Pando

If we’re right on the coming food-pocalypse, two dozen of the top VCs in the world are very very wrong

By Sarah Lacy , written on June 10, 2016

From The Disruption Desk

I’ve argued for a while that the glutted, over-funded solving dinner problem is perhaps the most overdue for a correction.

Even amid the headiest days of unicorn fever way too many companies raised shit loads of cash, and just one -- Blue Apron -- was actually a unicorn.

Even at the industry’s peak, there were clearly concerns about how big these companies could get. That issue is less the problem-- nearly half of us don’t know what we’re having for dinner by 4 pm every night, which represents a huge potential market. The real issues depend on which way you are trying to solve the problem but include what a lousy business dealing in fresh ingredients is, the logistical issues, the cost of having staffs working inside grocery stories, and insane customer churn and growing customer acquisition costs. It’s a universal problem that’s dozens and dozens of companies are trying to solve in different ways. Unfortunately there is no universal solution.

There’s another looming problem for many of these companies: Big league competition. I don’t mean UberEats, ho ho ho. I mean Google and Amazon.

GrubHub-- the only bringing you dinner company to go public yet-- got a direct volley from Amazon in May when the latter launched free restaurant delivery from 350 restaurants in New York for Prime members.

While that sounds scary, Morgan Stanley, for one, believes GrubHub will defend its turf well:

GRUB NYC Enters Amazon's Cross Hairs: We are often asked by investors which company/industry will be the "next target" for Amazon to disintermediate. On May 17th Amazon Prime Now launched restaurant delivery in Manhattan. Through this service, Amazon Prime members (using the Prime Now App) are able to enjoy free restaurant delivery from 350 restaurants. This is a new competitor and threat to GRUB given we estimate New York represents ~70% of adjusted EBITDA . That said, for now Amazon's offering does not seem differentiated enough to materially displace GRUB.

Its all About Selection...As in other e-commerce models, we believe selection (broad and unique) matters to driving user growth and conversion. While its early, Amazon's Prime Now offering is still behind GRUB. For perspective, Amazon launched with 350 restaurants in New York...which is 4.5% GRUB's ~8,000 total restaurants in the NYC Area (See Exhibit1). While Amazon has some unique inventory and access to higher-end chains – such as Le Pain Quotidien – we estimate that 70% of Amazon's Prime Now restaurants are also available on GRUB. This lofty overlap, in our view, speaks to the difficulty in obtaining unique supply in Manhattan, where many restaurants already offer delivery.

...And Amazon's Prime Now User base is Still Small: It is also important to remember that Amazon's Prime Now product is also still very small, as we estimate that the app has only been downloaded ~3.8mn times cumulatively in the US over the past 2 years (See Exhibit3). This is 60% of the total GrubHub app downloads over that period...and still only an estimated 12% of total Amazon Prime subs.

Morgan Stanley also brushed off similar concerns when it came to Uber vs Grubhub:

To Uber's credit, it has been effective in cross-promoting UberEats via its core app and email. On a national basis since the mid-March US launch, UberEats has been downloaded ~270k times. This compares withGrubHub, who has averaged 250k downloads per month in 2016, and a set of 4 competitors apps who together see a 350k monthly download run-rate.

...but consumer reviews are mixed...While app downloads are an indicator of top of funnel traffic, the category requires a strong consumer experience to drive conversion and retention. Our survey of app store reviews suggests ~50% of iOS and ~70% Android users rated the app with a negative 1 or 2 star rating; this compares with only 13% rating GrubHub that poorly. UberEats reviewers point to both technical issues with the app and mixed experiences with the service quality.

...and limits to unique New York restaurant supply impede differentiation. There is ample argument that Uber materially improved the taxi industry but we contend that the New York take-out market is more difficult to improve on. Since most mid-range New York restaurants offer their own reliable delivery service and are available on Seamless/GrubHub (~8,000 NYC restaurants on the platform), new last mile delivery services seeking to differentiate from GrubHub have done so via sourcing unique supply. However, this unique supply tends to be higher-end and is structurally limited, in our view. Of the 108 UberEats New York launch restaurants only 17% are unique to the platform, which we contend points to this supply constraint.</blockquote>

In the past, Morgan Stanley has also argued Grubhub’s already public position will help it fend off the dozens of “solving dinner” competitors who have struggled to even get a $1 billion private valuation.

Given how many of these battles center in New York, the 2013 acquisition of Seamless appears to have been it’s own personal Instagram moment.

Deals of would be GrubHub spoilers were down in 2016, the dollar amount invested wasn’t. And that’s after five years of “solving dinner” becoming the most overfunded category in all of on demand, by number of deals. That’s saying something.

Granted, some of this is dumb money. But a lot is what we’d consider smart money. CB Insights published some research this week showing the top 24 “smart money” venture firms all doubled down on the category in the first quarter, despite massive grumbling about how overfunded the category is.

Collectively, the top two-dozen VCs participated in 5 food delivery deals worth over $330M in Q1’16, up from just 2 deals in Q4’15. The rounds they participated in represented over $300M in dollar funding, a quarterly record for deals with smart money backing.

This is despite worries over the food delivery market being overcrowded, and smart money-backed startups running into a bit of turbulence, including Good Eggs (which scaled back operations) and Door Dash (which raised a round with share price declines). 

Part of that was the DoorDash deal. Larger rival Postmates is raising money now.

I’m interviewing GrubHub’s CEO Matt Maloney at Pandoland on Tuesday of next week. We’ll definitely discuss more of these competitive threats. Maloney has already had choice words for DoorDash and others in the past. One thing I’m anxious to ask the vociferous founder: How he thinks lone unicorn Blue Apron will fare in a rumored bid to go public this year.