GrubHub Facing Serious Challenge From Amazon

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GrubHub shares slipped on Wednesday as investors pondered the implications of Amazon’s new competing service called Amazon Restaurants. The stock fell 3.49% to close the day at $26.86 per share, likely because Amazon already poses a serious threat for the food delivery service, which has been struggling to grow. Shares of GrubHub fell again in early trading this morning, declining as much as 0.71% to $26.72 per share

Amazon food service launch was strong

Cowen analyst Kevin Kopelman and his team said they were surprised at how strong Amazon’s food delivery service already quite strong. Currently Amazon’s service is only available in Seattle as the online retailer tests it out.

Amazon added the food delivery service to its Prime Now mobile app in the city. The company is using its Prime Now infrastructure to make those deliveries, which is basically a “courier model.” Prime Now delivers a broad selection of items in local Amazon warehouses within an hour, so the addition of food deliveries isn’t much of a stretch.

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Amazon already dangerous for GrubHub

Cowen analysts surveyed the online delivery options for restaurants in downtown Seattle and learned that Amazon is already almost as large as GrubHub. The online retailer already has a wide selection of restaurants even though it has only been in the business for about a week and GrubHub and other competitors have been there for years.

Other strengths for Amazon

Further, Amazon’s selection of restaurants is set apart from its competitors, as the Cowen team discovered that 72% of the restaurants that are participating in Amazon’s restaurant delivery service are not available on GrubHub.

One comparison between Amazon, GrubHub and other competitors in the space was that the quality of the restaurants offered in their services was high among all of them based on Yelp reviews.

Amazon waives delivery fees… for now

Amazon is also serious about adoption and apparently aiming for GrubHub and other competitors’ throats. The online retailer is waiving delivery fees at launch to get consumers to adopt its service. This move isn’t uncharacteristic for the online retailer, as it offers free delivery on orders over $25 for anyone and free delivery for Prime Subscribers.

It’s possible Amazon will add a component of free delivery for restaurant orders for Prime Subscribers, but at this point, the pricing structure hasn’t been announced, and we don’t know when the company will begin charging. Customers still should tip their couriers.

The cost savings isn’t much right now, however, as the Cowen team estimates that it will only save$1 to $2 on a typical $20 order versus GrubHub and Eat24. The savings is a bit larger for other competitors, especially Postmates, potentially saving customers up to $9 on a delivery:


Postmates is different

One thing that could keep Postmates in business despite the significantly higher delivery cost compared to competitors is the fact that it will delivery to any restaurant. The Cowen team notes that even restaurants that are part of the $4.99 Favorites program will cost about $10 for delivery plus tips.

Postmates might also be able to differentiate itself by delivering orders much faster than the other companies because of those higher fees. Customers may be willing to pay more for that speed. Further, Cowen analysts note that the fee differentiation diminishes as the value of the orders rises.

Amazon Restaurants expected to expand quickly

The analysts also expect Amazon to expand its Restaurants service to other major U.S. markets based on the number of job posting in other markets. They refer to the online retailer’s expansion plans as “aggressive” because of the number of job openings. Also the company stated in the job descriptions: “Amazon Restaurants will rapidly expand in regions across the U.S.,” according to a Reuters report.

Amazon has historically moved fast when it comes to expanding its pilot programs as soon as management sees verification that they work. The rollout of Prime Now and the pairing with Amazon Restaurants also sets the stage for rapid expansion. Because the company already offers Prime Now in other markets, it should be easy to add Amazon Restaurants to those markets quickly.

The Cowen team notes that Amazon rolled out its Prime Now one-hour delivery “relatively” fast, expanding to 10 metropolitan areas in only nine months. Prime Now is currently available in Atlanta, Austin, Baltimore, Chicago, Dallas, Indianapolis, Miami, New York, Portland and Seattle.

Amazon Restaurants the next logical move

Certainly adding restaurant delivery services to Prime Now makes a lot of sense for Amazon, as Cowen analysts note that the space has the highest frequency of local deliveries. They also see convergence of deliveries for restaurant, grocery and retail items among Amazon’s local delivery competitors as Uber aggressively roles out UberEATS and expects to begin delivery retail items sometime this fall. Also Postmates recently partnered with Walgreens and Etsy, and Instacart is partnering with Target on delivery services.

Shares of Amazon rose as much as 0.16% to $528.25 per share in early trading.

Charts in this article are courtesy Cowen and Company.

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