With investing, as in life, sometimes it helps to take a step back to see larger trends emerging that might be difficult to see in the moment. After all, investors don’t want to miss the forest for the trees. Over the past decade, several macro trends have emerged that have benefited investors tremendously for those who were savvy enough to spot them in real time. These trends have been as diverse as they have been profitable and have included everything from e-commerce and artificial intelligence to cloud computing and the internet of things (IoT) .
The stay-at-home investment thesis
New technologies have created a tremendous shift in consumer behavior over the past decade. One of the largest changes seems to be consumers’ desire to stay home and, thanks to e-commerce, there are fewer reasons to leave home than ever before. By using websites like Amazon.com (NASDAQ:AMZN), shoppers can fulfill virtually every desire without leaving the comfort of their living room. Netflix has given us the power to control our entertainment like never before, creating whole new trends such as on-demand television and binge watching.
Amazon and Netflix have yielded incredible results for investors over the past decade, returning about 2,000% and 7,800%, respectively. Their success has almost all been fueled by empowering consumers with the convenience and choice necessary to stay at home without sacrificing options when it comes to their shopping and entertainment needs. There are still trends to take advantage of amid this stay-at-home phenomenon, the biggest of which could be food delivery.
The best ways to invest in food delivery today
Americans are eating out less, and getting take-out more often or, better yet, ordering food to be delivered right to their doorstep so they never have to leave the comfort of their home or pause their marathon binge-watching session. If you’re anything like me and my family, you’ve probably started ordering take-out and delivery more over the past couple of years than you used to. With new apps and smart-device integration, restaurants are working to make it even easier for customers to place delivery orders.
It’s not just restaurants that have an opportunity to exploit this tremendous and previously unmet consumer demand for food delivery, either. Grocery stores are trying to get in on the craze, offering more delivery options than ever before — the impetus of which was likely Amazon’s acquisition of Whole Foods. The e-commerce giant’s move shook the staid grocery business to its core.
There are several different avenues available to investors looking to take advantage of the surging popularity of food delivery, including restaurants, grocers, meal kits, tech companies that support payment systems, apps and other logistics, and larger corporations that will undoubtedly make waves in the space. Let’s examine some of the options.
|Company Name||Type of Business||Market Cap (billions)||P/E Ratio (GAAP)|
|Blue Apron (NYSE:APRN)||Meal kit delivery||$0.6||N/A|
|Domino’s Pizza (NYSE:DPZ)||Restaurant||$11.6||41.16|
|GrubHub (NYSE:GRUB)||Restaurant delivery||$10.5||136.47|
|Kroger (NYSE: KO)||Grocery||$20.8||24.53|
|Sprouts Farmers Market (NASDAQ:SFM)||Grocery||$2.8||18.2|
|Walmart Inc. (NYSE:WMT)||Retail/Grocery||$247.4||28.66|
|Yum! Brands (NYSE:YUM)||Restaurant||$27.2||15.0|
How big is the restaurant delivery business?
While exact numbers are hard to come by, it is clear that the food delivery business is likely the next wave of growth for restaurants. In a 2016 research note, Morgan Stanley stated that the total restaurant industry pulled in about $500 billion a year in revenue — which included about $210 billion of food that was eaten off-premise. Yet, of this $210 billion, only about $30 billion came from delivery sales, implying a huge unmet need for restaurant delivery and a long runway of growth.
More recently, the NDP Group, a global information and research company, said that while restaurant sales have been flat over the past five years, delivery sales have increased 20%. In that same five-year time frame, NDP estimated there were 1.75 billion delivery orders representing about $16.9 billion in sales. With restaurant foot traffic struggling and delivery orders growing, delivery has become the best chance for growth for many restaurants. “Restaurants need delivery in today’s environment in order to gain and maintain share. It has become a consumer expectation,” said NDP Group Senior Vice President Warren Solochek.
Even so, restaurant delivery is still a largely unproven business model on the mass scale — across all sizes of restaurants and all types of food — we’re seeing it adopted today. But done right, it provides an opportunity for restaurants to grow their business while not having to provide wait staff or table space to customers. Done wrong, it can be a costly venture that fails to provide any profits or cultivate customer loyalty. I believe curating data from customers is crucial to driving a successful and sustainable model for restaurants.
Domino’s: The cutting-edge technology company that sells pizza
The gold standard for any restaurant delivery business remains Domino’s Pizza (NYSE:DPZ). Amazingly, since 2010, the company has out-gained some of the hottest stocks in the market — including Amazon, Apple, and Alphabet — while giving investors returns over 2,000%. This didn’t happen by accident and, while Domino’s makes a tasty and affordable pepperoni pie, its pizza isn’t that much better than the competition’s. But Domino’s has made a science out of offering its customers convenience.
Through Domino’s Anyware platform, the company literally gives 11 options for ordering pizza including Google Home, Amazon’s Alexa, Slack, Facebook Messenger, Twitter, a connected car or television, smart watch, or one of Domino’s beloved apps, including one that allows you to order from your phone without even a single click. Once customers create their own pizza profile, their favorite order and default delivery address is automatically saved, making future ordering even easier.
It’s not just the many ways that customers can order a meal that makes Domino’s the king of convenience, it’s the countless places where customers can have their pizzas delivered as well. In the first quarter of 2018, Domino’s management announced its Hotspot program, a database of hundreds of thousands of public areas where customers can order pizza to when they either don’t know the address or are not at a place with a traditional street address. In the company’s first-quarter conference call, transcribed by S&P Global Market Intelligence, CEO Patrick Doyle called Hotspot “something we think could redefine delivery convenience” and continued:
This will allow customers to order Domino’s from thousands, in fact, now almost 200,000 of parks, beaches, sports fields and other places, which will now serve as official delivery locations. The ability to now deliver to spots without a traditional address and other rather unexpected sites will not only continue to drive incremental orders in the near term, but it is yet another meaningful step on our mission of industry-leading convenience and the ability to order from us anywhere, anytime.
It wasn’t intuition or lucky guesses on Domino’s part, however, that led to the company’s success, but rather an extraordinary effort to collect and analyze customer data. As Dan Djuric, the company’s vice president of enterprise information services said, “Domino’s AnyWare literally translates to data everywhere.” In 2016, Domino’s was actively collecting data from more than 85,000 sources on its customers. Despite the company’s massive returns over the past decade, it continues to thrive. When Domino’s reported its 2018 first-quarter earnings, revenues increased 25.8% to $161.2 million while diluted earnings per share (EPS) spiked even higher, rising 58.7% to $2.
McDonald’s: A fast food giant with a partnering strategy
McDonald’s (NYSE:MCD) does not have a long history of delivering its affordable meals to hungry customers, but it is trying its hand at the delivery game in a big way through a major partnership with Uber Eats. In 2017, McDonald’s went from offering delivery at only 200 locations in Florida to more than 7,000 worldwide by the end of the year. The company is now delivering from more than 11,500 locations worldwide, including its Asian and Middle Eastern restaurants, where it has been offering delivery services for years.
In the company’s first quarter, comparable sales — a measure of revenue growth from the company’s existing locations — increased by 5.5%, which, given the massive size of McDonald’s operations, equates to about $1 billion in additional sales for the company. Foot traffic, however, increased only about 0.8%, meaning most of the increase in comparable sales came from a rise in price in the average customer’s order.
While there were several factors leading to the increase in the size of customer tickets, including an emphasis on premium products, delivery services certainly contributed. McDonald’s CFO Kevin Ozan said that delivery checks were 1.5 to 2 times the size of an in-store check. CEO Stephen Easterbrook said, “[I]n most of our major markets, delivery is already a meaningful contributor to overall comparable sales.”
The primary advantage to McDonald’s delivery model is that this partnership does not require great spending to build out a massive delivery infrastructure, because Uber Eats provides the vehicle fleet and drivers. One substantial downside, though, is that McDonald’s will not have access to as much customer data as a company like Domino’s, which runs its own delivery efforts and has taken advantage of over the past decade. In fact, during McDonald’s last two conference calls, the word “data” was only used once, in reference to worker wages.
Another disadvantage is that customers ordering food through the Uber Eats app are unlikely to develop brand loyalty to any particular restaurant but rather to the app itself. As long as diners get a relatively cheap burger and fries in a timely manner, they probably won’t care where it comes from. That being said, for investors looking for a more stable restaurant investment and hoping for exposure to food delivery for its growth potential, McDonald’s might be just the ticket.
GrubHub: The restaurant delivery pure play
GrubHub (NYSE:GRUB) is the world’s leading online and mobile food ordering company, currently partnering with 80,000 restaurants in 1,600 U.S. cities. As the leader in this huge trend, it is not surprising to see the company produce impressive growth numbers.
In the company’s first quarter, daily average grubs (DAGs), the number of daily orders across GrubHub’s entire platform, grew to almost 436,900, a 34.4% increase year over year. The platform’s active diners, the number of unique diner accounts from which an order has been placed over the preceding year, grew to 15.1 million, an incredible 71.6% increase year over year. While some of that growth can be attributed to GrubHub’s acquisition of Eat24, which was finalized in the fourth quarter of 2017, management stated that with the acquisition excluded DAGs still organically increased about 18% to 19% over last year’s results.
Grubhub offers restaurants a low-risk, high-reward proposition for using its food-ordering platform. The restaurants do not have to pay anything up-front or any subscription fees, just a commission fee for every order the platform generates. Individual restaurants can choose to pay higher commission rates in exchange for more prominence on the platform, thus exposing themselves to more potential diners. GrubHub saves diners’ preferences, including previous orders and payment methods, to make the ordering experience as seamless as possible in an effort to drive frequent usage.
Founder and CEO Matt Maloney believes the restaurant delivery industry is still in its early stages and that there is a long runway of growth for both his company and the sector at-large. In the company’s first-quarter conference call, transcribed by S&P Global Markets Intelligence, he said:
We’re just breaking into a lot of these markets with the support of significant restaurant chains. So it feels like … restaurants are still testing the waters and trying to understand how online ordering and online delivery support their overall growth. Clearly, with the validation we have through our existing partnerships and the ones that are in the pipeline, everyone is looking at us. And we are likely — since we’re the industry leader, the team to beat. And so we’re really taking advantage of the momentum we have by aggressively dialing into … markets, not just with the expansion delivery, but by accelerating our restaurant sign-up teams.
GrubHub is accumulating a lot of customer data through its platform, which it then analyzes to give restaurants actionable data to help them optimize their online marketing, menu pricing, and delivery footprints. This makes the partnering restaurants more dependent on GrubHub, creating a stickiness to the relationship that makes it unlikely that a restaurant will leave for a competing platform.
One standout negative about GrubHub’s platform is its sky high valuation. Based on its trailing-12-months EPS of $1.43, the company currently trades at a price-to-earnings (P/E) ratio of more than 81! Still, given its growth rate and the macro tailwinds at its back, investors with an appetite for growth might want to take a bite of some GrubHub shares.
Yum! Brands: A hybrid approach with the best of both worlds
Yum! Brands (NYSE:YUM) is the parent company of restaurant chains KFC, Pizza Hut, and Taco Bell. In the company’s fourth quarter of 2017, it announced a major partnership with GrubHub, which went far deeper than subscribing to the delivery service’s platform. As part of the deal, Yum! Brands purchased $200 million of Grubhub’s primary common stock, giving it a significant vested interest in the global leader of online and mobile food delivery. The investment gives GrubHub the liquidity it needs to expand its delivery network faster and drive more orders to Yum! Brands’ KFC and Taco Bell restaurants. Meanwhile, Yum also gained a seat on GrubHub’s board of directors, ensuring that it will have a voice in all of the delivery company’s strategic growth initiatives.
Another unique aspect of the partnership is that all of KFC’s and Taco Bell’s points-of-sale (POS) systems will be fully integrated with GrubHub’s, making for faster delivery and more accurate orders. While this integration is still being rolled out across KFC and Taco Bell locations, the markets where it has been piloted have shown encouraging results.
What might be the best part about this deal is Yum’s access to GrubHub’s data, which Yum! Brands CEO Greg Creed called “critical.” With access to the data and the full-scale integration of GrubHub’s ordering system with Yum’s, this partnership has many of the advantages of McDonald’s partnership with Uber Eats — such as no great expense for a vast delivery infrastructure build out — with fewer disadvantages, because it has access to the customer data GrubHub generates.
In the company’s first quarter, same store sales grew a meager 1%, worldwide sales grew a bit more at 4%, and adjusted earnings per share jumped 38%. Yum! Brands currently trades at a P/E ratio of about 19.
Square: Thinking outside the box
Investors looking for an alternative way to invest in the restaurant delivery business might want to consider Square (NYSE:SQ). Known for its innovative payment processing solutions and the budding ecosystem of services it can offer small- and medium-sized businesses, the company also offers Square for Restaurants, a cloud-based platform designed to streamline the front-end and back-office operations for restaurants. The platform offers solutions for employee management, tip-splitting, fraud protection, menu planning, and enables servers to place orders more efficiently.
Square for Restaurants also integrates with Caviar, Square’s delivery and mobile order-ahead platform already used by Square’s restaurant partners. In the first quarter, Caviar was cited as one of the primary contributors to Square’s subscription and services-based revenue segment, which grew to $97 million, an incredible 96% year-over-year increase.
Earlier this year, Square acquired Zesty, a corporate catering service. In the press release announcing the deal, Gokul Rajaram, Caviar’s lead at Square, said, “Restaurants turn to Caviar to reach more diners and grow their businesses. Expanding our corporate catering product with Zesty enables us to offer our restaurant partners another way to boost sales through higher-margin, large-format catering orders.”
The combination of Caviar, Square for Restaurants, and Zesty gives Square quite a robust ecosystem, making it very difficult for restaurants to leave Square’s services once they subscribe to its robust food-ordering and delivery platform. It also gives investors another option for gaining exposure to the food delivery business without investing in a company with a sole source of revenue that is a play off this trend, such as GrubHub.
The meal kit melee
Restaurants aren’t the only way to jump into the food delivery trend. In 2017, the meal-kit business was estimated to be worth $2.2 billion, according to market consulting firm Pentallect, which believes the market could grow by 25% to 30% over the next five years.
One of the original leaders in the prepared meal delivery business is Blue Apron Holdings (NYSE:APRN), which delivers meal kits complete with recipes, measured amounts of each ingredient, and instructions needed for its customers to make the meal. But Blue Apron has struggled mightily since its initial public offering (IPO) last summer, losing almost 70% of its value in the nine months since it went public. It’s also recently been surpassed in the United States by German-based company Hello Fresh.
In the first quarter of 2018, Blue Apron’s revenue declined by 20% year over year, driven by a decrease in both customers and orders. If that sounds bad, it’s because it is. As a sign of just how low expectations have gotten, though, the company’s shares actually spiked on the news.
There are some signs of hope, potentially, in Blue Apron’s recently announced partnership with Costco Wholesale that allowed it to begin selling its meal kits in Costco’s stores. The share price has also gotten so low that the company could be the target of an acquisitive bid from a larger company. That being said, this company sports virtually no economic moat — a competitive advantage over business rivals — and the number of rivals is seemingly growing by the day.
Walmart (NYSE:WMT) announced earlier this year that it would be making meal kits available for online ordering and pickup at over 2,000 of its stores by the end of 2018. While it hasn’t ventured into delivery of those meal kits yet, its scale and massive footprint of stores gives it another important advantage over pure meal kit players such as Blue Apron.
Soon after Amazon acquired Whole Foods it began experimenting with meal kit delivery. Amazon’s massive base of Prime members gives it pricing options that Blue Apron just doesn’t have and its Whole Food locations gives the company a nationwide base from which to launch the business.
Other grocery stores are getting in on the action, too. In 2017, grocery store chain Albertson’s bought Plated, a meal kit delivery company it can run from its base of stores and sell in stores as well. Last month, Kroger (NYSE:KR) acquired Home Chef, the largest private domestic meal kit company, for $200 million — a price that could increase if certain incentives are met.
Private companies are also jumping into the fray and creating more competition. Chef’d, for example, has raised millions in investments from Campbell Soup and partnered with well-known brands such as Weight Watchers, to create tailored meals for people on that program, and Coca-Cola, to pair different beverages with meals.
This is a low-margin, highly competitive space, and it may be one that investors want to avoid unless you’re considering a larger company, such as Amazon or Walmart, which is using meal kits as a new method to rope customers into their larger ecosystems.
The grocery store wars
The last food delivery frontier is groceries. Unlike meal kit delivery services, there are only a few options in which to invest in this space: Amazon, Walmart, and Kroger. A possible wildcard entry could be the small-time, but growing, organic grocer Sprouts Farmers Market (NASDAQ:SFM).
Amazon’s Prime Now offers free two-hour grocery delivery to members from Whole Foods locations in seven markets including Atlanta, Austin, Texas, Cincinnati, Dallas, Los Angeles, San Francisco, and Virginia Beach, Virginia, and the company plans to continue expanding the program in 2018. For an extra fee of $7.99, customers can get their dinner delivered in just one hour. Given that many American consumers are already Prime members — there are more than 100 million worldwide — this could give Amazon a huge leg up on the competition.
Walmart offers pickup for online grocery orders at about 1,200 locations across the country, which has caused online sales at the retail giant to explode over the past year. In the company’s first quarter, online sales increased 33% year over year, and management believes e-commerce will accelerate 40% over the course of the full year. The retail giant has bigger plans to make grocery shopping convenient, though. CEO Doug McMillon recently said the company plans to start offering grocery delivery to about 800 stores by the end of 2018, and spoke to the importance of Walmart’s growing food efforts:
The eCommerce food business we’ve been building is important not only because of the volume it’s driving but, strategically, it’s helping to grow the number of omni-channel customers we serve. You’ll remember from our previous presentations that omni-channel customers spend almost twice as much with us, and they also spend more in stores even after becoming omni-channel customers.
Kroger has struggled since Amazon acquired Whole Foods — shares are down almost 17% over the past year. In May, the grocer took a decisive step toward closing the gap between it and its deeper-pocketed rivals by announcing a crucial partnership with Ocado, a British-based online grocery retailer. As part of the deal, Kroger will increase its investment in Ocado up to 6% and gain access to the technology behind the Ocado Smart Platform, which includes features such as online ordering, automated fulfillment, and home delivery capabilities. Is this too little, too late? Maybe not. Although it needs to catch up, Kroger’s 3,904 stores across the United States give it opportunity to still take advantage of the delivery trend.
Finally, Sprouts announced a partnership with Instacart, the still-private grocery delivery company, making home delivery an option for every single one of Sprouts’ 314 location.
Keep in mind that grocery stores that partner with third-party companies to offer delivery services face similar challenges to restaurants doing the same — they might not have complete access to valuable customer data and may struggle to build brand loyalty when customers associate delivery with the app provider not the store. Groceries are already a low-margin business struggling to keep up with the e-commerce revolution, so I wouldn’t recommend any grocery store based on its delivery services unless it was another way to hook customers into a larger ecosystem, such as Amazon or Walmart.
American consumers are staying home more while they shop and consume entertainment from the comforts of their living rooms. One of the things that previously was almost certain to draw us out of our homes — our appetites — is not nearly as strong of an incentive as it used to be as consumers order food and have it delivered right to their doorstep. Given the widespread popularity of online and mobile ordering, this trend is unlikely to abate any time soon. Savvy investors might consider that opportunity too good to pass up.