🔒 Naspers isn’t the only food delivery fan – The Wall Street Journal

DUBLIN – Naspers recently said that it plans to increase its stake in Indian online food delivery group Swiggy. The company believes that food delivery will be a key growth area and has been backing up that belief with investments in Swiggy, German food delivery group Deliver Hero and Brazil’s iFood. It seems that other investors are now also waking up to the opportunity offered by the sector – The Wall Street Journal reports that venture capital firms have bet $3.5 billion on the sector so far this year. Naturally, when there’s this much buzz about a sector, it raises concerns about a bubble. After all, other promising online sectors such as meal-kits attracted a lot of financing, but then failed to deliver profits. Hopefully, however, Naspers is making the smart bet. – Felicity Duncan

Investors Are Craving Food Delivery Companies

Restaurant and grocery delivery companies are the latest feeding frenzy for investors, who are betting that appetites for food brought to homes and workplaces will keep growing.

Venture-capital firms have invested $3.5 billion in food and grocery delivery services so far this year, more than triple the amount they invested in all of 2017, according to PitchBook.
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Instacart Inc. last week secured a $600 million investment that raised the grocery delivery company’s valuation to $7.6 billion from $4.4 billion. Founder Apoorva Mehta said in an interview the company expects to go public. Food-delivery service Postmates Inc., valued at around $1.2 billion, has interviewed banks for roles on an initial public offering, The Wall Street Journal reported last week.

DoorDash Inc. is valued at $4 billion after receiving its latest round of funding in August, the same as Wendy’s Co., the world’s third-largest hamburger chain whose burgers it delivers. Shares in Grubhub Inc., which went public in 2014, are up 61% this year.

UberEats, the food-delivery unit of Uber Technologies Inc., is credited with what bankers estimate will be $20 billion of Uber’s proposed $120 billion valuation if it goes public as planned early next year. UberEats on Tuesday said it expects to expand into new cities that will help it provide delivery to 70% of the U.S. population by the end of the year, up from 50% now.

Investors and food industry leaders expect delivery to boom as people gravitate toward more convenient ways to eat and as delivery services convert more people who call in to place restaurant orders to use mobile apps. Takeout and delivery will represent 15% of restaurant sales a decade from now, estimates Mizuho Securities restaurant analyst Jeremy Scott, up from about 5% now.

“Delivery is not a fad,” said David Mell, managing director at RBC Capital Markets.

Some investors say the rush into these outfits is reminiscent of bets heaped on meal-kit companies in recent years. Many makers of meal-kits—boxes of pre-portioned ingredients and recipes mailed to customers or bought in stores—have struggled to retain customers or even to stay in business.

Shares of Blue Apron Holdings Inc., once the biggest U.S. meal-kit company, made its debut in 2017 at $10 per share and closed Tuesday at $1.18. Blue Apron is pursuing different strategies to cater to customers and its business continues to evolve, the company said.

Others say delivery companies don’t have the same hurdles as meal-kit companies, such as the need to build big warehouses to assemble meals or the challenge of sending those perishable parcels through the mail.

Still, there are other challenges. Customer loyalty largely lies with the food company, not the delivery service they use. Many grocery chains already run their own online pickup operations, and could eventually offer delivery services themselves. Meanwhile, many restaurant delivery services have been cutting into their profits by offering free delivery in new markets in an effort to undercut competitors. Some restaurant companies, including Olive Garden parent Darden Restaurants Inc., have said they don’t think delivery is a good business for small orders.

“The market feels frothy,” said Ian Sigalow, partner at venture-capital firm Greycroft, which has invested in food delivery companies that later sold and has considered investing in restaurant-delivery companies.

Some investors expect a wave of consolidation. “Investors are doubling and tripling down on their bets to fuel a front-runner,” said Brita Rosenheim, an investor and consultant to food technology startups. “Ultimately I don’t think there will be much room for small players to succeed.”

Delivery companies say carrying food for well-known restaurant and supermarket chains gives them access to established customers that are more reliable than the pool of people that tried meal-kit subscriptions in recent years.

“Having McDonald’s on the app provides a bit of familiarity for the consumer,” said Liz Meyerdirk, global head of business development for UberEats, which started delivering for McDonald’s Corp. last year and Subway this month.

Grubhub this year began delivering for Yum Brands Inc.’s Taco Bell and KFC restaurants in the U.S. Yum has given Grubhub a foothold in cities where delivery wasn’t popular, said Grubhub Finance Chief Adam DeWitt. The company plans to report earnings on Thursday.

At a time of flat to declining foot traffic for many chains, some restaurant executives see delivery as a critical sales driver, even as delivery services charge a percentage on orders. McDonald’s Chief Executive Steve Easterbrook told investors on Tuesday that delivery represents 10% of sales in some markets and that delivery is becoming an increasingly important driver of sales growth.

“Customer satisfaction with delivery remains high,” Mr Easterbrook said. “Once they experience the convenience, many of them become our most loyal customers, frequently ordering delivery.”

Restaurants have a longer history of delivering food in the U.S. than grocers. Pizza chains and Chinese restaurants have been making deliveries for decades. An increasing number of customers have grown used to ordering groceries online since Amazon.com Inc. bought Whole Foods last year.

Some big grocers, including Walmart Inc. and Kroger, are building delivery operations that could one day eliminate their need for a third-party service. Target Corp. bought Shipt Inc., another delivery startup, last year for $550 million.

Uber is considering delivering groceries through UberEats as well as meals, a spokeswoman said.

Instacart is rolling out its delivery service at Kroger Co. and Aldi grocery stores, slated to reach around 3,000 locations by year’s end. Mr Mehta, also Instacart’s chief executive, said the company will attract plenty of customers even if big grocers start making their own deliveries.

“The opportunity is absolutely enormous,” Mr Mehta said.

Write to Heather Haddon at [email protected] and Julie Jargon at [email protected]

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