Trend Spotting: M&A Opportunities as Tech Giants Divest Local Branches
The food tech space has long been an area of huge profits for startups. In the last 10 years alone, we have watched 33 companies in the space have become unicorns - startups with valuations over the $1B mark. Quickly after seeing the success of these startups, more established tech names have been eager to jump into the food delivery space and expand rapidly utilizing their existing worldwide infrastructure.
The most notorious tech behemoth that has tried to dominate the food delivery space is Uber with their 2014 addition of UberEats. Despite starting in a relatively small market in Santa Monica, Uber quickly scaled this service by capitalizing on their existing app platform with millions of active users. It seems too good to be true for Uber - how could these small food tech startups compete for customers when consumers could order food from a company who’s other services they use on a daily basis?
Yet, we have seen recent movements in the M&A world that have proven this hypothesis wrong. In January of 2020, UberEats announced that they would be selling their India food delivery segment to Zomato, an Indian startup that has been dominating the Indian market and consistently coming in as a top competitor in the field. Uber, on the other hand, was hemorrhaging money in this geographical area of their multibillion dollar food spinoff. Despite India only accounting for 3% of UberEats’s gross bookings, the India market accounted for approximately 25% adjusted operating loss.
Dara Khosrowshahi, Uber’s CEO, told investors that he planned to make Uber Eats the primary or secondary food delivery service in every city where it operates. If the plan failed, “we’ll look to dispose or we’ll get out of the market,” he said. The success of food tech startups with seemingly insurmountable odds against giants like Uber comes down to a difference in ideology and strategy. Local startups, like Zomato, aim to capitalize in their proximity to the people that it serves by getting exclusive partnerships with restaurants. Meanwhile, UberEats aimed to profit off of low fees through scale and utilizing their brand name to gain traction.
Ultimately, Uber missed the mark on becoming the #1 or #2 food delivery service in India and made the decision to divest. The India arm of UberEats was sold to Zomato in exchange for a 9.99% equity share in the startup. We, at Qvantea, have been following this trend and see UberEats is not alone in this movement of large tech conglomerates selling portions of their food delivery services. In 2017, search engine and tech company Baidu, sold their food tech branch to Ele.me, a deal valued around $800 million dollars. Similarly, Rocket Internet, a massive tech holding company, sold unprofitable food delivery services in Spain, Italy, Brazil, and Mexico to JustEat - another startup. Baidu and Rocket Internet’s stories have many parallels to Uber’s: with their deep pockets and existing consumer bases, all assumed they could break into a space promising high growth and returns; yet, both deferred to local startups after not being able to dominate the space.
Nowadays, it has become increasingly evident that massive tech companies in Uber’s bracket of revenue and notoriety assume that whatever they touch will turn to gold. We live in an age where these giants are quick to acquire and slow to admit any sort of defeat. However, the food tech industry is an exemplary case study of why we cannot discount the startup model. We believe that proximity and small scale offer a personalized experience that consumers crave as opposed to an onslaught of mega-corporations. For the time being, Zomato and another small scale Indian food tech firm, Swiggy, are dominating the Indian food delivery service. However, Amazon is rumored to be attempting to break into the market as well. Only time will tell how this matchup of startup versus massive tech firm pan out, yet history points to another victory for Zomato and Swiggy.
We see Uber’s decision to divest as a wise one. Recently, we have watched once esteemed companies like WeWork overextend themselves and swiftly fall. As the world watches the COVID-19 pandemic unfold, companies hurry to shore up existing business -- and cut the fat in low revenue areas. From the perspective of our clients, we believe that this might be a great environment to purchase segments of tech companies, not only in the food tech sector, that are being sold cheap in an effort to consolidate business. The team at Qvantea suggests that founders should keep their eye out for promising business models that maybe did not receive the care and dedication from tech giants that might have allowed them to succeed.