Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Competitive threats are gathering around Just Eat. Britain's leading Internet take-out provider promises to carry on regardless but its asset-light business model will come under pressure.

The reckoning might not be immediate. Just Eat published defiantly strong results on Tuesday, beating expectations on sales and Ebitda. It lifted this year's forecast too.

Growth Stage
Just Eat's underlying profit is growing as it expands in Britain and internationally
Source: Company filings

But how long can it keep this up as tech powerhouses Amazon and Uber experiment with food delivery in the U.S. and Europe? Reuters has reported that Amazon is surveying Londoners about their takeaway habits, while Uber users in 10 U.S. cities and Paris can already get lunches delivered to their desks by its drivers.

Plus a newer breed of deliver companies, such as venture capital-backed Deliveroo, is colonizing the higher end of the British restaurant market ignored by Just Eat's focus on pizza, burgers and kebabs. Deliveroo and imitators such as Rocket Internet's Foodora run fleets of bike and scooter drivers to bring the food to your door, whereas Just Eat relies on restaurants for delivery.

Although Deliveroo is more expensive and charges a higher commission from restaurants (20-25 percent versus 13-14 percent), it means shorter, more reliable delivery times.

Just Eat argues that its technology and marketing know-how are more important than owning a delivery network, but some investors worry about how this model can be defended against infinitely richer rivals such as Amazon and Uber.

CEO David Buttress is adamant that delivery networks are neither attractive nor scalable, saying his leaner approach is a better way to target a take-out market he estimates is worth 24 billion pounds across 15 countries. He said Tuesday that Just Eat has experience in logistics in seven of its 13 markets, but operating margins are thin. In contrast, its U.K. Ebitda margin rose to 45.8 percent from 40.2 percent a year ago.

Just Eat prefers instead to export its capital-light model internationally via deals such as the 445 million-pound acquisition last year to buy Australia's Menulog.

The British company is still beloved by analysts, though a couple have started to question its strategy -- contributing to a sharp drop in its shares this year. Morgan Stanley's Andrea Ferraz argues that food delivery will segment, with customers using three or four apps depending on whether they feel like tuna tartare or a pizza. That means Just Eat's big marketing budget -- 17 percent of sales last year -- would become less effective as people divide orders between rival services. Ferraz also suggests that a food-delivery business with drivers could make more operating profit than Just Eat because of higher restaurant commissions and higher average prices of orders.

One thing's sure, Buttress will want to avoid repeating the mistakes of GrubHub, a listed U.S. peer. It went through a painful de-rating last year after moving into delivery by buying up two local logistics companies for about $80 million. Investors are sticklers for consistency. 

Feast or Famine
GrubHub was punished for adding food delivery to its model, a cautionary tale for Just Eat
Source: Bloomberg

GrubHub trades on about 30 times expected earnings over the next 12 months, according to Bloomberg data, while Just Eat's shares are worth about 40 times earnings even after this year's fall. This still looks generous given the challenges ahead. Just Eat has parted company with an Uber executive it appointed to its board, showing that relations with the taxi app will become less cordial. 

Sales growth is impressive, but it's slowing and that may worsen as diners' attention is divided between competing apps. So Buttress might at some point need to soften his stance on delivery networks as users become more picky about service quality. Just Eat is experimenting with a partnership with a London courier service to deliver food from a small batch of restaurants. First-mover advantage has given it a clear road to strong margins, but a crowded market may force Buttress to get on his bike.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net