Amazon backing Grubhub ‘changes the landscape’ for food delivery: Analyst

Fox Advisors Founder and CEO Steven Fox joins Yahoo Finance Live to discuss Amazon's 2% investment in Grubhub and what this means for the food delivery industry.

Video transcript

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- Grubhub is getting a new backer in the form of mighty Amazon. The two revealed a new partnership today that also includes Amazon taking a stake in Grubhub. This could shake up the food delivery landscape for sure. Fox advisors founder and CEO Steven Fox is here, as well as our very own Brooke DiPalma. Good morning to you both. Steven, I'll start with you. How disruptive do you think this will be to the broader food delivery landscape?

STEVEN FOX: So it definitely changes the landscape. Whether it's immediately disruptive, I would probably argue not so much. You've got to remember that Grubhub was doing $10 billion of orders last year. That's about a fourth of the size of DoorDash, and it's probably less than half of what Uber is doing. So immediate action, probably not. Is it something to watch, especially on the subscriber front? For sure.

BROOKE DIPALMA: And after this free year of subscription services for Grubhub customers, it'll cost about $10 per month to maintain that membership plan. What do you think the company has to prove this year in order to keep those customers wanting to pay that value next year?

STEVEN FOX: Yeah, so introducing-- reintroducing them to Grubhub is important. I think there's been some branding issues at Grubhub that have hurt them, as we've seen in market share data over the last year, and then providing value for that subscription. So I think DoorDash, for example, has made a good case of how they provide value for subscribers, especially in inflationary times. And so doing the same thing, especially as part of Amazon, will be critical. So adding on new categories into the Grubhub subscription, for example, would help, such as grocery.

- How much growth does restaurant delivery still have in it at this point?

STEVEN FOX: Quite a lot. I mean, in terms of the category's size, the penetration of the total category is still relatively small. If you layer on other categories like restaurant, it's even smaller. So we're talking less than 10% of the available category. In the case of DoorDash, they're just now starting international expansion, something that Uber has done very well with over the last several years.

So we're still early days. I think the question really is in terms of if you're looking at either of these stocks over the next, say, 12 to 24 months, is how does a recession impact near-term spending on delivery services, or how does it affect just discretionary spending on, you know, not cooking for yourself in general. And that's to be determined. But in terms of the secular trends, I think they're very sizable and they still have a lot of legs.

- Yeah, Steven, Uber shares are under pressure on news of this. I can't say I'm surprised. Anytime Amazon enters a space, usually not too good. But how serious do you think Amazon is here? Do you see them ultimately being that acquirer for Grubhub?

STEVEN FOX: So let's just put it into context. They're only acquiring a 2% stake to start in Grubhub. It could ramp up to 15%, which would not be immaterial, but still not owning the company outright. You can make a case for synergies between Amazon, especially since they already own Whole Foods and that grocery business, and owning a restaurant delivery business, as well. But it's important to keep in mind that what DoorDash-- especially DoorDash, and Uber has done, as well, is create value for merchants in a big way.

And that's including small merchants, where sometimes Amazon sort of bulldozes those types of companies. So they're providing other services around analytics, web services, providing white label delivery, things that allow them to expand beyond their four walls in a way that they weren't able to do without DoorDash and Uber. So that type of technology investment is probably something that Amazon would have to ramp up, and also have the frame of mind to do that for their merchants in a bigger way.

BROOKE DIPALMA: And just to jump off that part-- point, we saw Grubhub team up with 7-Eleven, a local convenience store really in the Northeast area, earlier this year. Like you mentioned, lots of market share ahead for Grubhub to share. How do you think that they can use this partnership to really expand into suburbs? Right now, we're seeing it available at 4,000 cities across 50 states, but in the suburbs, it's not so popular there.

STEVEN FOX: Yeah, so category expansion is going to have different effects in different places of the country, or different places of the world. I think if you expand that out to Europe, you would see a different type of trend, as well. In terms of working with convenience stores, I think there is an opportunity there, whether it's just for convenience items or maybe looking at a Walgreens or CVS to have prescriptions delivered, et cetera.

There's a lot of value that can be derived, especially if you're already ordering your groceries, maybe ordering out through restaurants on the same subscription. All those things can prove synergistic. And more importantly, just from the consumer side, remember what DoorDash and Grubhub and Uber Eats are. They are a part of networks. And so the more liquidity that they provide on these networks, the more they can reduce cost back to the consumer, and also capture a fair share of the margin. And that enables growth, and it's sort of a virtuous cycle that shouldn't be discounted at all.

- A lot of that cost reduction to the consumer has been hinging on how the employees, those who are doing the dashing or doing the driving, how they are classified as part of the broader operating model for the companies across the board here. Uber, DoorDash, the list goes on, of course here. And so with that in mind, is that battle done? Is that battle in the rearview mirror at this point in time, or is there still going to be more of a headwind that they have to really account for in the way that they're classifying drivers, delivery workers that come online in this gig economy?

STEVEN FOX: Well, I think the gig economy, in terms of classifying the workers, I think all the companies have recognized that they want to provide certain benefits back to the gig workers while giving them the flexibility to come on and off the network as it fits their lifestyle. So whether they're working 10 hours or 40 hours a week, they can make it so that, on a per-hour basis, it's very profitable for them.

I think the key with the network, though, is to remember, as the network develops more liquidity, it also enables the gig workers to be busier, which means they're doing more rides per hour, more pickups and deliveries. And that allows them to make more money, and do it-- make-- maybe make a targeted return in a quicker amount of time. So I think that's part of it, as well. But I think maintaining the flexibility, despite what you hear from different critics on that front, is really important to basically all of the gig workers that are having success on these networks.

- We've got to ask what the autonomous robots think about it, too, I guess, in the future, because they're going to be doing a fair bit of those deliveries once the technology is fully there and tested. Fox Advisors founder and CEO Steven Fox, thanks so much for joining us. And also thanks to Yahoo Finance's Brooke DiPalma for joining in on the conversation, as well. Appreciate it.