenfield opportunities without fresh capital raises;
  • Unlike other markets, Europeans have lower propensity to tip, putting more of the burden of the delivery cost into both the restaurants and the delivery platforms. Together with higher labor costs, this makes it harder to build profitability in Europe than in North America or low-cost emerging markets.

The appetite for large fresh capital injections from investors into logistics players has diminished somewhat. In addition, some of these players are preparing to go public and will be asked to demonstrate a path to profitability. Uber itself has committed to being profitable by the end of 2021. The competitive pressure from logistics players is abating and the only JET market where we believe they will have some meaningful share going forward is the UK, albeit with a very remote possibility to achieve leadership. JET, on the other hand, is well positioned to defend and expand its UK leadership due to strong cash generation from its core markets of Germany, UK and Netherlands and current strategy of adding chains like McDonalds and delivery from high-demand restaurants that don’t self-deliver.

This is a good illustration of the importance of critically monitoring an investment thesis continually. The data we gathered keeps us excited about the future. But if it didn’t, we would have acted accordingly based on the valuations presented to us.

GrubHub – United States

JET is currently in the process of acquiring GrubHub (Grub). Grub is a leading food-delivery platform in the USA. It is mostly a marketplace, although it has added self-delivery in recent years. It has strong leadership positions in NYC (I’m a happy customer), Boston and Philadelphia. It is also cash generative. Grub is led by founder Matt Maloney. Matt is a pioneer of the industry, having founded Grub in 2004. He will stay post acquisition to lead North America operations.

Grub’s acquisition has a similar flavor to that of Just Eat. Attractive valuation and a leading cash generative fortress in certain cities from which to build a profitable business. Unlike Just Eat, Grub is not the national leader and it is unclear whether it will achieve that position. In our judgement that makes it a less attractive asset than Just Eat. The valuation paid for Grub reflects this.

The US market is still very under-penetrated: less than 10% of the population currently uses digital food delivery platforms compared to 33% (and growing) in the Netherlands. There is still a lot of greenfield opportunity ahead.

The valuation paid reflects very modest growth for Grub going forward. So, in our judgement we are getting a good asset at a fair price with significant optionality to outperform once managed by the management team with the best track record for shareholder value creation in the industry.

Conclusion
At current valuations we see significant upside for JET in a scenario where their execution is decent but worse than what it has been in the past few years. We have free optionality to more upside, if they continue to execute at a high level and deliver consistent market share growth across their main markets.

The downside is currently modest and reflects superb execution, profitability and substantial fresh capital raises from their current competitors, coupled with execution lapses at JET. We see this scenario with low probability. In addition, we value the outcome of such a scenario based on JET’s standalone cash generation capabilities (in adverse competitive circumstances). The most likely outcome if JET doesn’t execute in any market is to sell that asset to the ultimate winner. Such transaction could be done at a premium given the extreme high level of synergies of the combination. We don’t account for this in our models. But looking at the sector history around the world and the financial logic that is the most common outcome we have seen[2].

This level of asymmetry of outcomes is uncommon. We have the best team in the world, in a growing industry finishing the first inning at a valuation that offers a payout heavily skewed to the upside. We look forward to keeping updating you on JET’s progress.

 

All the best,

 

Pedro Ramos

 

***

[1] Market leadership is key in food delivery platforms because it is associated with superior margins and faster growth given lower customer acquisition costs. We address this aspect of the industry in more detail in our original write-up on Takeaway.com published with our August 2018 letter.

[2] For example, Uber Eats recently acquired the unprofitable laggard in the US – Postmates – at a 2.65 billion valuation. Postmates is unprofitable, less than half the size of Grub, and only leader in its core Los Angeles market.

 

Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees. 

 

Image by MichaelGaida from Pixabay

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