The COVID-19 pandemic caused explosive growth in the demand for food delivery services. With dine-in services closed or severely restricted in many parts of the U.S., restaurants increasingly relied on third-party delivery services to stay afloat. And, with consumers avoiding trips to stores, online grocery delivery and pickup services thrived.
While demand for food delivery services has skyrocketed, transforming that demand into profits has proven difficult for some companies. Profitably delivering meals from restaurants is a competitive and low-margin business during the best of times. As consumer behavior shifts in the waning days of the pandemic, food delivery companies will need to prove their business model works in more normal times.
- DoorDash
DoorDash is the leading third-party food delivery service in the U.S., with a market share of roughly 50%. If you order from a restaurant that doesn’t deliver by itself, there’s a good chance that DoorDash will bring your meal.
DoorDash makes money by charging fees to both restaurants and consumers. Restaurants struggling to survive during the pandemic have had little choice but to pay the fees, and DoorDash’s income increased accordingly. Revenue more than tripled in 2020 to almost $3 billion, and it rose another 70% in 2021 to $4.9 billion.
If you want portfolio exposure to the third-party restaurant delivery business, then DoorDash is the stock to own. It’s important to note that the company is not yet profitable since it is prioritizing expanding its business over making money. Even with more than $40 billion in orders running through its platform annually, DoorDash posted a net loss of $468 million in 2021. As pandemic tailwinds fade, the company will need to find a way to rein in costs without hurting demand.
- Uber
Ride-share giant Uber doubled down on restaurant food delivery during the pandemic, bolstering its Uber Eats service with the acquisition of the food delivery service Postmates. Soaring demand for food delivery helped offset tumbling demand for mobility services, although both businesses are now showing strong growth.
Delivery is currently Uber’s biggest segment, with revenue jumping 78% in the fourth quarter of 2021 to $2.42 billion. That may not remain true as the mobility segment recovers, but it’s clear that delivery will be a big part of Uber’s future business.
Uber faces the same profitability challenges as DoorDash, with its delivery business still unprofitable even as revenue from the service is rapidly rising. The segment did turn profitable on an adjusted EBITDA basis in the last quarter of 2021. That’s a step in the right direction, but it’s not the same as true profitability.
Uber stock is a solid choice for investors who want portfolio exposure to both food delivery and passenger transportation.
- Domino’s Pizza
Fast-food pizza chain Domino’s has its own well-established food delivery infrastructure. Not relying on third-party delivery partners saves the company money in fees and gives it complete control over the delivery process and the customer experience.
The pandemic has been good for business at Domino’s, with same-store sales in the U.S. surging year over year by 11.5% in 2020. The company realized sales growth despite a vast increase in restaurant delivery options from third-party delivery services such as DoorDash.
Domino’s is now starting to see its momentum slow as consumer behavior shifts. U.S. same-store sales grew by just 3.5% in 2021, and international sales growth is slowing as well. The company is still opening hundreds of new restaurants each quarter, mostly in international markets, and it expects new restaurants to be the main driver of sales growth over the next few years.
Even though growth is slowing, the strength of the company’s in-house delivery operation is an enduring competitive advantage. Investing in Domino’s stock is a good bet if you want to own part of a restaurant delivery company that already generates a healthy profit.
- Target
Grocery delivery also increased in popularity during the pandemic, and Target has been one of the trend's key beneficiaries. The retailer acquired the delivery service Shipt a few years ago and provides both delivery and pickup options. Target offers delivery memberships and completes one-time deliveries for a fee.
Target increased its digital sales, which include grocery deliveries as well as standard e-commerce orders, by 145% in 2020 and by another 21% in 2021. In addition to delivery, Target offers customers the ability to pick up grocery orders curbside. Almost all of Target’s digital orders are fulfilled directly from its stores, and the company has driven down the per-unit fulfillment costs by more than 50% over the past three years.
Demand for grocery delivery may cool off as consumers shift back to shopping in stores, but many people who were introduced to the convenience of Target’s same-day delivery during the pandemic will continue to take advantage of those services.
- Walmart
Walmart has fully embraced grocery delivery during the pandemic. The retailer’s grocery pickup services have gained popularity in recent years, and the launch of the Walmart+ membership program has further enhanced its revenues from grocery delivery.
For a monthly fee, Walmart+ members can order and receive groceries, consumer staples, and general merchandise on the same day, and the membership also confers some other perks. Walmart uses third-party delivery partners to operate the delivery service, so it’s not delivering any goods itself.
For consumers who value convenience and the low prices for which Walmart is famous, the company’s grocery delivery service will likely continue to be popular, even after the pandemic has passed.
- Just Eat Takeway.com
Prior to its acquisition of Grubhub, Just Eat had no presence in the U.S. food delivery market. The Netherlands-based company derived most of its orders from northern Europe, the U.K., and Ireland, and it had a presence in southern Europe, Australia, and New Zealand as well.
After the Grubhub merger closed in mid-2021, North America is now responsible for almost half of Just Eat’s revenue. Profits are a different story – northern Europe is the only place where Just Eat is producing positive adjusted EBITDA. Overall, Just Eat posted a net loss of more than 1 billion euros on 4.5 billion euros of revenue in 2021.
Just Eat will increase its focus on profitability this year. The company is dropping Norway and Portugal, two minor markets, and it plans to delist from the Nasdaq to reduce costs. Just Eat expects 2021 to be the peak year for losses, and it has a long-term target of converting 5% of its gross transaction value into adjusted EBITDA.
If you’re looking for a food delivery investment with a global presence and a leadership position in many European countries, Just Eat is the stock for you.
