Deliveroo's IPO: a long road ahead
Updated: Apr 5, 2021
On 8 March 2021, Deliveroo, a London-based food delivery platform, unveiled its plans to list on the London Stock Exchange. In 2020, the company reported a loss of £224m despite simultaneously registering sales growth of 54 per cent. According to Financial Times, Deliveroo has been privately targeting a valuation of as much as $10 bn (£7.2 bn). Documents published by the company revealed that every month, over 6 million people ordered food from 115,000 restaurants and stores using Deliveroo. The Amazon-backed company's total transaction value, which is made up primarily of consumer spending, rose 64 per cent to £4.1 bn amid the pandemic in 2020.
Moreover, in 2020, Deliveroo's net revenue, which mainly includes fees from restaurants and customers, was £1.2 bn, a 54 per cent increase in the same period last year. Last year in the UK and Ireland, the company’s net revenue rose 65 per cent to £599m, indicating that Deliveroo's share of its home market is growing faster than that of its rival, Just Eat, a leading Danish food delivery company. According to Deliveroo, its recent revenue growth is the result of an increase in customer numbers and platform usage driven by the COVID-19 pandemic, which has prompted many to try online delivery for the first time. Even during periods where lockdown restrictions were eased, and people were able to patronise restaurants again, Deliveroo said it was "still seeing very high user engagement and order frequency".
By 2020, Deliveroo's losses had narrowed by 29 per cent year on year to £223.7m. However, the company told potential investors that it would continue to expand, saying it "remains focused on investing to drive the growth of the nascent online food market".
Two key opportunities lie ahead for Deliveroo. First, the high initial upfront costs necessary to acquire new customers through coupons and heavy discounts significantly suppress Deliveroo’s profitability. Therefore, once it has attracted customers, prompting them and other existing customers to subsequently spend more and order more frequently is vital for the growth of the company. From its IPO filings, it can be seen that, currently, Deliveroo’s customers complete only one order on average per week, indicating substantial potential for future growth.
The suburbs represent another potential growth area. Deliveroo was born in the city centre. Initially, Deliveroo was heavily reliant on the bankers and working professionals who ordered lunch or dinners late at night. The experience of being a banker at Morgan Stanley is precisely how the founder Will Shu came up with the idea for the online delivery platform. However, due to the pandemic, remote working or at least blended home/office working may be the new normal even after the pandemic subsides. Deliveroo must also keep up with these changing trends.
A good example of how to progress might be Door Dash in the US, which also operates in a highly competitive food delivery market, not unlike that of the UK. Instead of competing with other major players in the city centre, Door Dash strategically shifted its focus to the suburbs. It identified that families living in the suburbs tend to order larger meals for a much higher total cost than those living in the city centre, resulting in higher margins.
Nonetheless, Deliveroo investors are concerned that the eight-year-old company has failed to profit in what has been a booming year for the industry. Potential investors may be put off by this and the inevitable questions it raises about the viability of the company’s long-term business model. Deliveroo plans to use the proceeds from the IPO to fund the expansion of "Editions", shared kitchens used to supply takeaway orders only. It is also planning to launch on-demand grocery services through partnerships with Waitrose, the UK's biggest upmarket supermarket chain, Aldi, the German supermarket chain, and Co-op Food.
The company’s blue-jacketed riders would also benefit from the IPO as Deliveroo plans to distribute £10,000 in bonuses to over half of its riders. With these motivated riders, will I get my Deliveroo order quicker after the IPO? Maybe.