The Update Issue: A Promotion Gone Awry and the Breakout Star of the Pandemic Shows No Sign of Letting Up

Food delivery stocks have fallen squarely out of favor in recent months... Ironically, restaurant delivery services are one of the rare pandemic winners that didn't see growth run into a brick wall as the world reopened. Consumer interest has remained high in food delivery from companies like DoorDash (DASH), Uber's (UBER) Uber Eats, and Just […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: A Promotion Gone Awry and the Breakout Star of the Pandemic Shows No Sign of Letting Up By Berna Barshay --------------------------------------------------------------- [Whitney Tilson: 'The boldest call I've ever seen']( Since joining Empire in 2020, Berna Barshay has made a huge difference in our readers' lives, giving them countless opportunities to make peak gains including 130% on Fiverr... 249% on The Children's Place... 266% on Revolve... and 548% on L Brands. But her shocking takeaway from this year's Berkshire Hathaway meeting led her to make one of the boldest calls of her entire 25-year Wall Street career. [Details here](. --------------------------------------------------------------- Food delivery stocks have fallen squarely out of favor in recent months... Ironically, restaurant delivery services are one of the rare pandemic winners that didn't see growth run into a brick wall as the world reopened. Consumer interest has remained high in food delivery from companies like DoorDash (DASH), Uber's (UBER) Uber Eats, and Just Eat Takeaway's (TKWY.AS) Grubhub. Take a look at DoorDash, for example... While the rate of year-over-year order growth cooled in the first quarter, it still remained at an extremely healthy 23%. Paired with reduced promotions, revenue came in stronger, growing 35%. All other engagement metrics such as monthly average users ("MAUs") and average order frequency continue to grow, the latter even hitting an all-time high in the quarter. Sure, order growth has slowed from the height of the pandemic. In the first quarter of 2021, orders had grown 219% and revenue 198%. But no one ever thought that torrid pace was sustainable... And 35% revenue growth when comping against 198% is enviable. This looks like the epitome of a soft landing. DoorDash is no Peloton (PTON) or Netflix (NFLX) when it comes to growth grinding to halt – or in Peloton's case, revenues collapsing. Despite seeing continued demand growth in the face of a fully reopened economy, DASH shares have been big losers this year, down 50% so far... Just Eat Takeaway shares have performed even worse, down 58% year to date. Uber, which of course also has the ride-hailing business – a reopening beneficiary in theory – has seen its shares slide 45% since the year started. At Uber, deliveries also showed resilience in a reopened economy, with delivery bookings up 12% year over year. One thing all these companies have in common, besides the ability to bring you a pizza when you are too lazy to go out in the rain, is that they all lose money. Their year-to-date slide is a reflection of the market's sudden distaste for companies where profitability is always on the horizon. For 2022, profitless prosperity is out, and free cash flow is in. While the revenue growth outlook for delivery services remains promising, there are tons of questions surrounding the business model for these companies and whether they will ever make money. Investors are concerned about labor availability and the rising cost of labor. Leaning into the gig economy served these companies well when labor was abundant... But in a tight labor market that has witnessed large wage increases in recent years, finding the workers to meet ever-growing demand is becoming more difficult – and more expensive. Rising costs can be offset with fee increases, but there is a definite price elasticity to demand for most food delivery. After a land grab period in which delivery services were subsidized by venture capitalists – and then public shareholders – with lots of patience for red ink in the service of market share gains, now investors want these companies to make money. But will consumers still be interested in restaurant delivery with the same frequency if they have to pay full fare for what it really costs? And how will a potentially weaker economy affect consumer tolerance for higher fees? Not only do these companies have to contend with rising labor costs, but the risk of regulation is also still there and has never really gone away. Regulation can be aimed at the use of gig workers, and it can also be aimed at the fees these services charge to restaurants. [We've seen caps on these fees imposed]( in cities such as San Francisco and New York. The regulatory caps on fees were a reaction to the fact that often restaurants barely break even – or even lose money – on orders delivered by these third-party services... There's no restaurant delivery service business model without restaurants providing the food. However, doing business with DoorDash or Uber Eats has often been a raw deal for many restaurants. The shaky relationship of these delivery services with their essential business partners – the restaurants – has been another talking point of the bears on these stocks. Given how important restaurant partners are to their business model, you would think these companies would be working hard to stay in their good graces... Although a high-profile promotion gone wrong in New York City indicates that the communication lines between Grubhub and its restaurant partners in that city leave a lot to be desired. On May 17, Grubhub launched a "free lunch" marketing campaign in New York, offering a $15 promo code good for just three hours from 11 a.m. to 2 p.m. Unfortunately, it gave no warning to restaurants that they were going to do this, so they had no chance to staff up or otherwise prepare for the onslaught of orders they were about to receive. Grubhub told BuzzFeed News that during the promotion, the app took in an average of 6,000 orders per minute. The result was total chaos. Orders never got filled, leaving app users hungry... Ebenezer Ackon told BuzzFeed News he was in 3,630th place in line to talk to Grubhub's customer service when he gave up; after waiting more than an hour for food, he went to get something from across the street from his apartment. Food went to waste as orders were prepared, but no one was available to pick them up and deliver them... One of BuzzFeed News' own called Blue Ribbon Fried Chicken in Manhattan to check on her order after it was marked "closed" on the app, and an employee said they had done so to handle the 47 filled orders that hadn't been picked up. And of course, restaurants were slammed with orders they couldn't keep up with – worrying that they would permanently lose customers when it had really been Grubhub's poor planning that led to disgruntled home diners. Grubhub itself touted the promotion as a success, with the number of orders up six-fold from the same event last year. However, that assumes those orders were filled. BuzzFeed noted that while Grubhub couldn't keep up with the deliveries, it had no problem keeping up with getting out the text surveys inquiring about the customer experience... Erin Fred from the Upper East Side told BuzzFeed News no one ever answered her calls for help, but Grubhub did ask her to complete a satisfaction survey about her experience. "I hate you," she wrote. --------------------------------------------------------------- Recommended Link: [The 'Perfect 10' stock no one's talking about]( Legend who picked Amazon at $48 and Apple at $0.35 has found the "[perfect inflation-proof play]( --------------------------------------------------------------- Grubhub isn't the only one having trouble keeping up with demand on a promotion... Food giant Mondelez (MDLZ) launched a limited-time snack called Oreo X Ritz today. It's half cracker with peanut butter and half cookie with creme... Source: CNN.com The mashup is only available online at a special website. Supplies while they last are free but will incur a $3.95 shipping fee. The site launched at noon today and was so overwhelmed by demand that it immediately crashed. When I checked back two and a half hours later, it was still down – as was the entire Oreo corporate website. I guess the takeaway from these stories is to never underestimate the public demand for free stuff. But in the case of Oreo and Ritz, the site crash is probably also a testament to the power of these brands... and Americans' penchant for junk food. When I first wrote about TikTok in 2020, I called it the ['breakout star of the pandemic'...]( The pandemic may be solidly in the rear-view mirror for most Americans, but TikTok is going stronger than ever. No reversion to the mean here! In fact, the app continues to grab tremendous share from its rivals. In his Chart of the Week, NYU marketing professor Scott Galloway highlights that TikTok now grabs more hours from its users every month than Meta Platforms' (FB) Facebook and Instagram combined... Source: Prof G Media If you've used the app, you know how addictive it is. All social media is addictive... but TikTok takes it to a whole other level, to the chagrin of many a parent trying to have a two-way conversation with their child. In the mailbag, reactions to yesterday's piece on baby formula as well as the tragic events in Uvalde, Texas... How much are you willing to pay to have restaurant food delivered? What's your limit, in dollar terms or as a percent of the order total? Are you ordering more, less, or the same as a year ago? Do you know someone with a TikTok addiction? (I do!) Share your thoughts in an e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Hi Berna, I think it is Reckitt Benckiser, though I'm sure I'm probably only the 1000th person that has mentioned this. I also think it is important to note that the FDA must approve all infant formula manufacturing in the US, which is a further barrier to entry (including the scale required) to having more than 4 players in the market (Perrigo makes all of the store brand infant formula, and at one point actually had a larger combined market share than Nestle in the US). Store brand grew so much after 2008, so the share data you used is a bit dated, but I'm guessing you already knew that too. "I love your emails and have missed them over the past couple of weeks. Just thought I'd add a bit since I know the industry." – Darren S. Berna comment: Darren, you got me... It's a typo on how to spell Reckitt Benckiser (RKT.L). I have always had a mental block against getting that right. Thank you for your close eye! And you are right about the market share data being a bit stale... I couldn't find more recent numbers without paying for the data – and I generally don't pay for data to write my free e-letters (although I do when it comes to our premium, paid services). I figured while the numbers may have shifted somewhat, the dynamics around market share going to the WIC partner in every state have not, and that is what is contributing to the shortage. But it's a very fair point that there are four major suppliers, not three, in the U.S. baby formula market currently. "Berna, thank you very much for this extremely interesting article. It certainly demonstrates that the best of intentions can often go awry." – Sherwin R. "While baby formula is a major problem you also mentioned the mass shootings in your country. David Frum from The Atlantic had a statement that resonated with me. His remarks that, government will never do anything about guns until citizens form an equivalent of Mothers Against Drunk Driving ("MADD") then politicians will be forced to listen & do something." – Barry W. Berna comment: Barry, there actually is an organization like you describe... In the immediate wake of the Newtown shooting in 2012, Shannon Watts founded Moms Demand Action, modeled on MADD. It has chapters in all 50 states, more than 8 million supporters, and has been successful in getting much legislation passed on the state level... but no one has had any success with reforms on the federal level. Regards, Berna Barshay May 26, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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