At the end of last year, the US food delivery app DoorDash joined the ranks of the New York Stock Exchange, pulling off one of the biggest tech floats of the year.
Investor appetite for the company was insatiable: shares climbed 86pc and the company was valued at around $72bn (£52bn). Sceptics, however, found the demand baffling. DoorDash had never made a profit, even with demand for food delivery at record levels during the pandemic, and as restaurants struggled, there was a growing criticism of the fees it and other delivery apps charged.
But DoorDash’s success may have been the boost that Deliveroo, its British counterpart, needed. A month later Deliveroo would announce a $180m funding round that valued it at $7bn, and last week, the company unveiled plans to go public in London. Its value is expected to increase again, to as high as £8bn, more than 50pc above the level of its January fundraising.
Deliveroo’s float is by no means guaranteed to mirror DoorDash’s blistering debut. Investors in London have historically been less enthusiastic about internet companies than those in New York. And shareholders may be eyeing the end of lockdown more closely than they were a few months ago.
But both companies, along with many other food delivery start-ups around the world, face similar questions: do the economics of takeaway apps add up?
On Monday, Deliveroo shocked nobody in confirming that repeated stay-at-home orders had been good for business. Gross transaction value — the amount of money spent on its app — rose 64.3pc last year, from £2.5bn in 2019 to £4.1bn. Around 70pc of that goes to restaurants, with Deliveroo taking the rest 30pc as revenue. Gross profit — that made after the cost of providing deliveries, such as driver fees — rose from £188.7m to £357.5m, meaning that the company makes a profit of 8.8pc on each order.
Although gross profit is very different to a company’s true bottom line — which includes all the other costs of running a business such as the salaries paid to Deliveroo’s employees — it is seen as a crucial metric in food delivery, which has faced persistent questions over unit economics: does each additional delivery actually lose the company money?
The good news for Deliveroo is that this does not seem to be the case. Every £10 order should result in around 88 extra pence in profit. Although it remains lossmaking at the statutory level, with a £225.5m deficit last year, in theory, all Deliveroo now has to do is grow revenue enough for its fixed costs to be eclipsed by the profit it makes on each order.
The question is how quickly that will happen. The company’s registration document, published overnight on Monday, revealed that it expects booking growth on its app to slow from 64pc last year to between 30pc and 40pc in 2021, and then to between 20pc and 25pc in the medium term.
That estimate might seem optimistic to those craving a return to restaurants and bars, and is higher than the growth forecasts of other delivery apps including DoorDash.
There is no guarantee, either, that Deliveroo will be able to continue the model on which it has operated so far. Its filing lists a string of risk factors, most notably the prospect of a change in the gig economy system it uses to pay riders, which is being challenged in several countries. Its couriers being classed as employees or workers, as in a recent Supreme Court ruling against Uber, could increase costs or force it to exit markets, Deliveroo said, although the company says it believes its model is valid.
Alex Frederick, an analyst at PitchBook, says delivery apps are turning to other measures to increase profitability, such as “ghost kitchens” — those dedicated entirely to takeaways — and in the future, delivery robots and drones. “Labour is one of the most significant cost factors for the economics of food delivery. So automating the whole process and basically removing as much of the human labour as possible, with delivery robots, and potentially drones, any kind of automation technology, has the long term potential to really help improve margins.”
Deliveroo has made no mention of drone plans, although the company was early to ghost kitchens, which it says are more efficient for food delivery than traditional restaurants, in turn improving margins.
Deliveroo is selling itself on a long-term vision of the future: it says it is just getting started in a market that is worth £1.2 trillion. Shareholders may have a shorter attention span. Shares in tech companies including DoorDash have slid in recent weeks on the prospect of an earlier-than-expected reopening in the coming weeks. Deliveroo prides itself on providing customers with instant satisfaction, but it will have to convince investors to have patience.
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