On Tuesday, the e-commerce giant said Amazon Prime members in the U.S. can now sign up for a free, one-year membership to Grubhub’s premium “Plus” service—at a value of about $120 currently—and get unlimited free delivery on orders over $12 from hundreds of thousands of restaurants. 

For Grubhub’s European parent, Just Eat Takeaway.com, the deal offers the strategic partner it was long looking for in the United States—and does so amid an industry that is consolidating in an effort to achieve sustained profitability. Shares in the Dutch company soared as much as 20% on Wednesday. 

“The Amazon partnership is both material and welcome,” Jefferies analyst Giles Thorne wrote in a note to investors. “Grubhub has secured not just a very powerful partner, but also a very efficient acquisition channel. For a hitherto stranded asset and deadweight…this is positive news.” 

The deal appears to also be a shrewd move for Amazon, which can offer its Prime customers an appealing food delivery service in an asset-light fashion friendly to shareholders’ equity. 

Should it prove successful, Amazon still has the deep pockets to acquire Grubhub—or even its parent, which is valued at just €3.5 billion ($3.6 billion) on the Amsterdam stock market. 

In the near term, as part of the transaction Jeff Bezos’s company will receive warrants—a type of call option issued by a target company—that will gift it as much as 15% of Grubhub depending on the achievement of certain milestones.

“Amazon has redefined convenience with Prime, and we’re confident this offering will expose many new diners to the value of Grubhub+ while driving more business to our restaurant partners and drivers,” said Grubhub CEO Adam DeWitt in a statement.

Loss-making

While food delivery may be appealing to consumers and even a necessity in some cases, the business model remains under heavy scrutiny by capital markets after it failed to generate value for shareholders during the pandemic, when conditions were at their most favorable. 

Much like ride-hailing services such as Uber and Lyft, delivery apps are just like any software-based platform provider—the more people use it, the more valuable it becomes, and vice versa. 

A service that offers a smaller selection of restaurants than its rivals, has fewer menu options, or suffers higher costs or longer wait times will tend to lose customers to larger peers.

To achieve a competitive market position then, constant investment is required to expand and open up new markets, including heavy incentive spending to drum up business. 

Further complicating the equation, delivery services add very little economic value: The service is essentially limited to picking up and dropping off items, compared with, for example, a pizzeria that bakes a fresh $10 pizza from flour, tomatoes, cheese, and other ingredients that cost a fraction of that. 

Since restaurants and delivery people require a cut, margins are by nature razor thin. Any inefficiencies that arise in execution lead to bleeding red ink.

Grubhub parent Just Eat Takeaway posted a €1 billion loss last year and confided it only expects to achieve underlying operating profitability on an annual adjusted Ebitda basis come 2023. 

Go big or go home

Uber’s delivery division fared little better, with an Ebitda loss of $348 million also adjusted to exclude all one-off items and sundry other costs that typically factor heavily into the bottom line. That came despite revenue easily eclipsing divisional turnover at its core ride-hailing business.

Since the economics of the food delivery market are so poor, even Bezos was forced to kill off his Amazon Restaurants business in 2019 after four years of trial and failure. 

In other words, just as with ride hailing, scale is everything in this business: You either go big or you go home.

That’s why companies are in the process of consolidating the market in the hopes of driving greater efficiency.

U.S. leader DoorDash is in the final stages of its planned acquisition of Finnish food delivery service Wolt and its 2.5 million monthly active users across Europe. Thanks to a 16% appreciation in the dollar, it may now cost DoorDash only about $7.1 billion instead of the $8.1 billion originally anticipated. 

Meanwhile, Just Eat Takeaway on Wednesday reaffirmed its April admission that it was still actively shopping around Grubhub, a company it acquired barely over a year ago, and remained open to a “partial or full sale” according to its statement.

Since the Dutch company hit its all-time high in October 2020 when the stock traded for €110, it has lost close to 90% of its value.