EatStreet Eyes Exit Amid More Online Food-Ordering Consolidation
The market for food-ordering and delivery apps has advanced this month, as big companies gobble up smaller players to grab a piece of the pie or grow their share of it.
The latest examples come from GrubHub (NYSE: GRUB) and Yelp (NYSE: YELP). GrubHub, already a leader in online food-ordering, announced on Feb. 5 it’s buying two food delivery companies—DiningIn and Restaurants on the Run—for a total of around $80 million, according to Fortune. A few days later, Yelp, the online business listing and review site, snapped up GrubHub competitor Eat24 in a deal valued at $134 million.
Those announcements followed a string of exits and consolidation in the past few years. GrubHub, for example, acquired Campusfood and Allmenus in 2011, merged with rival Seamless in 2013, and raised $192 million in an initial public offering last year. Elsewhere, payment processing company Square purchased food delivery startup Caviar last year.
A number of startups have sprouted up in the past few years that allow consumers to order takeout or delivery from their favorite restaurants with the touch of a few buttons on a smartphone or other device. These companies are part of a broader movement toward on-demand delivery of everything from groceries to pet goods.
But all this activity raises a couple of questions: When will the appetite for acquiring online food-ordering companies subside? And where will that leave venture-backed startups that don’t get poached by a bigger company?
One online food-ordering startup still eyeing an exit is EatStreet, a Madison, WI-based company launched in 2010. Its fate is being closely watched in Wisconsin, where it’s one of the faster-growing software startups and a key investment for startup accelerator Gener8tor. Last year, EatStreet grew from 31 employees to about 80 and raised a $10 million Series B round, surpassing $12 million in total venture funding.
On the surface, Eat24’s acquisition looked like a tough one for EatStreet to swallow, considering both EatStreet and Eat24 previously struck partnerships with Yelp that allowed Yelp users to order directly from restaurants on its website (with EatStreet and Eat24 handling those transactions).
But EatStreet CEO Matt Howard shrugged off news of the Eat24 deal, which he said didn’t surprise him. “Our industry is moving fast, and with GrubHub’s success in the market, it only makes sense for larger companies to want to add this to their platform,” he said in an e-mail.
The Eat24 acquisition doesn’t affect Yelp’s partnership with EatStreet, Howard said, and he pointed out that many of the restaurants on EatStreet’s platform don’t overlap with Eat24.
Howard declined to say if Yelp has discussed buying EatStreet, and he wouldn’t speculate about whether or not the Eat24 acquisition effectively removes Yelp as a potential acquirer of his company. “It is hard to say what the future holds, but the industry is definitely heating up very fast,” Howard said. “At this point, nothing would surprise me.”
A Yelp spokesperson declined to comment about EatStreet.
Yelp’s acquisition of Eat24 was the next step in its strategy to move beyond being primarily a business listing and review site driven by advertising revenue, and become a place where consumers actually conduct transactions, said Tom Forte, a consumer technology analyst with New York-based Brean Capital. The ultimate benefit of adding Eat24 will be the ability to show restaurants data on their orders, which will ideally entice them to boost their advertising spending on Yelp. “It improves their ability to prove the return on investment,” he said.
The decision to purchase Eat24, and not one of its competitors, likely hinged on the number of restaurants and geographies covered in its network, Forte said. Eat24 counts about 20,000 restaurants across more than 1,500 cities. EatStreet, in comparison, has signed up about 15,000 restaurants in more than 150 cities, Howard said, and expects to reach 25,000 restaurants by the end of the year.
“EatStreet is now the largest independent food-ordering company in the United States with national scale,” Howard said. “We will continue to push forward with our expansion.”
The competition is likely to get stiffer because international rivals like Delivery Hero and Just Eat could expand to the U.S., and tech giants like Google or Yahoo could decide to follow the lead of Yelp and Amazon and get into the food-ordering industry, Howard said. But he’s confident that EatStreet will “continue to grow at a very rapid pace.”
Of course, an increasingly crowded field means that the buzz around the industry should continue, at least for a while—and potentially provide opportunities for EatStreet and others to court suitors.
Forte, for one, expects more deal making in the on-demand delivery market—not just for restaurants, but groceries and other goods. He predicts that Instacart, Delivery.com, Postmates, and Relay Foods are among the on-demand delivery companies that could be targeted for acquisition. Potential delivery startup buyers include Amazon (NASDAQ: AMZN), Groupon (NASDAQ: GRPN), OpenTable, Wal-Mart (NYSE: WLMT), and Whole Foods (NASDAQ: WFM), he said.
“I see the notion of companies wanting to expand their capability in delivery continuing,” he said.
The key will be getting the business model right. The labor costs for handling deliveries tends to eat away at a company’s profit margins, Forte said. “Historically, online delivery has not been an incredibly profitable business, so I think the challenge here is for these standalone online delivery companies to develop a profitable model independent of becoming an extension of somebody else’s strategy.”
Howard declined to say if EatStreet is profitable. The company works with many restaurants that already offer delivery, and it partners with third-party services like Mr. Delivery and Food To You to handle deliveries for restaurants that don’t. EatStreet is considering acquiring delivery companies or “building the capability ourselves,” Howard said. “We will continue to explore our options as the year progresses.”
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