I want nothing to do with the ‘Just Eat’ IPO

Just Eat website
Just Eat: living on borrowed time

The dotcom darlings – eBay, Google, and Amazon – what fantastic investments they would have been! We all wish we’d had the foresight to get in on the technology greats on day one. Maybe you did?

Of course, it took bottle to invest in these businesses at the initial (profit-free) stages. Many of us now feel we’ve missed out.

And so it’s little wonder that today investors are said to be clamouring to get in on the latest dotcom darling. A business that’s right in the web’s sweet spot.

Just Eat, the go-to website for online takeaway meals, is about to be floated right here in London. As tends to be the fashion these days, the public won’t be let in on the offer – it’s institutions-only here thank you very much.

Why don’t they want your money? Well, as I lamented on Wednesday, it’s another own goal for the regulators. If you make it too tricky to offer shares to an unsuspecting public, then don’t be surprised if the industry just bypasses them.

Now, as it happens, you’re not missing out on anything at all. Just Eat is no eBay; nor is it Amazon; and it’s certainly not Google.

In fact, Google is what you should be buying at this stage. Yes, it’s true. You may have missed out on Google’s early-day gains, but, as we’ll see, there’s still plenty more to come. And anyway, why on earth would you want to invest in a business that Google is likely to take apart?

Takeaways are 33% of our food budget

Undoubtedly, Just Eat is a company doing very well. It’s purported to take about half the UK online takeaway market, bringing in £96m last year.

The company is essentially a directory for takeaway foods; it allows customers to view menus, order and pay for food. It’s a good service and is said to have made a profit of about £14m last year. And that’s great going. In fact, I wish I’d started the business myself. After all, the start-up costs would have been small, and it’s in a great and growing market segment.

Just this week research revealed that we’re now spending about a third of our food budget on takeaways – 12 a month on average!

These sorts of online businesses can generate fantastic returns with barely an employee in sight. The business is eminently scalable and is already operating in 13 countries across the globe.

But before we get too excited, we have to look very closely at the nature of the business model. The fact that it’s scalable is brilliant. And sure, it’s profitable. But the next thing that we always look for is key: is there a barrier to entry? Can the competition come in and replicate this business? Is there what Warren Buffet calls an ‘economic moat’?



Just Eat is living on borrowed time

Now, I would suggest there most certainly is no moat. Not only is the moat dry, but the enemy is already within. This Yellow Pages of the online takeaway’s business’s days are numbered.

Ebay’s moat is the very nature of its business. Any auction house lives and dies on the number of customers. If you want to run a decent auction, you need a deep market of sellers and, more importantly, buyers. Who wants to sell to an empty room? This makes ebay’s head start pretty difficult to assail.

Amazon is a bit different. Scale is the business’s economic moat. The sheer volume of trade allows Amazon to buy cheaply. It gives them great leverage when it comes to negotiating cheap delivery terms, and drives economies in the fulfillment service. It would be very difficult to replicate, especially given the wafer-thin profit margin Amazon is dealing with.

In fact, as I’ve made clear before, I think the only real source of competition here in the UK is Tesco.

Just Eat is nothing but a directory service. Anyone can come in and replicate it. The insurmountable problem here is that anyone isn’t just anyone, it’s Google.

Google will do the job better

Exactly how is it that Just Eat can claim half of the UK online delivery market? Now, while I don’t know for sure, I’m pretty certain it’s because the business has got its online marketing strategy right. And in today’s world, that means it’s got its Google strategy right: Just Eat is top of the pops because Google allows it to be.

And when Google decides that it’s time to chuck its tenant out of the building, it will. In this situation, the tenant has no rights. Google will take over the business. And to my mind, they’ll make a better job of it too.

Google already controls most internet searches. It’s got a wonderful maps application that dovetails perfectly with an online takeaway directory. Flipping heck, with the proliferation of mobile devices running on Google software, these boys can bring in a takeaway offer that will blow Just Eat out of the water.

Google is sitting back, watching, waiting and salivating over this type of business. The minute they want to, they’ll toss the likes of Just Eat out the door and change the locks.

Not very fair? Absolutely. But this is business.

Just Eat has been given a window of opportunity. And quite rightly, the owners of the business are selling it on to a crazed investing public just at a time when it’s right to do so. When the fish are hungry, you feed them – it’s known as bait!

Just Eat may well have a successful IPO. The company may continue to do well, for a while. But be under no illusions: when Google wants to crack on in the takeaway market, it will do so. And Just Eat will have very little to say about it.

Google is a far wiser and safer investment option (in my opinion). Here’s how I’m playing it.

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  • transishi

    Totally disagree, Just Eat is a lot more than an online directory, they have a sales team on the ground in multiple countries visiting restaurants and signing them up, they have their own communication boxes they place in the restaurants that are easy to use. Do you really see google having a sales team on the ground and having the marketing image that Just Eat have ? I see more and more takeaway being ordered online as time goes on and Just-Eat are the biggest player, Google is an amazing company but not everything they do is a success (google plus, google wave etc….) this company could have a very big future tho I agree they are not a google or an amazon but they don’t need to be to still see huge growth, if their platform and business can cope with the scale then this is a winner as revenue will only keep going up.

  • Texas Pete

    I agree with transishi, there is more to Just Eat than the article implies. Sure it can be replicated, but any business can with enough investment capital. To replicate this business and eat (excuse the pun) into Just Eat’s massive market share would require spending millions on building brand recognition, sign up restaurants and integrate your ordering system with their software, then attract users to use your service and apps, which again would require a massive advertising spend given many potential customers will probably just click on Just Eat’s free app. While all this is possible my hunch is that if one of the internet giants such a Google or Yahoo! wanted in on the action they’re more likely to buy Just Eat and integrate it into their other services than go to the effort and massive spend required to set up a competitor with no guarantee of succes. Such a takeover would hardly be disatrous for investors. I’d need to do more research before buying in but on the face of it, with its strong brand recognition, user friendly site/apps, massive market share and healthy revenue figures at the right price this looks like it could be a promising investment.

  • Mark H

    Bengt
    Sorry this is not related to this article but based on a previous article i bought quite a chunk of Agriterra at about 3.5p since which time they have halved in price. They looked a good investment at the time and bought with my eyes open so no complaints but would appreciate an update on what you think now. Should I and others who followed your advice sell and take our losses like a man or hold on for the recovery. Problem I see is that the company could burn up its free cash before making its first profit. I look forward to your comments.
    Mark

  • CKP

    Unlike transishi and Texas Pete, I totally agree with Bengt, Just Eat has a very flimsy “moat” and it’s valuation is just ridiculous. The owners (venture and private equity) have zero reasons to raise capital other than to offload the business and get out while the going’s good. As well as the significant threat posed by other internet companies such as google, a takeaway customer could easily undermine the business model by approaching the restaurant direct and demanding a 10% discount thereby undercutting the 12% referral commission taken by Just Eat.

  • CBarling

    I agree with Bengt’s conclusions but not for the reasons he gives. As has been said elsewhere, Just Eat have boots on the ground, hand over “Just Eat” posters that many takeaways put up in their windows and provide a piece of hardware that enables them to reliably print off orders as they come in.

    I looked at a starting a company in this market a few years ago and didn’t because Just Eat already had a dominant position.

    As part of the preparation we looked at the business model particularly from the point of view of the take away. Just Eat take a big slice of the order value (from memory 15-20%). When there are few take aways with online ordering capability, the increase in business they can expect offsets the loss of margin. But once the market starts becoming saturated, and in particular once your existing customers start moving to order through Just Eat, it’s a bad deal for the take away.

    If you couple this with the fact that (I believe) customers like particular take aways, then Just Eat’s margins are potentially at risk from a lower cost service which could probably be delivered for £20 or less per month with card fees around the 3% mark.

    The take away would sign up for the cheap service, and carry on with Just Eat for a while, while placing a card saying “Order at http://www.mysite.co.uk for an additional 10% off” or similar with every batch of food.

  • Texas Pete

    CKP and CBarling – thank you for your responses. You both make good points, but the difficulty I have is that if it is so easy to set up a take away directory and ordering service, how have Just Eat managed to get such a dominant position? Indeed, Barling implies in the first half of his response that it is anything but.

    Personally, I tend to buy takeaways, as I’m sure most people do, when I’m feeling too lazy to cook, not exactly a frame of mind to be prospecting for the best deal. JE offers a convenient and trustworthy solution. With the exception of a savvy few, I can’t see a lot of takeaway customers going to the effort of looking up the restaurant on Just Eat, then contacting the restaurant and saying if I order it directly from you will you give me a 10% discount on your JE price? I also like the convenience of ordering online, no misunderstood orders over the telephone, payment by card, etc. I’d trust JE’s site’s integrity and security, but the restaurant would have to spend a fair bit on their site for me to trust it with my payment card info, etc. Also, the last thing I want is a load of takeaway leaflets and cards with websites cluttering up my home, such things have a habit of ending up in the recycle bin.

    That said, I do note CKP’s point about its valuation, its only worth a punt if the price is right as it will be a risky bet on rapid growth and the possibility of it eventually being snapped up by one of the big online players, which may or may not happen. That said, I do think due to its massive market share, positive cash flow and profitability it has some legs though, unlike say Ocada which is trying to carve out market saturated by larger competitors.

  • Hazwalker

    I don’t agree with the main premise of the article that this is simply a directory of takeaway businesses.

    It is not offering a way to search for takeaways. It offers the ability to order online from a clear menu and pay with a credit card securely, without having to go through the hassle of calling the restaurant, having misinterpreted orders, waiting for the phone not to be engaged and giving out your credit card details over the phone.

    Just Eat also offers the chance to gain cashback on your orders through sites such as Quidco – money for nothing is always a good thing!

    Those people using the service will not be simply googling ‘indian takeaway Birmingham’, but looking for their local restaurant that they particularly enjoy, with the added convenience of the features above.

    Furthermore there is the additional advantage of peer reviews and discount offers, which allow you to explore other options further afield while having the comfort of the review to know you (hopefully) won’t be wasting your money.

    For my generation (20-30s) ordering any product over the internet is second nature and the convenience that Just Eat and rivals such as Hungry House offer fits with the smart phone, tablet computer user’s lifestyle.

    If anything goes wrong with the order, you deal with Just Eat’s customer service department who liaise with the restaurant and compensate you direct. Again this has obvious advantages over dealing with the restaurant, not least in terms of scale, speed of response and taking all the hassle of telling someone who might not agree that they have messed up your meal off your hands.

    I do not see how Google can offer the same facilities without having to buy a business such as Just Eat themselves. As transishi says there’s also a sales team on the ground which signs up the businesses, rather than simply sitting back and waiting for businesses to come to them.

    On the valuation, this is clearly astronomically high and symptomatic of the current tech bubble that is building in spite of the experience of 2000/01!

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