Just Eat off the menu

Just Eat began as an online takeaway advertising and ordering platform, making the bulk of its revenues by taking a percentage of orders. It also uses its scale to help partners get discounts from wholesalers, utility providers, insurers and the like. The relatively fixed costs of operating a platform means there is potentially huge value to be created from building a dominant network, which Just Eat has done in its core markets. As a network grows, it becomes more valuable to each member: the more restaurants are signed up, the more choice (and therefore value) for customers; the more customers, the more money restaurants can make; the more data the platform operator can gather, the more the service can be improved. For a dominant player, this network effect can be a very strong source of competitive advantage and profit.

Just Eat operates across a range of European countries under its eponymous brand, as well as Australia, Canada, Mexico and Brazil under its brands Menulog, ifood and SkipTheDishes. The UK accounted for 49 per cent of revenues in 2018. The group boasts more than 100,000 vendor partners and 26m customers. By way of comparison, Deliveroo operates in over 200 cities across 12 countries, while Uber Eats is in over 50 cities in 13 countries. The challenge Just Eat faces is that it now finds itself competing against two very innovative and well funded rivals – Uber recently raised $8bn (£6.22bn) through its initial public offering, and just last month Deliveroo announced Amazon (US:AMZN) would lead it in a $575m (£444m) fundraising round.

Significantly, Deliveroo and Uber appear to be moving the online takeaway market away from a straightforward platform model to one that draws more on delivery capabilities. Just Eat has already been encouraged to roll out a delivery service, starting in parts of the UK and Australia. Leaving the difficulty of scaling a delivery network aside, the cost of running the operation alongside the existing business will affect the margin. In the UK, the underlying cash profit (uEBITDA) margin slipped 200 basis points to 49 per cent in 2018 as a result of investment in delivery. In the future investors may need to consider much more than the relatively fixed platform costs.

Management’s growth strategy is to invest in its marketplace, roll out delivery and sign up restaurant partners. It has had some success, but investment in growth initiatives was £51m in 2018, shy of the £55m-£60m previously targeted by management. It also had some success in bringing big brands on board, signing McDonald’s in Canada and KFC in Australia and New Zealand. However, in the group’s core market of the UK, McDonald’s has an agreement with Uber Eats, and KFC is trialling its own delivery service.

A further industry trend threatening Just Eat is the move toward “dark kitchens”, a concept Uber Founder Travis Kalanick has invested in, and that Deliveroo is launching through its “Editions” concept. Dark kitchens are delivery-only facilities that allow new or existing restaurants to start in new locations at a lower cost. Uber and Deliveroo can use insights gleaned from their delivery data to gauge unmet demand, and then bring in restaurateurs that would be well suited to underserved areas. Just Eat’s relatively immature delivery service leaves it on the back foot for launching kitchens of its own.

Just Eat is clearly at a crucial stage of its development, and yet the group does not currently have a permanent chief executive. Peter Duffy leads it on an interim basis, but he has previously ruled himself out as a contender for the permanent role. Activist investor Cap Rock, which owns a 2 per cent stake the group, has urged the group to appoint someone with experience in online food delivery, as well as pushing for the initiation of good-faith merger talks with rivals such as Takeaway.com, and the sale of “non-core” assets such as ifood. Indeed, while we are recommending selling Just Eat's shares, a bid is a possibility given the value of the company's market dominance, especially in smaller towns were it is less economic for rivals to compete.