A report by the Wall Street Journal claimed that GrubHub Inc. (NYSE: HUB) was exploring the possibility of a sale to one of its competitors; news of the potential sale had GrubHub's stocks up during trading on Wednesday, however, most of those gains were erased after GrubHub denied these rumors.
GrubHub's shares shot up 12.5% after the Journal's report that GrubHub had taken on advisors to explore different options for the company, including a sale or possibly even an acquisition. The spike was good news for GrubHub, which has been struggling with its stock price after a dismal Q3. After the company released its Q3 report, shares tumbled from the 50s down to the mid 30s, but with the recent single-day hike, GrubHub was finally closing in on its pre-drop share price.
Days after the Wall Street Journal's article, GrubHub would dismiss these rumors. This erased much of the optimism investors had on news of the sale, and resulted in a 7% drop of GrubHub's share price, erasing much of what GrubHub had gained. Given the effect the rumors had on GrubHub's share price, it has become apparent that investors favored potential consolidation.
Investors attitude towards consolidation is hardly surprising given recent trends. Uber (NYSE: UBER) saw a jump in stock price after news of a potential sale of its Indian division to competitor Zomato, reflecting the optimistic view many investors have towards consolidation. Many other companies have already sold off divisions abroad that weren't performing well enough; such deals have already occurred in countries such as the U.K. and South Korea. Such sales typically reduce the competition down to two or three companies; in an extreme case, consolidation left a single delivery company with hold over Germany.
Traditionally, gig-based food delivery services have not been a profitable venture. The market has essentially become over-saturated, too many companies clamor for a finite amount of demand. GrubHub competitors such as DoorDash and Uber Eats have struggled with profitability, with Uber itself being almost historic for its struggle to achieve profitability. Consolidation seems to be the solution for companies like GrubHub; reducing supply to keep pace with demand could help gig-based delivery companies finally become profitable, or at the least, could help them lose less money.
GrubHub is a standout from the increasingly saturated gig-delivery market; however, in that it at one point had market dominance and was fairly profitable. Before joining the delivery industry, GrubHub was simply a platform for restaurants to connect to customers; delivery was the responsibility of the restaurant itself. GrubHub took a small cut of orders made through its online storefront and avoided the costly overhead of having to maintain its own network of couriers. GrubHub's approach was very profitable and helped secure the company as a staple in the food industry, at least until its contemporaries began building networks of couriers to deliver food independently of restaurants. GrubHub would decide to begin building a network of couriers, which would subject it to the world of red-ink and skyrocketing overhead costs associated with the gig-based delivery industry. While consolidating would have helped GrubHub, be it selling off components or the entire company to a competitor or acquiring a competing service, the path to profitability for gig-delivery services is ambiguous at best, and many services may continue to experience growing pains for the foreseeable future.