'Online Food Delivery Still Only At 5% Penetration,' Morgan Stanley Reports

AlphaWise data suggested that although GrubHub Inc GRUB enjoys a large share of the online food delivery market, this market has low penetration, Morgan Stanley’s Brian Nowak said in a report. He maintained an Equal-Weight rating for the company, while reducing the price target from $30 to $26.

Online food delivery penetration remained at a low 5 percent. Analyst Brian Nowak commented that this was because restaurant chains had continued to largely avoid online aggregators, resulting in no meaningful acceleration of delivery. If this scenario were to continue, aggregators like GrubHub would be unable to scale.

Nowak mentioned that the best case scenario would be if restaurant chains adopt online aggregators and online delivery, resulting in “an overall expansion of the restaurant expenditure pie (taking share from eating-at-home, etc.).” He added that this scenario would be a win for both restaurants and third-party aggregators.

Related Link: Amazon Expands One-Hour Free Restaurant Delivery Service To Manhattan, Dallas

Need For Higher Investment

AlphaWise data indicated that GrubHub has a share of more than 50 percent of the online food delivery market and its brand awareness is twice that of its nearest competitor. Nowak noted, however, that merely 24 percent of those who were aware of GrubHub actually used its services in the last six months.

The data also indicated that a high 44 percent of people who moved away from GrubHub would do so because of its limited selection. “These data, in our view, highlight GRUB's need to continue to add more restaurants (in particular outside of the top 10 markets) if it hopes to drive faster top-line growth,” the analyst commented.

GrubHub needs to continue investing in its own in-house delivery systems in order to add selection and restaurant supply. This will, however, likely result in higher net delivery losses, Nowak added.