In Focus: Deliveroo's Bigger Question
In 2021, one of the questions that investors have to ask themselves is, is independent food delivery a viable business on its own?
Deliveroo went public last week on the London Stock Exchange and it's being classified as a disaster. After going public at £390 per share the stock immediately dropped, closing out the week down more than 30%.
Deliveroo. If you haven't heard the name before is a food delivery service headquartered in London that serves parts of Europe and Asia.
This article was going to be another article where I explain that Deliveroo's public market flop was more an overreaction by major investors than anything else, but I had to stop myself and question the validity of the food delivery business model as it is.
During a year when major cities were forced into lock downs and many people were forced to have their food delivered we still saw losses across the industry. In 2020 GrubHub (GRUB) lost $155 million, DoorDash (DASH) lost $461 million. Uber, which had to transform itself from people delivery to food delivery reported a $6 billion loss in 2020. Which makes me wonder, if they couldn't turn a profit with everyone locked inside, can they ever turn a profit?
In the wake of the Deliveroo flop, what I've read most is the idea that Deliveroo should have listed in New York instead of London because the American investor is more tolerant of struggling start-ups and their owner's behavior. It was a very nice way of saying American investors are more likely to buy the frog and pray everyday that it becomes a prince.
On the struggle side Deliveroo has yet to turn a profit since it started in 2013. The company ended 2020 with a £223.7 million ($309 million) loss, which was better than the £317 million ($438 million) loss from 2019.
The owner's behavior is like that of many tech company owners in the U.S.. Deliveroo's founder Will Shu established a dual-class share structure which allows him more control over the direction of the company. This turned a lot of big European banks off from accumulating Deliveroo shares in the open market.
The company has had its fair share of success though. It was one of the fastest growing businesses in Europe several years ago, and revenue growth continues to be strong. With the help of the 80,000 restaurants that Deliveroo serves and the millions of users across more than 500 cities and towns, the company was able to grow revenue by 64% in 2020.
However, it's not crazy to envision more struggles ahead even after 2020. Because of the pandemic and the lockdowns, 2020 was an outlier for food delivery companies. It would be foolish for investors to believe that it's just going to get better for food delivery companies after 2020 when people are vaccinated and bars and restaurants are fully reopened, and the demand for food deliveries fall.
Taking into account my own food delivery habits, those delivery fees on top of the tip start to add up after a while, similar to interest on a mortgage. If the only way to profitability is to raise the delivery fees, I don't know how sustainable a food delivery service on its own can be.
There are a lot of players in the food delivery space globally, and for some reason or another they've all been able to get investment dollars from somewhere, but maybe it's time to rethink those investments and rethink that business model and ask ourselves, can independent food delivery be a profitable business?