The lockdown has exposed the fatal flaw in Deliveroo’s business
The coronavirus lockdown should have been a sales bonanza for Deliveroo. Instead, it almost collapsed.
In 2013, sceptics told Deliveroo founder Will Shu that his idea for an on-demand delivery company would never work. British people wouldn’t want food delivered to their doors, they claimed. With the benefit of hindsight, they were wrong about the food but right about Deliveroo. Last month the company – once valued at $2.2 billion – was forced to admit that it would face financial ruin without a major cash injection from Amazon.
On the face of it, the food delivery startup should have been pandemic-proof. With the world on lockdown, Deliveroo’s couriers, gig economy key workers, would keep people fed and help restaurants stay in business. But from the moment Nando’s closed, Deliveroo went into a financial death spiral. Just weeks into lockdown, as restaurant after restaurant followed suit and takeaway orders dried up, Deliveroo was on the brink of collapse.
But it wasn’t coronavirus that hobbled Deliveroo: it was its small margins and the crippling costs of competing both in its home market and abroad. In the UK, there are three big players in the market, in the US there are half a dozen, in Europe there are over 20. These businesses are the heart of the gig economy: famous for changing the way we travel and eat, as well as for offering their couriers zero contract hours, no sick pay or paid holidays – and fighting governments in court to stop that from changing. It is these low-cost workers, not app technology, that are the key to delivery companies making profit on every order. The global market for takeaway delivery was worth £4.2bn as of February 2018, according to global information company NPD Group. Deliveroo’s ambition was to claim as much of that market as possible.
Sources close to Shu describe him as press-shy and “extremely driven”. He used to quote principles from Amazon founder Jeff Bezos’ book as an example of a smart way to solve a problem, one former executive says. “Deliveroo had a growth at all costs mentality,” they claim. Last year, Deliveroo’s revenue increased by 72 per cent to £476 million, but its losses also widened by 16.6 per cent from £199m to £232m, as it pumped cash into its network and launched in over 250 cities. And that was before coronavirus derailed its ambitions.
But the takeaway sector as a whole has never been profitable, says Peter Backman, a food service consultant. “You could argue strongly that delivery will not make much money in its current form,” he says. “And the money’s been available from people who said, ‘It’s not necessary for you to show a profit, all you have to do is to show that you are growing your business phenomenally well’. Now the music has stopped. The world simply cannot support the vast amount of delivery companies.”
In the last few years, the three major UK players have engaged in a price war that analysts have described as a “race to the bottom”. In a market where there is no clear dominant business, the winner is the one left standing. So JustEat, Deliveroo and Uber Eats have fought for market share and emptied their pockets to offer lower rates to restaurants and bigger marketing campaigns in a bid to capture enough customers to boot the others out of town.
To fight off the competition Deliveroo came up with a three-pronged strategy last year, the details of which were rather vague: it said it wanted to target “switchers” (people who already use other delivery sites); to “win” every neighborhood it operates in; and to make sure that the food it has on the site is the best quality. In practice, this means one thing: more advertising spend. The company launched its first nationwide TV campaign last year, spending money on targeted advertising as well as normal TV spots and hired its first chief marketing officer.
Although Deliveroo has not confirmed advertising spend for 2019, a report by Digiday claims it spent a reported £10m annually on media in 2018 when it hired agency the7Stars, and that the expense was up year on year. This, coupled with rapid international expansion, shows just how far Deliveroo has departed from the strategy it followed in the early days – described by insiders at the time as “remarkably capital efficient” – when it spent almost nothing on marketing and instead focused on growing by word of mouth.
Deliveroo and its competitors take a 30 per cent cut on average from restaurants, but in the case of big ticket brands, they offer special discounts to capture orders that will come from having well known names on their sites. Earlier this year, JustEat looked like it was slowly winning the war; prying McDonald’s out of its exclusive contract with Uber Eats and becoming another partner. Alongside Greggs, McDonald’s is the most popular food brand in the UK – and JustEat has them both. A merger with rival company Takeaway was agreed last year (this was delayed by a CMA investigation and then green-lighted provisionally last month), making it the largest online delivery company outside of China, surpassing Uber Eats.
Last year, Uber Eats tried to make a pre-emptive strike against JustEat, announcing plans to cut fees for delivery in the UK and Ireland and allowing restaurants to use its app to carry out their own deliveries, capping its fees at 30 per cent of the value of an order, compared with a maximum fee of 35 per cent. The idea was to lure JustEat’s loyal local restaurants away to its site, allowing them to cut costs by using their own couriers – and to bring their customers with them. In the US it also made moves to turn itself into an advertising platform for restaurants, selling ad space within the app to those seeking to boost delivery orders to increase its rather meagre 10.7 per cent gross margin.
The ultimate aim of all three of these businesses is to do enough to become part of people’s daily routine: if one of them can offer all your favourite restaurant food and discount code incentives, in theory you’ll probably not bother spending the time downloading and registering with another app to find out what it can offer instead. But the coronavirus pandemic blew this basic consumer theory straight out of the water, as people suddenly found themselves bereft of real life restaurants and unwilling to make up for it by regularly splurging on takeaways. Data from SimilarWeb, which tracks downloads and smartphone activity across Europe, shows that the average daily users in France, Spain and the United Kingdom for Uber Eats and Just Eat dropped by between two per cent to as much as 23 per cent in March, compared with the averages for January and February. The data also showsDeliveroo use fell in France and Spain, although there was a small increase in the United Kingdom in March.
This seems counterintuitive. When the coronavirus lockdown started, many countries allowed Deliveroo and its competitors to operate as normal and classed couriers as frontline workers. This seemingly provided a lifeline for ailing restaurants across the country who had to shutter under government orders. But the boom in deliveries simply never happened. Although people were ordering takeaways, the struggling restaurant sector was crumbling under the social distancing measures, and immediately reduced their menus.
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Out of the big three, Deliveroo was the worst prepared to weather the crisis: not only was its latest fundraising blocked by competition watchdogs; but some of its major brand names – Wagamama, Burger King and KFC – were among a cohort of big-name restaurants to shut down completely as the coronavirus lockdown came into effect. Unlike Uber Eats, it could not rely on SoftBank’s coffers or a ride-hailing service; and it did not have the scale of JustEat, which has always tried to corner the local takeaway market. Desperate for income, Deliveroo turned to grocery deliveries, partnering with supermarkets like Marks & Spencer and Morrisons to supplement the loss of trade. But these efforts were not enough.
In February, market sources were already sceptical about Deliveroo’s financial health after the CMA blocked the cash injection from Amazon. On April 17, they were proven right when the CMA issued a humiliating financial update on behalf of Deliveroo. The company had admitted that the impact of the coronavirus pandemic on its business meant that it would fail financially and exit the market without the Amazon investment, a notice issued by the competition watchdog read.
“Without additional investment, which we currently think is only realistically available from Amazon, it’s clear that Deliveroo would not be able to meet its financial commitments and would have to exit the market,” said Stuart McIntosh, chair of the CMA’s independent inquiry group.
Behind the scenes, the Deliveroo team were feeling a rollercoaster of emotions, one source close to the business claims. “The CMA holding up [funding] for as long as it did was not part of the plan,” the source says. Once the CMA agreed to green light the deal, Deliveroo insiders heaved a sigh of relief. “I actually think people are pretty bullish on the long term future.”
This week is the CMA’s deadline for views on the provisional approval, ahead of a final decision by June 11. The $575m investment – which Deliveroo initially planned to use to grow its tech team and expand the company’s reach to new customers – will instead be used to cover its losses. This fundraising was also expected to help Deliveroo compete in the European market, which has just become even tougher after JustEat’s merger with Takeaway.
Another former Deliveroo executive says that the situation within the business is changing so quickly that the media reporting on it is “at least a year out of date”. They claim that the company’s current troubles are a temporary blip, because of the CMA delay, and that activity is already returning to normal. “They obviously have a lot more visibility internally around what their cash flow is and what the future looks like. The sense I get from people who work there is that it [activity] is really picking up now. Bigger restaurants are starting to come back online, and as the virus is getting more under control, people are starting to really miss takeaways. I think Deliveroo could emerge from the crisis in a really strong position.”
But Deliveroo has already tempered its growth ambitions. Less than a fortnight after the CMA gave the green light for the Amazon investment, Deliveroo cut 15 per cent of its workforce, 367 of its 2,500 employees, and furloughed a further 50.
It is not the only takeaway company struggling. As both ride-hailing and food deliveries dry up, Uber Eats has been forced to reevaluate its standing in markets around the world. Earlier this month, the company pulled out of eight markets. By June 4, Uber Eats will no longer operate in Czech Republic, Egypt, Honduras, Romania, Saudi Arabia, Ukraine and Uruguay.
Once the lockdown ends and life returns to something like normal, the battle to dominate the UK’s takeaway market will ramp back up again. But this time, thanks to Amazon, Deliveroo may no longer be on the back foot. Amazon has flirted with the takeaway sector unsuccessfully before, but it did not have Deliveroo’s experience of scaling from scratch. And Deliveroo will be able to sustain thin margins for far longer if it persuades Amazon to keep backing it.
A Deliveroo spokesperson said Amazon’s investment would help the company “overcome immediate and long-term challenges”.
Market analysts at Jefferies, a financial services company, predict more consolidation in the sector, touting a potential tie-up between Uber Eats and Deliveroo in the next two years. Of course, these two companies have a history: Uber offered to buy Deliveroo before its infamous IPO – but was reportedly unable to reach an agreement because Deliveroo was not willing to drop its asking price.
Merger or not, don’t expect Deliveroo to continue expanding at this pace, sources close to the business have said. Instead, Deliveroo will take stock of the markets where it already has a presence, and decide whether it’s worthwhile to continue investment if it can’t find a way to dominate. Deliveroo’s retreat from Germany last year was the start of a wider trend, they say. But there’s no way Shu will let the UK go so easily.
Fonte: Global Retail Alliance