Domino’s Pizza CEO: A shakeout is coming in the third-party food delivery space – Yahoo Finance

Dominos Pizza (DPZ) CEO Richard Allison is delivering a flaming hot message right to the doorsteps of execs at third-party food delivery companies such as GrubHub and Uber Eats.

That cautionary message: at some point in the near future, you will have to run businesses that care about profits or else.

I think we will see some shake-out in the third-party [food delivery] space, Allison tells Yahoo Finance.

Delivery as a service that these third parties are offering [is] not sustainable in its current form, he continued. Look at what has happened to GrubHubs P&L [profit and loss statement] since they went from being an order aggregator to being a third-party delivery company. They have grown revenue very rapidly but their profit has declined to almost nothing. Uber Eats in the third quarter lost over $300 million in EBITDA [earnings before interest, taxes, depreciation and amortization] delivering food. DoorDash is private, but speculation is out there they could be losing close to half a billion dollars.

A spokesperson for DoorDash didnt return Yahoo Finances request for comment.

Others did chime in, however.

"While there are few barriers to entry in this industry, there are major barriers to creating a sustainable, profitable business, a GrubHub spokesperson told Yahoo Finance via email. Several of our peers have achieved national scale, but we are the only one that has grown without unsustainable shortcuts like incurring massive operating losses, offering irrational diner pricing, and giving drivers substantial subsidies. Instead, we have built our business recognizing that our value is helping independent restaurateurs reach new customers efficiently through our scale and expertise, while making all choices available to our diners when they want to order takeout.

Were proud of a business model that helps restaurants to use technology to increase sales, and hundreds of thousands of people to earn flexible income on their own time delivering food. Uber Eats is a young business, but a competitive one, and were optimistic about its future around the world, an Uber spokesperson said via email to Yahoo Finance.

But judging by the state of the third-party food delivery space entering 2020, Allisons call may be right on the mark.

GrubHub (GRUB) shocked Wall Street in late October with a sub-par third quarter and concerning outlook. The companys sales clocked in at $322 million versus analyst estimates for $330.5 million. Non-GAAP net earnings plunged to 27 cents a share in line with analyst forecasts from 45 cents a share a year ago. Growth rates in GrubHubs closely watched daily active grubs and gross food sales metrics continued to slow.

For the nine months ended Sept. 30, GrubHubs non-GAAP net earnings have dropped to $77.5 million from $135.7 million a year earlier despite a 35% increase in sales. That dynamic surging sales and declining profits reflects the intense competitive environment in food delivery where gobs of money must be spent on advertising and incentives to keep diners engaged.

GrubHubs stock is down about 35% year to date.

The companys main response to the soft quarter is to ramp up incentives to diners even more, which is likely putting pressure on the entire industry to cap off 2019. It also plans to add more restaurants to its delivery network.

We will be moving quickly, spending more and trying many different strategies over the next 12-18 months to increase restaurant supply aggressively while making our diner experience more sticky effectively taking action to remove any reason for diners to look anywhere else, GrubHub founder and CEO Matt Maloney said in an October letter to shareholders.

GrubHub CEO Matt Maloney (C) applauds after ringing the opening bell before the company's IPO on the floor of the NYSE, April 4, 2014. REUTERS/Lucas Jackson

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Nevertheless, Wall Street remains concerned about GrubHubs bottom line for the foreseeable future. Jefferies analyst Brent Thill says GrubHubs fourth-quarter sales growth guidance of about 13% would be by far the lowest in the companys history and a step down from 30% in the third quarter. GrubHubs fourth quarter EBITDA guidance implies a 6% margin, which Thill notes would also be a historic low.

GrubHubs initial 2020 EBITDA guidance of at least $100 million was markedly below Thills outlook of $180 million.

But hey, at least GrubHub is profitable and in business right? The same cant be said for rival Uber Eats (not profitable, but still in business) and countless others in the industry.

For the nine months ended Sept. 30, Uber Eats (UBER) has lost a shocking $911 million on an adjusted EBITDA basis thats up from a $323 million loss a year ago. In its latest 10-Q filing, Uber highlights a range of issues with Uber Eats typical to the food delivery space and that are unlikely to abate anytime soon.

Eats adjusted EBITDA lossincreasedprimarily attributable to an increase in consumer promotions, brand marketing, and employee headcount costs, the filing says. Losses of that magnitude for Uber Eats points to a business that is in big-time trouble, and clearly not viable in its existing form.

Meanwhile,Amazon Restaurants closedfor good in June after making little headway in the food delivery space. Caviar couldnt hack it, so it sold out toDoorDashin August for $410 million (a wise call by Caviar in light of GrubHubs October commentary).

Waitr was told earlier this month by the Nasdaq it could be de-listed in January if it doesnt get its stock back above $1.00. The reason the stock has crashed 97% this year to 33 cents? You guessed it, a year of staggering losses to the tune of $270 million as the company struggled to stay competitive amid all the industry discounting.

Back in July or August I might have felt like this could go on for some indefinite period of time because there seemed to be particularly in the private market an appetite to drive growth with little regard to profitability, Allison says. I think theWeWork debacleand some other things going on out there the decline inshare prices for Uber and Lyft, PostMates IPO being stalled, the valuation of GrubHub has now come off I think there is less patience out there among investors today in December of 2019 than there was in July or August. But I dont know when the shakeout ultimately comes.

A spokesperson for PostMates didnt return a request for comment.

Uber Eats continues to loss massive amounts of money. REUTERS/Valentyn Ogirenko

Ultimately, a shakeout along the lines of what Allison predicts could take several forms.

One, the entire third-party food delivery space goes belly up under the weight of its own penchant for offering deep discounts on orders, heavy advertising and aggressive investment in tech. In turn, a large restaurant chain such as McDonalds could swoop in and buy a major delivery player on the cheap and gain access to a turnkey operation.

Another version of an industry shakeout could see a well-established player such as GrubHub continue to buy up smaller rivals to gain the required economies of scale to be a viable business longer term. GrubHub has taken on the role of consolidator thus far it has acquired nine food delivery platforms since 2013, including Seamless and Eat24.

Or a slight twist on this version may see GrubHub merging with Uber Eats, becoming its own stand-alone entity. Uber would therefore primarily be a ride-hailing/transport company, which it could make money on.

Of course Allison who assumed the CEO role in July 2018 after leading Dominos international business is coming at the food delivery topic from the view of a powerhouse franchise in Dominos. The pizza chain for decades dominated the delivery space with its formidable fleet of drivers and mobile ordering technology.

But as fast-food delivery has become ubiquitous thanks to third-party delivery services, Dominos once mind-blowing quarterly sales gains have slowed. So too has the stock price shares are up 17% over the past year, trailing the S&P 500s 30% gains. Should Allisons third-party delivery industry shakeout happen, Dominos would stand to benefit immensely as the companies scramble to consolidate and even stay in business.

A Domino's Pizza employee fires up a pie. REUTERS/Sergei Karpukhin

While Allison has been one of the most vocal critics in the restaurant industry of the tactics used by the aggregators as they are often called he isnt letting the issue consume his time as CEO.

As I think about Dominos Pizza, we have got to stay focused on the things we can control that will allow us to be successful regardless of when or how that shakeout occurs. So that means keeping our system and our franchisees focused on value, meaning we remain a very affordable way to feed your family tonight. We are that today, and we are very aggressively planning to compete in the future. We have got to be even better on being on time with delivery. We need to be even better in the years to come, we have an extensive set of initiatives underway to continue to improve service in our business, Allison says.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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Domino's Pizza CEO: A shakeout is coming in the third-party food delivery space - Yahoo Finance