Chit Chat Stocks - Just Eat Takeaway (TKWY) | Not So Deep Dive

Episode Date: August 24, 2021

Just Eat Takeaway specializes in online food ordering and home delivery. The company connects consumers and restaurants through its platforms in various countries. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Just Eat Takeaway. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:42) Industry | (9:44) Management & Ownership | (11:04) Valuation | (13:30) Earnings | (15:37) Balance Sheet | (18:27) Our Analysis | (19:30) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode. We're about three weeks in to redoing the format. So, we're going to have these Not-So-Deep-Dives on Tuesday instead of Thursday

or Sundays like we had them. And this is going to be, what day is this going to be? Probably like the 20th, the 24th, maybe something like that. I think 24th sounds good. Tuesday the 24th. Okay, perfect. You got it right. We got Brad Freeman on the show. We're talking Just Eat Takeaway. Guys, Brad, have you heard of this company before? Have you taken a look at the financials before reading this? I have not heard of the company or the financials, but just seeing, I mean, we'll get into some of the M&A activity they've done, but pretty notable. So surprising that I haven't heard of it. Yeah, it's newsworthy. And if you don't know,

it's going to be very similar but slightly different than the doordash and uber model they're in the same food delivery space um excited to talk about it i think all three of us this is the first time looking at it uh so we're gonna this uh if you're listening for the first time it's our first time as well ryan i'll kick things off to you do you want to introduce just eat takeaway and again if you're listening their name is a bit strange um they just merged the names and they merged with grubhub so i'm surprised they don't just call it Just Eat Takeaway Grubhub now, but that would have been too much of a mouthful, right? But Ryan, do you want to introduce the company and talk about our sponsor,

Potential Multibaggers? Yeah, so I'll talk a little bit about the sponsor and it's the service is Potential Multibaggers. We just had our friend Chris on, if you've listened to that episode, he talked about Fiverr. So if you want to know kind of his strategy, how he approaches his investments, that's a great place to start. A few updates though. So we've got some new team members on the writing team for the potential multi-baggers. There's Nathan and Leandro, along with Mark, who's still there. And he gave us a little update. So someone, I'm not sure how exactly he got this,

but he was able to figure out the compounded annual growth rate of the potential multi-bagger stocks. And since May of 2017, his positions are up 57%. That's his compounded annual growth rate. Not bad. It's decent returns. Decent returns. Watch out, Jim Simons.

Yeah. Brad, you have something? Yeah. And I know you guys both know this, but in case anyone doesn't know that, that means 50% average growth through that period, not 50% aggregate growth throughout that period. So pretty darn impressive. Kudos to you, Chris. Yeah, for sure. And Ryan, do you want to talk about where people can find that and what the service is about? Well, you can go look it up. It's on Seeking Alpha. I think we have a link in the show notes as well. Just look up, or you can find him on Twitter at From Value. Pretty much just look up potential multi-baggers, you're

going to find it. Yep, exactly. And if you can't find it, it will be in the show notes. So get that link and you'll be able to talk with him, sign up for the service. And they have a two-week free trial. So you can check it out, see if it's something that you like, and then decide whether it's something you think it's worth paying for for yourself. He made sure to tell us, to tell people that canceling is really easy. He's made it seamless. He makes you want to be on there. So learning from Netflix, one of the classic multi-baggers. So, all right, Ryan, you want to talk about Just Eat Takeaway? Yeah. So, it's not even Just Eat Takeaway. It's justeattakeaway.com and they are a leading global online food delivery marketplace, basically.

But it isn't just one app or marketplace. It's sort of an amalgamation of a bunch of different services depending on the region. So, it's a conglomerate really, but it's all under the Takeaway or Just Eat Takeaway, JET for short, brand. And most people are probably familiar with the delivery marketplace model since there's especially domestically it's like services like doordash and uber or uber eats but it's a little different so justy takeaway for reference is home to 60 million active consumers across 24 different countries and so consumers come to the justy takeaway apps looking basically exactly what you think they're looking for food and then justy takeaway has more than 250 000 restaurants around the globe on the platform

that you can choose from you can pick whatever food you want you select the food you order it and either go to pick it up or you have it delivered or and so the delivery comes the delivery varies by market so this is where it's kind of nuanced so some of their restaurant partners have their own fleets that do the delivering some don't which means that just eat takeaway it has to provide the delivery and so there's three different ways they can do that they have scuba which is like fully employed couriers which they have like electric bikes if you go look up justy takeaway careers or scuba you're going to see these people in bright orange gear they're all smiling which is exactly what the job you know everyone's so happy during the

job right they love their bikes oh they're just in love with this job and so that's one way that they deliver the other one is delco and so this is the model that they got originally from uh their canadian service i'm blanking on the name it's like no dishes or something there's so many names. Yeah. But this is the independent contractor delivering food. This is a lot closer to sort of the Uber Eats DoorDash model. And then the third option is third-party delivery providers. So it's a completely different business. Essentially, they're offloading their orders to these third-party delivery providers. They're trying to lower this as a part of their strategy. Like they don't want, they want the third-party delivery providers to

be limited on their platform. So that's hopefully going to become less a part of the business over time. And then if it's delivery, consumers pay the delivery fee to cover the cost. But as we know from most of these logistics providers, that's not super profitable, that business. I would say it's tough margins. Even the CEO has said structurally non-profitable. Yes, tough margins for sure. And then just for reference, they have the marketplace model is very similar to the legacy Grubhub model from like five to 10 years ago that was very popular where you're not necessarily doing the delivery. You're just creating the marketplace. And that makes sense why they acquired it because they have the similar models. Although in the United States, DoorDash and Uber

Eats have kind of been growing rapidly with that more, I wouldn't call it vertically integrated, but just doing the delivery themselves. Yeah. And then as far as actual revenue, Just Eat Takeaway makes the majority of their money by implementing a 14% charge on the gross order value for every order. I think that may vary depending on the market and depending on certain factors, but then they also make money with every restaurant that signs up. They charge them an upfront cost. That's a smaller portion. There's a few other revenue streams that we'll talk about that are other ways, but the majority is that 14% charge or that commission on the gross order value. And then history, it's basically, Just Eat Takeaway is the byproduct of two decades

of mergers and acquisitions. So, sorry if I'm butchering this name, but Jits Groen today is the CEO and he was the original founder of Takeaway in 2000. How was that pronunciation? I think it was okay. Dutch and German stuff can be really hard for Americans. So, I think we'll do the best we can. But it was not called Takeaway when it was first launched. So, they actually adopted that name, I think seven, no, maybe 11 years later, but the first name I simply can't pronounce. So I'm not going to try. It was a Dutch name, but they in 2007. So seven years after they were initially founded, they launched in Germany and Belgium. That was kind of their international expansion. And then from 2010 to 2020, there were several funding

rounds and several like smaller acquisitions. There was one that's called 10 Biz, which I think is in israel and that sort of was their entry into the business to business uh delivery marketplace and so that is saying like corporate orders so you can get like all right we're gonna have 30 coffees delivered today or something like that 10 biz was sort of the expert on that in israel and then totally different company which was uh just eat that was united kingdom focused right i think? It was first founded in Denmark in 2001. So a year after Takeaway, but they, I believe, yeah, they pivoted. I think they switched their headquarters to the UK in the late 2000s. So that really became their main focus. And they had a really a similar kind of history,

lots of 20 years of acquisitions, kind of smaller acquisitions and becoming sort of this conglomerate in and of themselves. And then in 2020, I think it was maybe announced in 2019, Just Eat and Takeaway merged together, became JustEatTakeaway.com. And so that was an all-stock merger. And they were two very large companies at the time. And so they combined, and I think that put them into 23 different countries altogether. And then this year, they announced that they were acquiring Grubhub for $7.3 billion. That puts them into 24 markets. And that closed in June. Yeah. And then today, I think it's an $18 billion company between all these different services,

but you'll get to that. Yeah, I'll get to that in the valuation. Let's hit industry quick. Everyone knows it's a big industry. The food delivery industry worldwide is supposed to be about $100 billion right now, and it's supposed to grow to about $150 billion by 2023. So, large market, big tailwind. It's really too long to go over all the competitors. If you're interested in this company, it's probably too complicated to just remember yourself i would really recommend just building like an excel sheet or a database of all of the competitors that operate in each market because it can be you know with 23 24 and five or six really important markets there it's going to be hard for you to just remember that i'm not

going to be able to go through all of them right now but it has been gaining market share on average so consolidated they went from 18 to 26 market share in 2020 and then they said in their latest update that market share continues to climb without giving out a number there but those numbers are phenomenal and we'll get into why like you know what companies have done more what companies are sorry what countries have been doing better what countries have been doing worse they're taking on a difficult route in the uh united states because grubhub is a bit of a distressed asset doordash and uber have been eating their lunch no pun intended over the last few years uh but we'll see what they can do there we'll probably talk about that more in the second

second half of the show. And Brad, do you want to hit the next section, management and ownership, or do you have? No, no. Yeah, I'll skip right to that. So Jits Krohn, again, just like Ryan, I'm sorry if I mispronounced that. He's been the founder for 21 years. He's the CEO. So he's not a super old guy. So because he's been with this company for 21 years, he doesn't have a lot of other experience to highlight, but he is an advisory board member at Suitsupply. He's got an 87% class tour rating with 240 views. So that's pretty good volume or pretty good sample size. And before Just Eat Takeaway, he was the CEO of a company called GRIB, B-V, G-R-I-B, space B-V. I have no idea what that is. I had a really hard time figuring

out information about it online, but he was the CEO of that company. So moving on to the CFO of Brent Wissink. Again, not a ton of notable experience outside of the company, but he was the CFO at Nedstat. The COO is George Gerbig. He was a UBS iBanking director. He was the founder and manager. He is the founder and is a managing partner at YourDelivery, sort of a complement to the services that just Eaton Takeaway provide in different countries. And he still works as a managing partner for that company. So he's involved in two roles. In terms of ownership, 14.85% of the float, or I'm sorry, percent of the shares are held by insiders with Jits Grone leading the way, as you'd expect. 53.4% of the total shares are held by institutions with, again,

as you'd expect, BlackRock leading the way. So pretty good institutional representation. There's been a general pattern of institutions adding to their stake, not subtracting from it. So points to confidence from people who have a lot more money than we do. Do you know how much, do you have the percentage of Jits Grown's ownership? I believe it's the majority of that 14.85%, but I don't have the statistic off the top of my head. Really tough to find proxy statements and information on this company, but I do know he's the majority owner of that 14.85%. Yeah, I'd imagine it's kind of shrunk with all the mergers. Yeah. Well, it's going to differ with Grubhub. That throws a whole wrench into things

we'll have to talk about. And it made the valuation and earnings stuff a little bit difficult, but I'll get into valuation quick. Market cap, $18.4 billion. Ticker is going to be TKWY in Europe for anyone that's, you know, has access to all the different exchanges. But if you're someone that's just in the US or, you know, you have TKAYF, if you're on the OTC markets in the United States. I'm going to use forward guidance here because trailing will look a lot worse because it'll exclude Grubhub. And then they also have not disclosed anything for revenue so far in 2021. They will have reported by the time we release this, but they just gave an update with their GMB number. So I'm going to have to try to look at their historical take rate and then

backfill all these numbers here just so just know that these are estimates. They did give out GMB and they did give out GMB guidance for the full year. So I'm basically just putting it off of that. But here are the numbers. So EV to GMB and GMB or GTV is just the number of dollars flowing through their platform. That is 0.56. That is not really a financial metric, but I think it's something that is interesting to look at. If you look at the 2020 combined take rate, it was 18.6%. This may change and go, I think it would go higher if they're doing more delivery, but gross margins might go lower. So that might be a give and take with the investments they're making in delivery and with the investments they're making with Grubhub, who is going to

be more delivery. If that take rate's the same, that would put their forward EV to sales at three, which is really close to the next 12-month consensus number I'm seeing on Coifin. So I think that makes sense, kind of a three, EV to sales of three there. And then right now, or sorry, in 2020, they had 44% gross margins, and that would imply a forward EV to gross profit of 6.8 but i would count on the number either well maybe the stated one won't go down but the courier costs are going to start rising as a percentage of revenue i believe as more and more of the revenue you know is uh facilitated by their own couriers so i would think that the margin structure might change a bit even if gmv is growing faster i know that's a mouthful and i

hope that makes sense uh but i'll kick it over next to ryan start with earnings i guess this maybe a good time to mention that they are investing heavily in their logistics so their own delivery service which is if you've studied doordash or uber eats is more capital intensive it's less profitable well it's adjusted if it's a profitable it's less adjusted even that's true but yeah i'll go through the earnings and i'll go through the 2020 numbers to kind of give a holistic view but then i'll talk about what happened in the first half of this year and so in 2020 active consumers increased 23 to 60 million they had 588 million total orders that they processed which was a 20 which was a 42 increase year over year their average order value

was like 22 bucks or something like that it was like a tiny increase that i mean that's not really up to them i'd say unless they're attacking on a whole bunch of fees and then gross merchandise value or gmv was 15 billion up 51 year-over-year revenue grew 54 year-over-year to 2.8 billion and then they had adjusted even a margin for the entire company of 11 percent uh and so what's basically going on here is that they have in their core markets so germany netherlands the uk their adjusted even a margin is north of 30 percent but they are investing heavily apparently This is, I guess, what they're trying to tell shareholders is they're investing heavily into these new markets or emerging. They're not really emerging markets, but they are emerging in these

markets. And so they're investing heavily to do so. And their adjusted EBITDA margins are pretty low because of that. And they're kind of saying that advantage is they already have these profitable segments. They'll use that cash to invest in these ones that aren't profitable yet. Yeah. And so for the first half of 2020, overall growth pretty much continued, as you can imagine with COVID. And so orders increased 61%, 51% if you include Grubhub and then gross transaction volume increased 62%. So their GTV guidance or what they're expecting for the full year is between 33 and $35 billion. And I put at a 15% revenue cut, that's about $5 billion in revenue. It's a bit higher, but yeah, right around there. And then fiscal year adjusted EBITDA,

they're expecting to be between negative 1% and negative 1.5%. UK is a market they've been investing in really aggressively. They've been trying to expand the logistics there, the delivery service, and then they've been doing apparently a lot of marketing investments as well. So you've seen the adjusted EBITDA margin in that country go down. And then the CEO and really the entire management team is really stressing that they're trying to prioritize market share gains over profitability right now. And kind of, as Brett said, press their advantage of being profitable in the core markets. Yep. All right, Brad, do you want to hit balance sheet wrap up the first half? Sure. And I should preface this by saying it's going to totally change

because that Grubhub deal closed and because they're going to update their results in a week. But as of right now, so just know it's going to change. But as of right now, they've got $822 million in cash um ryan informed me thank you for that before the show that they've done recently a 1.1 billion dollar convertible offering to bolster that cash position they've got 570 million in debt um so no net debt on the balance sheet if you if you just take your factor in the fact that their cash position is higher um 7.8 billion in goodwill um from just eat so you gotta think that number is going to continue to rise with the grubhub purchase um so something for sure to to keep an eye on going forward that that goodwill line um yeah watch it yeah the they're not like

any liquidity issues but definitely watch the cash burn they've raised money in the past you gotta expect within the next few years they start generating cash for sure for sure yeah yeah all right let's hit the ad break this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at la quinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight la quinta tomorrow you triumph book your stay at lq.com cox panoramic wi-fi includes advanced security to help protect all your

connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply Welcome back. Next up, we have anecdotal evidence. We got nothing except Grubhub probably in our home market. So Brad, anything for you here? Yeah. I mean, we were recently undergraduates, so I'm sure we've all used Grubhub pretty liberally. But I will say I do kind of prefer ordering directly through a brand just to give

them that direct-to-consumer business. And that is probably because I own Olo, which is the company enabling this direct-to-consumer digital business. So I'm clearly biased there, but I do sort of lean towards supporting the local restaurant or the chain over the aggregator. That's just me. Yeah, it's, I mean, I really don't, I've never thought these services were that valuable to be totally honest. And maybe that's just me, but I think we've talked about for the price. Yeah. I mean, it provides value, but it's expensive. It seems like a solution looking for a problem, all of these. Or just for rich people. I don't know. Yeah. Or, I mean, okay it was it was important during covid i think it was even deemed an essential service but go

okay if you're in like a city or a metropolitan area go walk to your restaurant or even a smaller one like us like we're in a small city of like 20 000 people it's still walkable like the only reason i've ever used some of these third-party services like a grubhub like a doordash is if i've gotten an insane like if i've gotten a like discount or i guess i get uber eats gives me like a 30 discount once a month i'm like all right cool let's let's use that once and then i'll never use you again i mean to be honest i have no loyalty to any of the services i have i actually i think i have one of those like app folders of all the different services for whichever discount i get yeah yeah i'm in the same boat and the thing is uh the first impression like with me

grubhub is just a terrible asset right now they've lost in the united states and maybe that's fine because uber and doordash from our point of view it seems like the unit economics are bad so if it scales it's not going to even be that great but either way i do get worried about the grubhub purchase it seems like their operations with supported by the marketplace in europe at least or better in australia too is one of the big markets but yeah us i kind of kind of struggle All right, let's hit future growth opportunities. Brad, what do you have? Yeah, I'm going to kind of go way out in left field here.

So kind of expanding beyond restaurant delivery and into a more holistic on-demand commerce solution. The cannabis industry, where it's legal in certain countries, is very new and very unorganized. The technology stacks and logistics are pretty awful at this point in time, to be totally candid. So a company like this with its know-how on how to deliver goods that spoil and have to do it within a certain amount of time, cannabis is even easier than food. So it seems like a pretty natural extension from food to cannabis, and I'm sure it's not even on their radar right now. But to me, it makes sense.

There is – yeah, I know that sounds like pie-in-the-sky thinking, but these delivery service providers could definitely tap into adjacent markets. We saw the – DoorDash is doing that right now. with good RX with like, uh, whatever it is, prescriptions and they're doing grocery. Yeah. There's definitely reason to think that they could move into other markets as well. What about you? Uh, no, you, uh, all right, I'll go first. Okay. Go out order. I have takeaway pay surprise that payment stuff. Uh, it's not the same as a normal payments thing. Although that probably would be nice with their marketplace to just like integrate stuff with the restaurants

and stuff like that. But I, that may be harder than I'm thinking. Uh, but this is just like a digital allowance given out to employers to give employees to order food. Pretty good system. If you're a big company, they said they have Spotify, Airbnb, some big companies on there. That's kind of nice for people's lunch. I think it makes sense if a lot of these companies, it seems like they are investing heavily in work-from-home perks, like $10,000 a year sometimes for employees. this seems like a pretty good way to get, you know, the perks in, uh, you kind of lock those in very recurring for lunchtime orders. That seems like a solid business. Although again, it all comes back to, uh, you know, how good are the margins? Uh, but it seems like a good way for

pretty consistent demand there. Uh, I like that idea. Uh, Ryan, what do you have? Mine's promoted placement. So this is their feature that allows restaurants to promote themselves on the platform. And it's kind of, I mean, if you're trying to think about, I can imagine most people understand how that works, but think about it kind of like Google promoted searches. It's advertising. Yeah, it's very simple. And then, I mean, Just Eat Takeaway's focus right now is eating market share in their respective areas.

If they're able to do that, if they're able to maintain their dominance in their existing markets where they're already doing really well, that means really their core value to restaurants isn't necessarily the delivery part. It's the lead gen and being able to get consumers more and more sales to their restaurants. So I imagine as market share grows, the value prop to promote your restaurant grows as well. So just adding more consumers, the value on promoted placement goes up. Yeah. That could be a way to get margins up. It's just tough. Like if your whole thing is like we're gonna do this super unprofitable thing just so we can do this small profitable thing it's like what why but it isn't super well i guess the marketplace yeah the

marketplace i i'm thinking about the like the delivery the marketplace is pretty you know it's really profitable but yeah yeah it and that's that's kind of one of my lowlights i'll talk about that after but uh brad you want to go with your highlights and lowlights first sure are we to do in bold case, spare case, or do you guys want to go right to highlights? We're going to do, yeah, we have highlights and lowlights, then bold case, spare case. So highlights and lowlights. Um, so I love that 21 years into this company existing that it's founder led. Um, and, and I listened to a few interviews. It's hard to gauge because I, I mean, he's not, he's not an American, but, um, but he does seem like he does seem like he's a candid and honest person. And I'll, uh,

say that I think that about pretty much every CEO that I listened to. So you can take that with a a large grain of salt um but but i really like that it's founder-led um he's integrated he has a long history of integrating these large m&a projects effectively um which gives me some confidence that maybe he can figure out grubhub because again like like brett and ryan were saying it has not it has not done well in holding up market share um in the united states yeah yeah he's kind of giving me robert para vibes if i don't know if you remember him but he was the ceo of ubiquity. Yeah. It's not ubiquity network. So I thought it it's ubiquity. We actually did a show on them a few months ago. So he's also the owner of the Memphis Grizzlies kind of gave me similar

dynamics. He's young. So, uh, but I'll talk to you. Yeah. I forgot to, uh, to talk about my low light. So I'll do that super quickly. So, um, just to be totally candid upfront, honest, and I think Brett and Ryan maybe feel similarly. I really hate the delivery business model. Um, I, I don't see fat margins in a scalable fashion for a long time for these companies. So lofty top line growth might be awesome, but it might not matter all that much to be totally candid. Yeah. I think we're going to have similar lowlights here. Ryan, do you want to hit your highlights and lowlights? Yeah, they've shown that they can, or they have the ability to be profitable in their core markets. So that's a highlight for me. In 2019 in the UK, for reference, they had 42%

adjusted EBITDA margins so well it's true yeah well I wonder what they adjust you know yeah I mean it is still adjusted EBITDA margins but it's maybe yeah it can't be worse better than probably some of these other delivery providers that's true low lights for me I don't like the market that much either and the other thing for me is like how many consumers are like me where they have a bunch of these apps downloaded and then they just go to the lowest cost provider whenever they need the food. Yeah. It might be different, not in the United States. It might be different in Europe, but I see what you're, I see what you're. I was looking at the market share breakdowns and even like, all right, in the UK, you've got Deliveroo, who's now a public

company. You've got another. Yeah. I mean, I guess, yeah. Jet is only 26%. I mean, they're growing market share, but they're still, I mean, they're not majority or even close. I mean, that's, so my thing is like, I don't like, I think they have to acquire their customers over and over. Like they have to do that perpetually. And if I have no loyalty to any one provider here. I feel bad using them too, because like, it's a tough job. It's not a fun job. Yeah. And then also maybe it's just being in the U.S. and sort of the regulatory environment over here. But whenever I think about the benefits that these delivery providers get from scale, it always feels anti-competitive. So like, oh, we can prefer certain restaurants over others because all the consumers come to us. Oh, we can start to raise our take rate because we are the main provider. Okay, the restaurants are screwed. It's just not a stakeholder friendly operation. Yeah, that's my main low light. There's not enough dollars to go around. Brad, what do you have?

Yeah, just talking about what Ryan's saying. It just, it feels better if I want to order Jimmy John's, it feels better going to jimmyjohns.com and ordering Jimmy John's through their website. And again, maybe that's because I'm biased and on Olo, but I don't know. The brand disconnect when you go through an aggregator is very real.

And I am sort of loyal to my favorite brands. So yeah, the, yeah, you may just be, you know, you may just be a dedicated shareholder, but I think I agree. And even with the smaller restaurants, their websites are usually pretty bad, which I don't know who, what I just call or call. I mean, yeah. If you know, if it's one you've been to before, just call and order. But like, if it's something else, like, I don't know, I, I usually just go through Google maps and the websites there uh it seems pretty simple uh and you can just miss it and then you just take five minutes and you'll get it uh but that's all anecdotal so it's kind of tough to you know

what i mean like what are your highlights uh track record is good tracker is good uk business is doing really well i think delivery or i forget what the numbers were but just check take a look at their uk business it's it's growing rapidly um and then margins from the marketplace could give them a small advantage or excuse me small advantage when trying to grow delivery uh low lights uh same as you guys you know food delivery is going into the too hard pile i always ask like why invest in this industry when they're yeah maybe dozens is a bit much but why are there you know there's dozens of other industries out there that actually generate profits like it seems like everyone's hopeful that this industry will generate positive or break even

adjusted EBITDA profits, which are still not real profits. And it's like, why put your dollars here? That doesn't make sense to me. And I guess we're kind of getting into the more or less interested here, but let's move to the bull case next. Brad, what do you think has to go right for this to be a good investment. Yeah. And I think this bull case is sort of feasible just based on Groen having such a successful track record of effective M&A integration. But Grubhub has to turn out to be a good decision a few years down the line. They already have, what was it, almost $8 billion in goodwill. So you got to think that number is going to go up. And hopefully, hopefully, Groen can kind of manufacture this market share rebound in Grubhub for the United

States, sort of like he's been able to boost market share and these other markets that we've been highlighting. Yeah. And then I guess, and then I have this company continues to take market share and sees positive margin momentum as competition becomes a little more rational. Hopefully as the industry matures, we'll see consolidation and we'll see people approaching a market share at all costs mentality a little less wholeheartedly. And that needs to happen as well for for this company to really see a lot of margin upside a lot of free cash flow margin upside yeah ryan yeah this this might sound counterintuitive but maybe a bear market is the bull case here because it might lead to less funding of the competitors in some of the

markets like so let's think about they're usually going to drive the bc industry like you see go puff raising a billion dollars you're like oh another one of these guys or even like i mean think about doordash right now i'm sure they could issue i don't know i haven't really kept up that much with them but i think they have like six secondaries yeah they're like six billion in cash i could be getting that totally wrong they have a few billion at least in cash they just might not be able to invest as heavily in a bear market um whereas theoretically i i wasn't i didn't look at the net margins on these uh but they're generating enough cash in their core markets just the takeaway is to help uh to maybe grill market share during a fair market uh because

they're kind of in an advantageous position versus competitors i think if they can get to 10 true cash flow margins um like consolidated and continue to at least maybe reach 10 billion dollars in revenue this seems like good investment yeah yeah i can see why so seth clarman bought like 650 million dollar stake or something like that the fame is a deep deep value guy i can see why he would do it i'm just not sure i'm sold on the thesis yeah i guess that that makes sense um let's see my bull case very similar to brad's you know industry gets rational i don't know what that means because it's not like you can just like the delivery courier is still got to get paid and they're going to get paid they're not going to get paid less and they're likely

gonna have to get paid more i mean um go ahead ryan all right if let's play it out where maybe delivery velocity goes up and they just get paid more or let's say i mean if they can so if they got to enough market share maybe these businesses want to get funded like their competitors would lose funding because it's like we're not going to pay for you to compete with just a takeaway yeah i don't know maybe that's what they're going after maybe maybe um and then the other thing i You have to believe that Grubhub is going to be a successful acquisition. I think that's going to be tough. But if they do, I mean, it can make sense.

Do we know what multiple they bought them at? No. Grubhub was trading at – its stock had taken a tumble. I would research that. Apologies to listeners. We didn't know the multiple there. I assume it's lower than DoorDash's because DoorDash trades at a very steep multiple. But let's move into Bear Case.

We've talked about some of those things, but Brad, what do you think would go wrong with this investment? Yeah, I don't have a ton of new insight to offer here. Just the unit economics of this business are not compelling and they won't be compelling in the future. That is the bare case because that makes this really awesome growth. I think Brett mentioned $100 billion to $150 billion by 2023. That makes that eye-poppingly amazing growth not all that lucrative or compelling. Yeah. My bear case, I guess, is that the competition, it's exactly what we talked about, that they have to continue constantly reacquiring their customers, that they have to

constantly discount and stuff like that. I mean, think about, so I guess the goal here is that you get to scale and then you have scale advantages so you can increase margins once again. But think about what happened in the UK. In 2019, their operating margins were 42%. In 2020, they were 30 and this was because they invested heavily if if you have to lose margin every time you invest heavily to gain market like as long as those businesses exist like their competitors they're going to have to constantly lose margin just in order just in order to gain customers and then do it over and over again if one someone decides to burn a billion a year everyone has to Yeah, just, it's like the, I think Dan McMurtry talked about one time that it's,

that food delivery battle going on right now is like a bunch of people swimming 10 miles off the coast trying to survive, but they're still 10 miles off the coast. They're all trying to drown each other. Yeah, that makes sense. At least in the United States. Europe, it could be more rational. Mine is, yeah, industry stays irrational. the companies continue to set money on fire. Uber and DoorDash, it's just worrisome. You see what DoorDash does and they seem to have an appetite for risk, an appetite for spending money with no regards for unit economics. And if they continue to do so, that's what crushed Grubhub. If they have more money, you know, I don't know. It seems that it's tough. It's just tough.

Can you sustain market share if you don't constantly discount and invest heavily? No. That's a big question. I just don't see. In the U.S., I think it's a clear no because, I mean, just look at what they have to do. They have to give me $30 for free, and then I never come back. I mean, I don't know. To me, that sounds like a business that's not viable.

uh but let's go to more or less interested i think we all know the answer to this but brad what do you have for us less interested and i will only add that it's not less interested because management hasn't hasn't performed well it's not less interested because because their market share isn't impressive it's less interested because i hate the business model and and it it really is a non-starter because of that yeah ryan uh so first first of all we were kind of put this was put on our radar by a friend of ours and so i really wanted to like it but i i'm really just convinced that this isn't a market for me maybe i don't understand the economics as well as people other people do yeah maybe in europe it's a lot better um maybe there's doubt there's actual

brand affinity like custom like customer loyalty to a certain delivery company yeah and the marketplace business makes sense it's great you don't have any costs it's just whatever you're of a middleman, but if everyone's forcing you to do delivery, then it's like, you can't just say like, we have this marketplace business and we're going to keep it. You can't just keep it. You have to, you're forced into these low margin things with delivery, either hiring or contracting out workers. And that makes it tough. Yeah. I'm less interested too. It makes me think of that quote. Charlie Munger is not the only one that said it, but he said, he basically said, if you have a good business run by a bad manager, it can be fine. Kind of like the Coca-Cola example or

whatever, you know, the ham sandwich type stuff. But if you have a bad business run by a good manager, usually the bad business wins out because there's nothing you can do if the economics don't work. I mean, people love Dara Khorshashahi, excuse me for saying that name wrong. I just kind of try to say it fast, but he was great at Expedia. It seemed like he had a good track record he was at iic they have you know they're really good at incubating management talent but uber it just seems so tough like uh what are you gonna do and what do you do i feel the same with just you take away um not a bad valuation though valuation is better than doordash although doordash is growing really fast um not evaluation it's not bad for just you take away it's not bad

at all yeah all right stock for next time brad you have one for us i know we didn't talk about this beforehand uh let me go through one or two and then if you guys have done them already i'll i'll let you know in a few days what about uh grow generation let's do that one that's been a recommendation but from a lot of people so really all right that's perfect then and what is it is it cannabis i'm assuming ancillary so they they provide fertilizer and and professional services to support the cannabis industry and and growers so um so i i do invest in in three of the the grower so i'm i'm very interested to explore some ancillary plays okay and this is not scott's miracle grow what's it called again no not scott's that's that's their main competitor so grow

generation um it's sort of it it's uh it's a retail it's a retail chain that that has been very aggressive with a public market roll-up um to to boost growth and and and rightfully so just based on cannabis having a 20 kager for the next decade um but yeah they they really support the grow operations of these large and small enterprises. All right. Should be fun to talk about next week. All right. Let's wrap things up. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.

Bye.