Just Eat Menulog acquisition – Has Just Eat bitten of more than it can chew?

Date: 10-05-2015

The Just Eat Menulog acquisition for AUD $865 million represents a whopping $150,000 per Restaurant that Menulog currently has as a customer.  Just Eat Chief David Buttress defended the price paid, stating that Menulog was capable of driving dramatic growth over the next 5 years and was currently “growing like a train.”

Just Eat’s shares have increased 70% since April 2014, when it floated, although the shares were down 12% after the Menulog acquisition was announced on Friday.

UK Stockbroking firm Peel Hunt’s Nick Batram, stated that based on research  that he is “cautious on the price paid” by Just Eat, in a sector where “valuations are being driven ever higher – which is fine until the music stops”.

Just Eats Mr Buttress believes that the Australian market is similar to the UK market 3 years ago.

Just Eat Menulog acquistion price may be too high.

1. Menulog and Eat Now have already taken all of the low hanging fruit.

Prior the the introduction of our Free Restaurant OnLine Ordering system, as the webmsaters for hundreds of our customers, where we were a neutral party between the battles between Menulog, Eat Now and Delivery Hero, who all wanted their online ordering widget on the Restaurants website because it represented the easiest way to capture new customer data.  It was very common to have Restaurant owners using all 3 services and very few only used one.  Of the 5,500 Restaurants using Menulog, this is the low hanging fruit.  Nearly all have been approached and those that haven’t come across either haven’t because they can’t afford it, don’t want to share their customer details or aren’t interested in online order taking.  Whichever the cause, they will be harder to bring across than those already taking online orders.

2.  Profit margins are a lot tighter in the Australian Market.

Wage costs are a lot higher in Australia for Restaurants.  We see Restaurants with wage costs over 50% of Revenue.   Restaurant and Catering Australia puts the average cost for wages and on costs at 45.3% in their recent submission to a Parliamentary enquiry. Rent is a further 9%.  Anecdotally we see many Restaurant owners earning less than their staff and working much longer hours in an effort to keep the Restaurant profitable.  A bill for 10% commission for Take Out and delivery orders is a sticking point with many of the Restaurants.  After we released our Free Online Restaurant Booking system, an online ordering system was the number one feature requested by Restaurant owners and they wanted it so they could save a lot more money than they did with our free bookings widget.

3.  Increased competition from Delivery Hero and Zomato

Up until 3 months ago, Delivery Hero was very quiet in the Australian market, so much so that we thought they may leave Australia to concentrate on more profitable countries, but since their latest capital raising, valuing them at $1.8 billion, there has been a dramatic increase in the amount of advertising that they have been doing.  To add to that, Zomato is also planning on creating an online ordering solution for Urbanspoon users.  Lastly, there is our own Free Restaurant OnLine Ordering system, which we are offering free to all Restaurants, whether they are a customer of Marketing4Restaurants.com or not because we believe that Restaurants should not have to pay to take online orders from their own website.

4.  The introduction of a Free Restaurant OnLine Ordering system finally gives Restaurants a choice.

Up until now Restaurants who wanted to take orders on their own website needed to build their own eCommerce platform.  The costs of this was often more than $10,000 and virtually all Restaurants shied away from the investment.  Now with the introduction of our Free Restaurant OnLine Ordering System, Restaurant owners are empowered to use technology like the big chains are using, particularly like Dominos Pizza in Australia.  This creates a level playing field for all Restaurants and returns some of the power back to the small operators.  Technology has enabled us to create FROLO for a fraction of the price that it would have taken 5 years ago.  Restaurants can now benefit from that.  We were able to fund the development of FROLO out of existing cashflow, which would have been impossible 5 years ago.  This has contributed to the decreasing barriers of entry into the Online Ordering space.

5.  The high take away order Restaurants have the most to gain by defecting.

The 80/20 rule applies to the Online Ordering industry as it does to the Online Bookings area.  We find some Restaurants are very good at generating online bookings, but many are not.  In the online booking space, the charges for taking a booking on their own website from companies like Dimmi are $1 per seat, which is often less than 2% of the revenue from the booking.  However in online ordering, the commission is 10%.  Those Restaurants generating significant numbers of orders each week are sometimes taking well over $2,000 a week.  These costs can be as high as $10,000 a year.  These are the Restaurants that have the most to gain by getting their customers to order directly from their website using a platform that they control.

6.  Data privacy is becoming more important to Restaurants.

Many Restaurant owners are only now beginning to  understand the importance of building their own database.  When a customer orders through a Restaurants website using the Menulog website, their contact details go into Menulog’s database.  Menulog is then free to email offers to the customer from other Restaurants in the area.  These are often ones running with discount campaigns.  We believe that this is one of the largest reasons that Restaurant owners are experiencing decreasing customer loyalty.  Importantly, many Restaurant owners are now beginning to understand this and are placing a higher importance one keeping their customer database secure.

7.  No synergies in advertising cost savings.

One of the little understood strategies in the online ordering business is the use of Adwords to stop customers going directly to a Restaurants website and to order from the Menulog / Eat now or Delivery Hero platform.  Because the average order is around $50 and the commission is $5 and these clicks can be purchased quite cheaply, it has been a very lucrative process for the online ordering companies.  The more competition there are for clicks however, the more expensive it is.  One of the massive benefits of the Eat Now / Menulog merger was that this advertising budget could be slashed as the competition would drop from 3 to 2 with just Delivery Hero to compete with.  However we are seeing a trend of Restaurants fighting back and starting their own adwords campaigns, because they know they can save $5 on an order.  The entry of Zomato will add more pressure on adwords spend and we think this could be a significant increase in the business over the next 5 years, not a decrease.

8. Risk of potential cashflow issues.

As the competition heats up, there will be a lot of pressure to make the Just Eat Menulog acquisition work by increasing the number of Restaurants and the number of orders.  Many Restaurants currently have to wait as long as 10 days to be paid for an order.  Online ordering companies have used the long payment time to finance their own operations.  For many small Restaurants, this has a significant impact on cash flow.  It is more pronounced in the Restaurants that are doing large volumes of orders.  We went to San Francisco to negotiate the best terms possible with Stripe, our online payments partner on behalf of the Restaurants.  Restaurants are now able to get paid 3 days after the order on a rolling basis.  This has a significant impact on cash flow for the Restaurants.  Menulog now has $40 million in revenue.  Assuming that no discount or commission free orders are taken, That is $7.5 million a week.  Our FROLO is paying a week earlier and it could be a key competitive advantage for others as well.  If Menulog changed their terms to 3 days, they would need to pay out $7.5 million.

Is the Just Eat Menulog acquisition overpriced?

Just Eat is currently debt free and will fund the Menulog purchase with an issue of shares, but the numbers appear to suggest that they are planning to increase revenue too high from too many Restaurants.  In a competitive landscape that is only going to get harder and the pressure on commission rates is going to be significant.  Just Eat cannot afford to decrease commission rates at all, in fact we believe that to get an adequate Return on Investment, they will be looking to build a digital monopoly in Australia and increase commission rates in Australia.

For what is a relatively small market, the Australian and New Zealand market is definitely going to heat up and only time will tell if the Just Eat Menulog Acquisition is overpriced or not, but based on our local knowledge, we would think that the team at Just Eat may just have eyes bigger than their stomachs.

Apart from that, it is a fantastic result for a couple of Aussie startups.  Eat Now and Menulog have done a great job of being acquired by Just Eat and if this is a bubble, then they have picked their exit timing brilliantly.  Hopefully it will spur on more startups in Australia to such great exits.

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