When food delivery service Grubhub struck a deal with Amazon earlier this month, offering Prime customers a year's free delivery, shares in rivals slumped.
The deal, a lifeline for Grubhub that will increase pressure on its competitors, was the latest example of a meal delivery company taking action to revamp its business to cope with an anticipated downturn.
The loss-making food delivery sector was one of the big beneficiaries of the COVID-19 pandemic, but that effect has waned as consumers, faced with surging prices, have started to cut back.
Analysts still believe food delivery will ultimately become a money spinner, given customers' love of convenience. But for the moment the sector has to cope with a cost-of-living crunch and companies will be judged on whether they meet margin, not growth, targets.
To that end, firms are reducing costs and exiting unprofitable markets or making tactical moves like Grubhub to cope with the tougher climate.
"It’s a misconception that competition will keep increasing forever," said Fahd Beg, an executive at Prosus, which has investments in meals companies around the world.
"As the funding frenzy of the last few years dies down, many businesses are looking to rationalise and exit markets where they don’t have a leadership position."
Just Eat Takeaway has hiked restaurant commissions across Europe and cut jobs in France, Uber Eats has quit Brazil and Britain's Deliveroo has exited Spain.
"Everyone's scaling back, everyone understands they now need to get to profitability," said Citi analyst Monique Pollard.
Players that are already dominant in one region are best placed to expand their lead, analysts said.
Those include DoorDash in the United States, Just Eat in Northern Europe, Delivery Hero's Glovo in Southern Europe and iFood in Brazil. These can invest operating profits to strengthen their delivery network and add more restaurants to their platforms.
Companies in a second or third place position will suffer, analysts said.
Under Grubhub's Amazon deal, the company will strengthen its delivery network, building from city strongholds such as New York.
Amazon has a similar deal with Deliveroo, which is a major player in London and Paris.
The number of US restaurant delivery orders dropped 6.3% for the 12 months ending in June to 4.8 billion, the first year-over-year drop the sector has seen since 2016, according to data by The NPD Group/CREST.
Morgan Stanley has said its polling showed spending on restaurants is one of the first places consumers will look to save money during a recession.
'Food delivery also stands out as uniquely at risk ... given that this tends to be expensive on a per person basis and likely viewed as indulgent by some consumer groups,' they wrote.
The Amazon deal will be a shot in the arm for Grubhub, which Just Eat Takeaway bought for $7.3 billion in 2021 but has now said is up for sale.
The influx of new subscribers – about 2 million in July alone, as reported by the Wall Street Journal – will help Grubhub make better use of its existing delivery network, analysts say.
Morningstar analysis estimated that Grubhub had 3 million subscribers at the end of 2021, and it could double that number in the first year of the Amazon deal.
It estimated Amazon's deal with Britain's Deliveroo launched in September 2021 led to a doubling of subscribers from 750,000 to 1.5 million in the first month following the deal.
Amazon Prime has approximately 10 times the number of subscribers in the United States than it does in Britain.
Citi's Pollard said DoorDash remains in a dominant position in the United States, while Uber benefits from a nationwide delivery network in the country.
What the Amazon deal "does for Grubhub is it changes the narrative for them from one where they're losing share to one where they start to regain share, particularly in the short term," she said.
With just two to three players left in each country, those that remain are better placed to protect margins in a downturn.
Deliveroo and Delivery Hero both cut sales forecasts last week.
But their shares rallied as they maintained or improved operating profit forecasts.
"Going forward, operating efficiencies will be rewarded and reflected in both public and private market valuations," said Beg of Prosus, in e-mailed answers to Reuters' questions.
Leaders in each market are now established and those with a delivery focus "will be able to successfully defend their businesses," he said.
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