Deliveroo part 3 - How did Deliveroo managed growth in the past
Deliveroo part 3 - How did Deliveroo managed growth in the past
The past week has been a crazy one – within a single week, 3 rulings were passed which will have a major impact on the way food delivery platforms operate in the future.
Before we go further into the post. Let me reiterate some obvious points regarding food delivery. Food delivery is a network effect business. The player with the stronger and larger network will dominate the industry. There are basically 3 key elements in this network:
Number of users
Number of restaurants
Number of couriers
Each element is dependent on each other (the classic chicken and egg problem). Therefore, the scaled player that has the largest share of all three will be the winner.
And this is why I think $TKWY will win in London - it has the larger network, stemming from its wide selection of marketplace restaurants that is hard to replicate.
On the flipside, replicating $UBER inventory of large QSRs is easy. Because it involves working with a handful of relationships that are incentivized to work with $TKWY. Once $TKWY builds its QSR inventory and begins moving upmarket to capture high end restaurants in London, $TKWY will be have the undisputed larger network
It is better than Deliveroo because it has QSRs + marketplace
It is better than $UBER because it has high end restaurants + marketplace
Now, since we have a common understanding of why the food delivery industry is a network effect business, this means that getting to scale is paramount.
With that, let’s go back in history to understand how Deliveroo achieved its growth. Understanding how it grew in the past helps us better grasp how it will grow in the future.
Historically, Deliveroo grew by expanding into new countries, as opposed to expanding within their existing countries. When they do expand within the country, it is more about expanding into new cities (within the country), rather than going deeper within the city. A clear example is when Deliveroo’s total revenue grew even though their order book in UK slowed in 2019 – this is because they expanded into new countries like Spain, Italy or France.
I have repeatedly questioned this decision – Why did Deliveroo do that? This seems to be a strategic mistake as Deliveroo is not actually building the ONE thing necessary for a successful food delivery business — scale. I suspect Will Shu is optimizing for (short-term) revenue growth, rather than building a long-term sustainable moat.
Driving revenue growth is a straight-forward move due to how the industry is shaped - the food delivery industry has low barriers of entry but high barriers to scale. All Deliveroo had to do was to subsidize (vouchering, etc.) to drive orders (and revenue growth) in new regions. This worked especially well as Just Eat was in a coma when Deliveroo was expanding.
However, if the plan was to build a sustainable moat, then capital should have gone to existing markets like the UK. This would’ve been an unpopular move - the incremental revenue for each dollar reinvested into the UK diminishes as there are fewer low hanging fruits. Deliveroo chose not to do that.
Looking at Deliveroo’s share data, our story is further confirmed — in almost every country, Deliveroo’s market share grew exponentially from a low base before plateauing at ~20%. They are always either the #2 or #3 player in each market, never the #1.
Hence, my take is that Deliveroo made a critical strategic mistake. Instead of focusing its resources to win the UK, Deliveroo allocated incremental capital to expand into new countries. Expanding into new countries is much more expensive as Deliveroo needs to spend a lot on marketing to attract users, couriers, and restaurants. Jitse has reiterated this point multiple times – there are barely any transferable competitive advantage when expanding into new countries. The new entrant is as good as any new player.
Also, the incremental revenue from expanding into new countries numbers are not sustainable – both from a long-term growth and unit economics perspective. In terms of growth, it is easy to manufacture growth by entering into new regions, but as the market mature and competition increases (like what’s happening today), such easy wins will disappear. In terms of unit economics, without scale and density required to increase drops per delivery, it will be tough for Deliveroo to turn their operations into a profit.
Finally, a quick thought on Deliveroo valuation
So… Deliveroo is clearly the #3 player in most of its markets. What sort of multiple should one apply to a collection of #3 assets across Europe, that in general, have been losing market share and are unlikely to be profitable (meaningfully) due to it being a subscale player (even without competition from $TKWY).
The immediate comparable I can think of is $WTRH (trades as 5x gross profit). It’s a subscale player and is profitable, but the market understands that it’s screwed. I’m sure some of its assets are valuable (Louisiania is strong), much like how Deliveroo positions in certain European large cities are relatively strong. But ultimately, it simply isn’t worth much. Certainly not a 20x gross profit.
In my following post, I discuss how growth might be like for Deliveroo after corona and it is a doozy (spoiler alert: potentially -50% GMV in the UK). Stay tuned.
Links to other related parts:
Links to other related companies: