March 23, 2021
Photo: Carl Campbell/Unsplash
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.
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.
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.
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.
Finally, the pandemic has been a significant boon for Deliveroo, but it may struggle to retain customers as lockdowns ease.
Here are the entities that owned Deliveroo, per the IPO prospectus, as well as their potential payoff, assuming a $10.8 billion valuation: