Is GrubHub a Threat to Kroger (KR)

Bizarrely, humble takeout delivery apps like GrubHub (NYSE: GRUB) are a threat to Kroger (KR). Meal-delivery apps threaten grocers like Kroger because they lessen consumer’s need to cook.

GrubHub threatens Kroger (NYSE: KR) because of the size of its footprint and growth. For instance, GrubHub claims to serve over 1,700 American cities and 95,000 restaurants.

In fact, GrubHub claimed to process 416,000 takeout orders in 2018. Beyond that, that GrubHub now has 16.4 million active users. Moreover, GrubHub is growing dramatically.

In particular, GrubHub’s diner base grew from 8.17 million in 2016 to 14.46 million in 2017, to 16.4 million in 2018, Statista calculates. Hence, GrubHub’s customer base more than doubled in two years.

How GrubHub is a threat to Kroger (KR)

GrubHub is a threat to Kroger (KR) because its meals are more convenient and often more appealing than Kroger’s.

In particular, GrubHub now offers delivery of modern American comfort food; fast food from Kentucky Fried Chicken or KFC, and Taco Bell. Notably, GrubHub has an alliance with Yum! Brands (NYSE: YUM) to deliver food from outlets like KFC and A&W.

Thus, GrubHub now offers entries cheap enough for almost any working American to afford. In addition, GrubHub can now take advantage of what I like to call the Dollar Menu or salad effect.

Behavioral economics makes GrubHub a Threat to Kroger (KR)

To explain, McDonald’s (NYSE: MCD) offers a Dollar Menu and salads but expects nobody to eat them. Instead, Mickey D’s bets that customers will come into buy a salad or order from the Dollar Menu, but get a Big Mac instead.

GrubHub understands that its customers will pick up the phone to order Sushi or Thai Curry but end up with a bucket of KFC instead. For example, the soccer mom can justify GrubHub by saying “I will use the app to order vegetarian entries.” In reality, she orders KFC, or Pizza Hut (another Yum brand), or Taco Bell.

Therefore, behavioral economics makes meal apps like GrubHub a huge threat to Kroger and other grocers. Such apps are fast, convenient, and easy to use.

Obviously, GrubHub is to going to face the wrath of the healthy-eating police over Yum Brands soon. I predict the neo-puritans will blame GrubHub for obesity because of its Yum Brands! Alliance.

Is GrubHub (GRUB) really a threat to Kroger (NYSE: KR)?

On the other hand, Kroger is in a good position to counter GrubHub’s threat because of its vast resources.

For example, Kroger recorded yearly revenues of $122.662 billion on 3 February 2018 and quarterly revenues of $27.672 billion on 10 November 2018. Meanwhile, GrubHub records quarterly revenues of $247.23 million on 30 September 2018 and annual revenues of $683.017 million.

However, GrubHub’s Stockrow data indicates GrubHub’s revenues are growing fast. For instance, Stockrow gave GrubHub a revenue growth rate of 38.46% for 2017 and 51.6% for 3rd Quarter 2018.

In contrast, Kroger’s revenue growth shrank by 0.28% in 4th Quarter 2018. However, Kroger’s revenues grew by 6.35% during 2017.

How GrubHub (GRUB) threatens Kroger

Interestingly, GrubHub has the potential to make a lot of money under the right conditions. To explain, GrubHub had a gross margin of 60.55% during 3rd Quarter 2018. Meanwhile, Kroger had a gross margin of 22.01% during 4th Quarter 2018.

Hence, GrubHub can theoretically generate large amounts of cash through its platform like Amazon (NASDAQ: AMZN) does. Thus Kroger could find itself squeezed by three-fast growing meal-delivery platforms.

Those platforms will be GrubHub, Amazon Restaurants, and UberEats. Obviously, Amazon Restaurants is the most dangers because it can also deliver groceries. Thus, lazy customers could order hot meals and milk from the same place.

How Kroger (KR) can fight the GrubHub (GRUB) threat

Fortunately, Kroger is in a great position to GrubHub threat. In particular, Kroger has three attributes GrubHub and DoorDash cannot match.

First, Kroger can ship customers a wide variety of other items including; groceries, prescriptions, beer, wine, alcohol, and cleaning supplies. Second, Kroger has the facilities and employees to cook meals in-house.

Notably, Kroger operates 2,782 supermarkets and supercenters nationwide many of which contain kitchens, bakeries, delis, ethnic cafes, and even pizzerias. In fact, Kroger is testing a wide variety of hot food ranging from soups to noodles to cheese sandwiches in its stores.

How Kroger (KR) can fight the GrubHub (GRUB) threat

Fortunately, Kroger is in a great position to GrubHub threat. In particular, Kroger has three attributes GrubHub and DoorDash cannot match.

First, Kroger can ship customers a wide variety of other items including; groceries, prescriptions, beer, wine, alcohol, baked goods, and cleaning supplies. Second, Kroger has the facilities and employees to cook meals in-house.

Notably, Kroger operates 2,782 supermarkets and supercenters nationwide many of which contain kitchens, bakeries, delis, ethnic cafes, and even pizzerias. In fact, Kroger is testing a wide variety of hot food ranging from soups to noodles to cheese sandwiches in its stores.

Third, Kroger can offer deep discounts a service like GrubHub could not match. For instance, Kroger can use hot meals as a loss leader or allow customers to include popular meals in its popular reward points program. Thus, you could save money on gasoline or your next takeout meal by ordering a Kroger pizza.

Kroger’s management knows of the threat apps like GrubHub pose because the company is expanding its hot meal and delivery capabilities. For instance, Kroger has a close partnership with Instacart to offer same-day grocery delivery from 1,372 stores.

How Kroger (KR) can use robots to counter the GrubHub (GRUB) threat

Moreover, Kroger and Britain’s Ocado Group PLC (LSE: OCDO) are developing next-generation robot-operated Customer Fulfillment Centers to support grocery delivery. An obvious upgrade of the Customer Fulfillment Centers is to add a kitchen where meals are cooked for hundreds or thousands of customers.

Significantly, the Kroger and Ocado fulfillment centers could offer the economy of scale necessary to make robotic food preparation possible. In fact, there are now a number of companies experimenting with cooking robots.

For example, Creator; a San Francisco restaurant, uses two car-sized robots that prepare 120 burgers an hour, The BBC claims. The robots at Creator sound perfect for a fulfillment center. In addition, California’s Zume Pizza is experimenting with robot pizza chefs.

In addition to Kroger, Amazon will probably adopt a similar meal-cooking strategy. Tellingly, Amazon owns Whole Foods Market which operates cafes in its stores. In fact, many people who never shop at Whole Paycheck go there for lunch.

On the negative side, the convergence of takeout delivery and robots will lead to new debates about technological unemployment. In particular, Amazon and Kroger could put tens of thousands of short-order cooks, cashiers, and waitresses out of work.

Is Kroger (KR) still a Value investment with the GrubHub threat?

Interestingly, Kroger (NYSE: KR) is still a value investment despite the GrubHub threat.

For instance, Kroger offered investors a low share price of $27.99, a dividend yield of 2%, an annualized payout of 56¢, a payout ratio of 26.4% and 10 years of dividend growth on 28 January 2019. In particular, Kroger paid a dividend of 14¢ on 1 December 2018 and a bigger bonus dividend of 45.5¢ on 27 September 2018.

Moreover, Kroger offers vast resources and growth potential for a very low price. In fact, I think Kroger is one of the few brick-and-mortar retailers that will transition to a digitally powered e-commerce platform.

However, to achieve that goal Kroger will have to battle many dangerous competitors such as GrubHub and Amazon. One thing is clear though, Kroger is a better stock than GrubHub at present.

To clarify, Kroger is cheaper than GrubHub; which traded at $81.46 on 28 January 2019. In addition, GrubHub pays no dividend. Thus, Kroger is a great value investment for the digital disruption of the grocery market.