Just Eat - I'd rather not, says Luke Johnson

Just Eat's model reminds me of Groupon - the website takes all the profits, and its customers end up with almost nothing.

by Luke Johnson
Last Updated: 03 Nov 2014

This is the best new issue market since 1994, according to EY. But I am concerned that some issues are dramatically overvalued and will prove poor investments.

Take Just Eat. This is a Danish business that claims to be the world's largest online marketplace for home-delivery restaurants. It floated in London recently, making it worth more than £1.6bn in the after-market. This would give it a multiple of over 110 times its 2013 underlying Ebitda, or a heady 240 times last year's pre-tax profits.

That sort of price suggests extraordinary future growth and astonishing technological advantages, together with a perfect management team. Just Eat seems to be expanding fast, but there are worrying features about the business that give one pause for thought. The first is that both the chief executive and finance director were appointed only last year to those positions.

I met the previous CEO, Klaus Nyengaard, not so long ago. In over 240 pages of prospectus, there is no explanation as to why he has left the board completely, even though his personal website still says he's Just Eat's CEO. Meanwhile, the entire board now owns just 0.3% of the business - a fraction of his holding.

There are a great many statistics about the takeaway food business in the offer document. I'm not sure how reliable they are, and I speak as someone who has owned many restaurant firms over 20 years.

Just Eat claims it has a '50% share of customers ordering takeaways online' in the UK. This proportion seems remarkably high, and it implies they only ever order through Just Eat, which surely isn't true.

Also very high is the operating margin enjoyed by the business: around 40%. I wonder how sustainable that number is. Just Eat takes almost 11% commission from restaurants on every order, plus other fees. Given the sort of net profitability most independent takeaway restaurants achieve, many will be making almost no profit on much of their Just Eat business.

Certainly, I wouldn't dream of using them in my home-delivery restaurant chain, Feng Sushi. Just Eat's model reminds me of Groupon: the website takes all the profits, and its customers - the retailers that provide goods, pay rent, staff and so forth - end up with almost nothing. No intermediary can survive long term if its commercial relationship with customers is so one-sided.

And the final reason I have doubts? Its investor website states: 'Our mission (is to) empower consumers to love their takeaway experience.' I find such stuff phony in the extreme, because selling shares at such an inflated price suggests to me that its core mission is to deliver huge profits to the owners.


But backers do love a sexy new market. Take the budget gym sector. This category of no-frills fitness centres was pioneered in the UK only about six years ago, at the start of the recession. It offers a simpler, cheaper version of high-end exercise palaces such as David Lloyd, Nuffield and Virgin Active - costing perhaps half as much, generally with much shorter membership contracts.

From early beginnings, the business is now beginning to look crowded. There are at least five operators with multiple sites - Fit Space Gyms, Pure Gym (recently merged with the Gym Group), Fit4less, Easy Gym and Anytime Fitness.

No doubt there are additional regional players and more will enter the market. Anytime Fitness might become Britain's biggest player. It is a franchise model, with 2,469 locations, mostly in the US. Its gyms are very low cost, open at any time for members with a key, and for much of the day they are unstaffed.

Such facilities are inexpensive to open, costing perhaps as little as 10% of the capital investment needed for a posher gym, which has a swimming pool, cafes and so forth. Locations outside London for such basic gyms are plentiful, so I expect the incumbents to quickly roll out more, and the market to become saturated within a few years.

Meanwhile, Fitness First and LA Fitness have both been through CVAs and are now more competitive, after they have shed over-rented sites.

Thus a new leisure category will go through the entire boom and bust cycle within 10 years or less. This demonstrates that the desperation among investors for growth is so acute that as soon as an exciting new business model emerges, the space becomes almost drowned with capital, which tends to devastate returns.


Some years ago, I invested in a gym business called Motorcise Healthy Living Centres. It specialised in fitness for women over the age of 50. We were so confident of the proposition that we launched new openings even before the existing ones had reached true profitability.

At one point, there were more than 30 such outlets, mostly in low-cost, compact locations. I felt sure the demand was there. Millions of unfit or overweight older females need help with an exercise regime for health reasons.

Unfortunately, the business never really succeeded commercially, and I sold out at a loss after a number of years. It proved to me that the fitness industry is not an easy one in which to do well, and also that an apparently obvious new opportunity in the sector can prove to be an expensive delusion.

Nevertheless, I wish the various operators in the budget-gym segment good luck, and hope their plans for expansion are all achieved.

- Luke Johnson is chairman of Risk Capital Partners.

Follow him on Twitter: @LukeJohnsonRCP.

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