Just Eat PLC’s (LON:JE.) £60mln bet on its new delivery service helped revenue surge in the third quarter, but it now expects the costly investment will dent its full-year profits.
The online takeaway marketplace has traditionally just connected consumers and restaurants, leaving delivery to the restaurants themselves.
READ: Why ‘Uberoo’ could spell the end for Just Eat
But recently it has been investing heavily into building its own network of drivers and cyclists as it looks to head off the growing threat posed by Uber Eats and Deliveroo, both of which offer a delivery service.
Just Eat has been hard at work getting chains such as Gourmet Burger Kitchen, KFC and Subway on board, while Papa John’s has also outsourced some of its delivery services to the FTSE 100 group.
In the first half of the year, it spent £24mln on scaling its UK delivery operations and expects to pour in another £30-35mln over the next couple of years, up to £10mln more than it had previously indicated.
The increased investment was announced back in July, although it repeated its full-year underlying earnings guidance of between £165-185mln at that time.
Earnings to be at lower end of forecasts
However, in a third-quarter trading update today (Thursday), the £4bn company said it now expected underlying earnings for 2018 to be at the lower end of that range.
The investments are making an incremental difference to the top-line though, with Just Eat guiding for revenue to be towards the upper end of its £740-770mln range.
“Our delivery expansion plans are on track, ensuring we give customers exactly what they want, and I'm very pleased with the progress we are making against our strategic objectives,” said chief executive Peter Plumb.
What heatwave?
The benefit was seen in the company’s third-quarter results, with revenue surging 41% to £195.3mln, a figure which was also boosted by the inclusion of Hungryhouse.
Almost 55mln orders were placed with takeaways through Just Eat’s marketplace, with 57% of those coming through its app.
Analysts had expected the group’s UK performance to be affected by the “exceptionally hot” summer, but Just Eat said a strong September, when it recorded its first-ever weekend with over 1mln orders, helped to offset some of the impact in its home market.
“The group has delivered another strong quarter as we helped our 97,000+ restaurant partners serve over 54mln takeaways to millions of hungry customers,” added CEO Plumb.
“Our increased investments in delivery, brand and data are already taking the Just Eat brands to more customers, making it easier for them to order from a widening choice, ensuring their takeaway moments are even more enjoyable.”
Increased investment is just the right approach
Liberum analyst Ian Whittaker thinks Just Eat is adopting the right approach by re-investing heavily into its operations.
He notes that, unlike property or car classified ads, the online food delivery market is still relatively young, with phone orders or walk-ins still accounting for the majority of sales.
“While Just Eat is the market leader in nearly all the markets in which it operates, the food delivery market has not fully transformed yet from phone to online and so the emphasis should be on growing share and growth generally,” he wrote in a note to clients.
Shares were volatile in early trading but have since settled and were up 5.4% to 640.4p shortly before midday.
--Updates for analyst comment and share price--