Just Eat leaves bad taste in mouth: Sizing up Bob van Dijk’s food delivery target – Ted Black

Former Naspers CEO Koos Bekker is known for making one of the smartest investment decisions – EVER – by a South African businessman: he persuaded Naspers to invest in Tencent when it was a small startup. The Chinese company has enjoyed explosive growth, powering up the Naspers share along the way. Bekker's successor Bob van Dijk recently said that the food space is probably the largest investment opportunity he has spotted in his lifetime. A bid to buy food delivery Just Eat is linked to this belief. But, for Ted Black, a smart investment analyst who assesses Return on Assets Management, Just Eat is not a particularly tasty idea. – Jackie Cameron.Is Just Eat tasty prey?.By Ted Black*."The food space is very, very, very large," Bob van Dijk said in a recent Bloomberg interview. "Probably the largest opportunity I've run into in my lifetime." Apart from the big growth potential he sees, Naspers invested in Delivery Hero in 2017 because of its "attractive financial returns" in countries familiar to it – around fifty of them..___STEADY_PAYWALL___.According to reports, if Bob acquires Just Eat, he plans to pump more money into product innovation, technology and delivery capability. He believes the firm has under invested causing a loss of market share and pressure on its share price..They are typical reasons for explaining a strategic move, but what do some trended numbers tell us about the attractiveness of the food space market and Just Eat?.Take returns first. For a market to be attractive, the financial productivity measure managers, especially those in marketing, seem to focus on is Gross Profit (GP). It's also the one they usually mean when they talk of "Margin"..Comparing the three firms involved in the bid, these are the trends over the last few years..From an unbelievable, heady 90% in Just Eat's case, they are all on a downward path with Naspers' Delivery Hero, starting at 72% in 2016, now trailing far behind the other two in the race with a GP margin of 32,9%..The gross margins are tasty, but that's way less than half the story. If they are based on high pricing and low-cost inputs in a highly contested marketplace, they can become a protective umbrella for new entrants..On the other hand, if it means raising defensive barriers by spending more money on innovation, technology and delivery support systems, then what happens to the next productivity measure – operating expenses (OPEX) linked to sales revenue?.Just Eat is best performer by far and holding steady at 57% of Sales. In contrast, Delivery Hero has a 31% productivity gap to fill if it wants to catch up. Takeaway has a slightly bigger one to fill. All in all, it seems if you want to be in this game, you have to spend a lot to support sales..This takes us to the next "margin" – the most important one of all for operating managers. It's the Profit before interest and tax linked to sales. However, rather than "accounting" profit, let's take operating Cash profit (Cash Return-on-Sales – Cash ROS%) and see how they compare..Just Eat outperforms them by miles even though its "accounting" ROS was only 5% at the half-year of 2019. At least that's positive. Delivery Hero's accounting ROS is -47% and Takeaway's is -12%..Next, we compare the three of them with operating management's ultimate productivity measure – the Cash ROAM% and how ATO – Asset Turnover (Sales ÷ Assets) – will make, or break it. In the next chart, we have ATO measured as Sales divided by tangible assets over four periods..Again, Just Eat is the exemplar by far. In comparison, Takeaway has an ATO productivity gap of 50% to fill but Delivery Hero's is 344%! As to Cash ROAM, in 2018 Just Eat's was 33% and Delivery Hero's was -8,5%. That's also a huge productivity gap..Judging by these few slides, and I may have the wrong end of the stick, it looks as if there's not much benefit Just Eat can gain from Naspers other than cash. Whether the "food space" is also tasty is moot to say the least. It seems to be a highly investment intensive, competitive, and low margin arena to be competing in..Judging by GrubHub's recent 80% collapse in market value and Uber Eat's losses, all that seems to be happening is massive growth through acquisition. Most balance sheet assets are intangible because of paying huge premiums. To cap it all, most seem to be loss makers and cash drains. Isn't that the opposite of what business should be about?.Moreover, if Bob succeeds in his bid, because of goodwill, Just Eat's Asset base will move from ₤1,3 billion to around ₤5 billion. This raises the asset productivity hurdle much higher than it is now..What you will get in due course, if history since the dotcom bubble is anything to go by, is a Goodwill "write-off", a big reduction of shareholders' equity value, and a new LTIP for management from a lower base..Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at jeblack@icon.co.za.

Just Eat leaves bad taste in mouth: Sizing up Bob van Dijk’s food delivery target – Ted Black

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