Food delivery apps are sweating with Amazon’s Grubhub partnership

Raise your hand if Amazon has bullied your industry.

Streaming ✋ Cloud ✋ Grocery ✋ Pharmacy ✋

Amazon is notorious for muscling into other industries. When they bought Whole Foods, grocery stocks fell. Amazon wants to launch physical pharmacies, and pharmacy stocks drop.

The next industry to break a sweat? Food delivery apps.

Amazon strikes a partnership with Grubhub

Under the partnership, Amazon Prime members will get a one-year free membership to food delivery platform Grubhub+ — which offers zero fees on food delivery orders.

• Grubhub gets access to Amazon Prime’s 200M+ customers — a significant sum considering Grubhub’s 31M users in 2020.
• Amazon gets 2% of Grubhub — up to 15% pending performance milestones — and another incentive to convert Prime customers.

In 2019, Grubhub had 31% of the U.S. food delivery market share but quickly eroded to competitors. In May, the market share breakdown was DoorDash (57%), Uber Eats (31%) and Grubhub (11%).

Amazon once had a delivery service that it discontinued in 2019 and has again found its way back to the market. The partnership sent food delivery apps DoorDash and Uber Eats briefly lower before recovering their losses the next day.

DoorDash doesn’t need Amazon to lose money

It can do that on its own. DoorDash’s biggest problem is its business model, one that’s highly unprofitable.

• Food delivery apps are left with tiny margins after paying restaurants and drivers. Then there’s marketing, payroll and other costs.
• DoorDash couldn’t even turn a profit during COVID — the optimal condition for food delivery apps.

Food delivery businesses must operate at max efficiency to even have a chance of breaking even. It’s why ride-sharing companies Uber and Lyft are still struggling.

DoorDash is one of those stocks that went public during peak tech valuations in 2021 and has fallen 57% since.

Investors: Next Uber in the making?

Being compared to Uber isn’t a good thing. Uber lost nearly half its stock value in the four years since going public. Sales have grown, but profitability is nowhere in sight.

DoorDash faces the same challenges with a similar business model but at a more expensive valuation. Unless DoorDash finds its way to profitability, it risks following a similar route to Uber.