Just Eat was an early mover, but it doesn't appear that it's kept moving at the pace necessary to fight back rivals or expand out of its small UK market.
— Jason Clampet
Just Eat Plc, the British food-delivery star of recent years, has missed out on its peers’ stock gains since entering the blue-chip FTSE 100 Index in late 2017.
“The market has been spooked by the extra investment to launch delivery services,” Ian Whittaker, an analyst at Liberum, said in an email. “More generally, there have been concerns that the food-delivery business is seeing powerful entrants,” as well as worries over the company’s recent sales decline in Australia, he said.
After starting the year as the most valuable online food-delivery company, Just Eat now has about half the worth of U.S. counterpart GrubHub Inc., while shares of European competitors Takeaway.com NV and Delivery Hero SE have also increased, even after coming down from mid-year peaks.
Investor sentiment started souring when Just Eat announced in March that it will spend about 50 million pounds ($65 million), more than analysts had predicted, to expand its online marketplace into a courier service. The move marked a significant change in strategy, and in July the London-based company bumped up the spending figure by 5 million pounds to 10 million pounds.
U.S. technology giants are also starting to breathe down its neck. The stock was most recently hurt by reports last month that Uber Technologies Inc. is looking to step up competition with a tie-up or purchase of London-based rival Deliveroo. Those companies provide third-party drivers for bringing meals to customers, unlike Just Eat’s predominantly online platform for restaurants with their own delivery services.
Just Eat tripled in value between its 2014 initial public offering and its graduation to the U.K. benchmark gauge, but since then the stock has progressed more slowly than the competition on many metrics. Analyst optimism hasn’t faded as quickly, and the gap between Just Eat’s share price and estimates has never been larger.
Uber Eats has in the past few months overtaken Just Eat as the top-ranked food and drink mobile application in the U.K., both in Apple Inc.’s App Store and Alphabet Inc.’s Google Play, according to download data compiled by App Annie. More than half of Just Eat’s orders are done via the app, and practically all of its profit comes from the U.K. business.
“As a result of its delayed move into delivery, Just Eat’s core customer base in terms of restaurants is still very much skewed toward the lower price segment, which increasingly brings strategic disadvantages,” Marcus Diebel, an analyst at JPMorgan Chase & Co., wrote in a report last month.
The high to mid-price market demands delivery and is already served by Deliveroo and Uber Eats, while for lower-price customers, chains are strongly expanding into rural areas, cannibalizing Just Eat’s marketplace, said Diebel, who has an underweight rating on the shares.
Those weaknesses have started attracting funds betting against the company. Short interest as a proportion of Just Eat’s freely traded stock has almost doubled in the past two weeks to 5.7 percent, the highest level since early 2017, according to Markit data.
The competition from Big Tech is set to intensify as growth prospects burgeon. UBS Group AG predicts a 10-fold increase for the global online food-delivery market in the next 12 years, to $365 billion by 2030. Shared meal production combined with increased delivery capacity through cheap gig-economy labor or unmanned vehicles and drones could lead to even more radical outcomes, UBS analysts including Chris Grundberg wrote in a lengthy industry report in June.
“There could be a scenario where by 2030 most meals currently cooked at home are instead ordered online and delivered from either restaurants or central kitchens,” they wrote, comparing the development to the industrialization of clothes production.
Despite the challenges, Liberum’s Whittaker sees reason for optimism, bolstered by Just Eat’s market-leading position in most of the countries it operates in.
“This type of business benefits from virtuous network effects, where the more restaurants you have, the more customers download the app, which drives more restaurants in,” he said. “It also has a very high barrier to entry in its strategy of focusing on second-tier cities, where delivery services such as Deliveroo and Uber Eats find it harder to operate.”
©2018 Bloomberg L.P.
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