Mon 05/18/2020 14:54 PM
Takeaways
 
  • If Uber Technologies Inc.’s acquisition of Grubhub Inc. comes to fruition, it is likely to face a prolonged antitrust review in the United States, according to antitrust practitioners.
  • The potential transaction is already facing criticism from Capitol Hill and the restaurant industry in New York City.
  • The pandemic has helped trigger a spike in demand for food delivery services, thereby creating new challenges for the industry. However, it is uncertain how long the coronavirus crisis will affect consumer purchasing behavior.
  • The antitrust decision will hinge on how the product market is defined by U.S. regulators. Prior guidance suggests that traditional restaurant delivery and carry-out will be included in the product market analysis.

If the Grubhub Inc./Uber Technologies Inc. deal comes to fruition, it is likely to face a prolonged antitrust review in the United States, according to antitrust practitioners.

While still being negotiated, the potential transaction is already facing criticism from Capitol Hill and the restaurant industry in New York City. Peter Mucchetti, a partner at Clifford Chance, said that U.S. antitrust officials will give “significant weight” to the restaurant industry’s concerns and predictions about how the merger will affect prices they pay for delivery services.

Mucchetti, who previously worked at the DOJ, said the DOJ is more likely to review the Grubhub/Uber deal since it vetted Grubhub’s purchase of Seamless North America LLC in 2013. The market has further evolved since then, with Grubhub acquiring Foodler and Eat24 in 2017.

Although the pandemic has helped trigger a spike in demand for food delivery services - thereby creating new challenges for delivery app companies - it is uncertain how long the coronavirus crisis will affect consumer purchasing behavior. Mucchetti said that whichever authority reviews the Grubhub/Uber deal “will try to predict how changes in consumer sentiment and consumer demand will affect the demand for the merged company’s services.”

Mucchetti said it is likely the Grubhub/Uber deal will receive a second request, since questions related to determining the relevant product market may be difficult to answer during an initial 30-day HSR waiting period. While the relevant market could be defined as app-based food delivery services, the DOJ or FTC could expand the definition to encompass all food delivery, including when restaurants such as Domino’s Pizza or others deliver food themselves, he said.

Additionally, the effects of the transaction are likely to vary by local market. State attorneys general offices may review the matter as well, Mucchetti said, noting that the New York state attorney general analyzed the Seamless/Grubhub transaction and entered into a settlement with the companies. During its investigation, the New York attorney general found that “Seamless and GrubHub compete and have significant overlap in the business of providing Online Food Ordering Platform services in Manhattan.”

Steven Levitsky, an antitrust practitioner in New York, agreed that the Grubhub/Uber deal would be likely to receive a second request, adding that the companies compete in a concentrated market with high barriers to entry. “There also may be restrictive exclusive dealing arrangements between delivery services and restaurants - those could very probably reduce competition,” Levitsky said.

New York investigators had determined in their Seamless/GrubHub investigation that Seamless had exclusive agreements with several Manhattan-based restaurants that would, if enforced, prevent them from contracting with competing online food ordering services. The combined company within 45 days of the merger was required to notify all Manhattan restaurants under an exclusivity obligation that Seamless was waiving its exclusivity provision. Additionally, with limited exceptions, the parties agreed not to enter into new exclusive deals with Manhattan-based restaurants for 18 months.

Andrew Rigie, executive director of NYC Hospitality Alliance, said there are estimates that Grubhub and Seamless control 60% to 70% of the market for app-based food delivery services in New York City. “We see how they use their leverage to extract as much money as they can from local restaurants,” he said, adding that the Grubhub/Uber deal “poses greater concern because of more consolidation” in the market.

Rigie said that as Grubhub and Seamless have grown over the years, fees restaurants pay for their services have increased. “Shouldn’t it be the opposite?” he asked, since creating economies of scale should ultimately lower the cost of offering delivery services.

Based on mobile application downloads for April 2020, Doordash has five million downloads, UberEats has nine million, Grubhub has 1.7 million and Postmates has 1.1 million. While there are some regional applications such as Waitr, they represent a very small competitive challenge due to the national footprint of the other companies. Additionally, Uber has a strategic advantage in that their distribution network of drivers is supplemented by their already large pool of car service drivers. The combination of Uber Eats and Doordash would represent close to 60% of the market.

Antitrust regulators in the United States offered guidance in 2018 on how agencies will determine product markets between digital and real world services, providing the example of Zillow versus brick-and-mortar competitors. In the Zillow decision the FTC went into great detail on how the agency looks at the two distinct markets. The 2018 guidance states that the agencies apply traditional competition analysis, including whether customers switch between online and brick-and-mortar competitors. Given the guidance from Zillow, it is very likely that regulators will find that “real world” services such as restaurant delivery, takeout and drive-thrus compete with Uber and therefore the transaction will have sufficient competition to garner antitrust approval.

Outside of the mobile distribution of these applications, another defining feature is whether the delivery drivers are contract employees of a delivery company or full time employees of a restaurant. Compared with other online services, this nuance could provide increased scrutiny because it deals directly with the nature of the service itself. Theoretically, a market line could be drawn between traditional services, which tend to use employees, and online services, which tend to use contractors.

--Alex Wilts and Nils Tracy
 
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