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London-based food delivery service Deliveroo released its IPO prospectus on March 23. The company made its trading debut on the London Stock Exchange on March 31. Shares closed 26% below the IPO price, valuing Deliveroo at £5.6 billion ($7.7 billion). In the lead up to the IPO, Deliveroo set a price target that would have valued it at up to £7.9 billion ($10.8 billion).
Food delivery service revenue has broadly spiked during the pandemic. The challenge for Deliveroo, however, will be convincing investors that it can convert that demand into long-term profitability. It has struggled to do so thus far, posting net losses averaging £259 million ($357 million) per year between 2018 and 2020. In April 2020, Deliveroo laid off a quarter of its employees, a decision that the company attributed to "the extraordinary global health crisis" which they said "requires us to look at how we operate in order to reduce long-term costs."
Deliveroo needs to show that it stands apart from the food delivery industry at large, which has notoriously low margins and low barriers to entry. The industry is also subject to intense regulatory scrutiny, and Deliveroo has broad exposure to markets that have been less favorable to gig-worker companies relative to the U.S. Over 51% of Deliveroo's 2020 gross transaction value came from the U.K. and Ireland, while the remainder came from its operations across Europe, the Middle East and Asia.
What does Deliveroo do?
Deliveroo was co-founded in London in February 2013 by Greg Orlowski and his childhood friend Will Shu, who now serves as the company's CEO. The company completed its first delivery order later that year, and has since grown to service 115,000 food merchants with a delivery-worker base of over 100,000 riders.
Deliveroo currently operates across 12 markets. Expansion outside the U.K. began in 2015, as Deliveroo launched in Australia, Belgium, France, Germany, Hong Kong, Ireland, Italy, the Netherlands, Singapore, Spain and the United Arab Emirates. It launched in Taiwan in 2018 and in Kuwait in 2019. The expansion strategy hasn't been entirely smooth, however, as Deliveroo decided to pull out of Germany in 2019 and Taiwan in 2020.
In 2018, Deliveroo added grocery delivery to its platform, partnering with large chains including 7-Eleven, Aldi, Co-op, Marks & Spencer, Waitrose, and Amazon's Whole Foods. Many of these grocery partners maintained their own next-day delivery services, but Deliveroo focuses on fulfilling smaller orders with a faster turnaround. In fact, in 2020, Deliveroo riders fulfilled orders on the platform in under 30 minutes on average.
Deliveroo is operating at a steep net loss. According to its prospectus, the company reported net losses of £231 million ($318 million), £317 million ($436 million) and £226 million ($311 million) for the years ended 2018, 2019 and 2020, respectively.
Deliveroo's top-line financials paint a brighter picture: Revenue grew 54% from £772 million ($1.1 billion) in 2019 to nearly £1.2 billion ($1.7 billion) in 2020. One positive sign for Deliveroo investors is that cost of sales grew proportionately less than revenue in that period, yielding a rise in gross profit from £189 million ($260 million) in 2019 to £356 million ($490 million) in 2020.
Another noteworthy trend is Deliveroo's revenue from the U.K. and Ireland grew at a faster rate (65%) between 2019 and 2020 relative to revenues from all other geographies (45%). In total, the U.K. and Ireland contributed £599 million ($825 million) in 2020 compared to the £592 million ($816 million) from the remaining markets.
What could go wrong?
Three risks stand out from the IPO prospectus: government regulation of the gig-worker model, fierce competition and changing consumer habits.
Regulation of the gig economy is a huge risk for Deliveroo. While U.S.-based competitors such as DoorDash and Grubhub have a clearer picture of their regulatory future given California's passage of Proposition 22 in November, Deliveroo operates in markets with developing regulatory landscapes.
- Deliveroo disclosed that it is engaged in ongoing legal proceedings relating to the status of its independent contractors in the United Kingdom, France, Spain, the Netherlands and Italy.
- Additionally, Deliveroo points to broader government efforts to challenge the gig labor model in Australia, the Netherlands, Spain and Italy.
- The European Commission has also kicked off a statewide consultation of gig-economy working conditions.
- The company writes: "Whilst we will continue to engage actively with governments on the issue of how individuals in the gig economy are engaged and have had a number of successes in this regard, and we will continue challenging or appealing any unfavourable decisions taken by governmental agencies (including the recent investigation in Italy referred to above), we may not be successful in all of our challenges or in averting changes to legislation or practice that could adversely affect our business."
The food delivery industry has dozens of deep-pocketed competitors — like Amazon — and relatively low barriers to entry. This dynamic makes it exceptionally difficult to achieve lasting profitability.
- "Larger competitors or new market entrants, particularly if they have greater financial resources, could undertake extensive marketing campaigns aimed at offering discounts to consumers, increasing consumer awareness and driving website visits and app downloads and orders placed through such competitors' online platforms," Deliveroo writes.
Finally, the pandemic has been a significant boon for Deliveroo, but it may struggle to retain customers as lockdowns ease.
- "Since the COVID-19 pandemic has continued and related restrictions remain in force in many jurisdictions as of the date of this document, it is unclear as to whether the level of demand for online food delivery will be sustained," the company writes.
- Restaurants, particularly those that are independently owned, have had a difficult time during lockdowns. Many have turned to delivery and take-out orders to stay afloat. Delivery apps have developed a reputation for making life difficult for independent restaurateurs — once lockdown restrictions ease up, restaurants might look to wean themselves off of Deliveroo: "We might not be able to retain the consumers or partners who started using our platform as a result of the pandemic-related restrictions or increased their usage, and the cost of consumer acquisition could increase when restrictions are eased," the company writes.
Who gets rich?
Here are the entities that owned Deliveroo, per the IPO prospectus, as well as their potential payoff, assuming a $10.8 billion valuation:
- Amazon held 15.8% of shares, which would be worth $1.7 billion.
- Index Investors held 10.2% of shares, which would be worth $1.1 billion.
- DST Investors held 10.1% of shares, which would be worth $1.1 billion.
- Greenoaks Investors held 9% of shares, which would be worth $972 million.
- T. Rowe held 8% of shares, which would be worth $864 million.
- Fidelity held 7.3% of shares, which would be worth $788 million.
- Will Shu owned 6.1% of shares, which would be worth $659 million.
What people are saying?
- "Deliveroo founder Will Shu and his bankers are being too greedy on valuation. If Deliveroo was alone in its market and had built an impregnable "moat" around it like AirBnB, you could see the argument. But Just Eat-Takeaway, Uber Eats, Delivery Hero, DoorDash; all are performing similar tasks, and, despite having just been in the best possible environment for their business models, haven't made a profit." —Jim Armitage wrote in the Evening Standard.
- "I'm not one of those Silicon Valley types with a million ideas." —Deliveroo CEO Will Shu wrote in the Founder's Letter within the IPO Prospectus.
- "Food is content." —Deliveroo later declared in the prospectus, in what might be one of the most Silicon Valley phrases imaginable.
- "Here's an interesting one - gross transaction value (amount you spend) is over 100%[.] That means customers generally go on to spend more than the previous year, each year. (For example, if you joined Deliveroo in 2017 then you'd now be spending 1.6x what you spent in the 1st [year.])" —Robert Collings, head of finance at Flux, tweeted.