Deliveroo is facing a funding squeeze at the same time as its biggest British rival in online food apps, Just Eat, has been strengthened by new backing, putting pressure on one of Europe’s most prominent private tech companies.
Investors in Deliveroo have been left confused and anxious by a UK Competition and Markets Authority investigation, which has put hundreds of millions of dollars of planned investment from Amazon on hold, for months on end.
Meanwhile, its battle for market share is intensifying after Just Eat agreed to merge with Takeaway.com earlier this month, creating a new European leader by revenues. In the UK, Deliveroo is also facing strong competition from Uber’s Eats division, especially outside London.
Some fear that the very future of Deliveroo, which remains lossmaking, looks uncertain. Even if the CMA does eventually approve Amazon’s investment, in the meantime Deliveroo has already been forced to curtail its growth plans.
Deliveroo has not revealed how much cash it still has in the bank. Some investors worry that it may start to run low on capital later this year if it cannot close the Amazon deal or find an alternative backer.
“How they are keeping the lights on is an open question,” said one Deliveroo investor.
Deliveroo declined to comment for this story.
Meals on wheels
Founded in 2013 by American entrepreneur and former investment banker Will Shu, Deliveroo shook up the online food-ordering market by pioneering a new model that provided couriers and logistics services to restaurants that did not previously offer takeaway.
Going beyond the traditional takeaway joints that listed on the likes of Just Eat, Deliveroo signed trendy London restaurants such as Pizza Pilgrims and Mildred’s, as well as striking an exclusive deal with high-street favourite Wagamama, which soon became its most popular partner.
Growth surged, with Deliveroo’s revenues increasing by 72 per cent in 2018 to £476m, the most recent year for which accounts are available.
Just Eat, a longstanding UK tech champion that previously relied on restaurants’ own delivery personnel to fulfil customers’ orders through its website and app, started to look vulnerable. It was forced to spend tens of millions of pounds to develop its own courier network to rival Deliveroo’s in 2018. But activist investors took aim at chief executive Peter Plumb over the poor performance of its share price, leading to his departure in January 2019.
Then Amazon announced last May that it would lead a $575m funding round in Deliveroo, cementing its position as one of the UK’s most valuable private tech companies.
So when the CMA announced an in-depth investigation into the deal in late December, arguing that Amazon and Deliveroo would “cease to be distinct” businesses after the investment, Deliveroo and its investors were stunned.
The deal would remove any potential for competition between Amazon and Deliveroo in UK food ordering, the CMA said.
‘The winner takes all’
Deliveroo has argued that Amazon’s minority investment would, in fact, improve its ability to compete. Nonetheless, the CMA’s intervention came at a time when food delivery services around the world were coming under greater pressure to generate profits.
The high-profile debacle at WeWork and Uber’s lacklustre share-price performance since its initial public offering last May have made investors far more wary of heavily lossmaking tech businesses.
After Uber Eats sold out of India this week, venture capitalists and executives alike predict further consolidation around the world, which would allow app operators to reduce their marketing spending and potentially increase delivery fees.
“There is an acceleration in the concentration in this market,” said Dominique Locher, co-founder of LeShop, one of the first online supermarkets in Europe, and an investor and adviser to several food and ecommerce start-ups. “The winner takes all.”
Even though Deliveroo has raised a total of $1.5bn to date (including Amazon’s potential contribution), according to data provider Crunchbase, many predict that the company would still need to raise yet more funds, whether privately or through an IPO, within the next 12 to 18 months.
“Deliveroo are in a position of weakness,” said an executive at one online food rival. “Raising [capital] now would be very difficult.”
Nonetheless, investors in food delivery companies agreed that there was still a huge opportunity ahead in the food delivery market, for whichever company ultimately wins big cities such as London and Paris.
“There is still a lot, lot more growth to come . . . for at least a decade, if not more,” said Martin Mignot, partner at Index Ventures, an investor in Deliveroo and former Just Eat shareholder. “We are still in a fast-growing phase that requires a lot of investment.”
Analysts said that Just Eat was initially slow to respond to Deliveroo’s competitive challenge but, because of Takeaway’s backing, now has greater firepower to invest in expanding its logistics network and improving its app. Last week, Just Eat signed a sought-after exclusive delivery agreement with Greggs, one of the UK’s most popular high-street food chains.
The Takeaway deal’s timing was “spot on”, said Mr Locher, to exploit the fact that Deliveroo is in a “holding position”. It is “extremely painful” for any fast-growing company in a competitive market to be deprived of capital for months on end, he said. “An internet year is like a dog year — it’s all about speed.”
‘It’s a bump in the road’
Deliveroo’s defenders said that it would take the combined Just Eat Takeaway.com more than just a few months to upgrade its offering to consumers. In many cities, Deliveroo has a greater range of high-end restaurants that will lure more affluent customers and bigger order values, which translate to better profit margins.
“Investing more money or being more aggressive with pricing is not going to change the fact that [Just Eat] doesn’t have anywhere near the proposition of Deliveroo in the UK,” said Mr Mignot. “They don’t have the tech, they don’t have the product, they don’t have the delivery network.”
Nonetheless, other investors said they are frustrated that the CMA’s investigation, which began last summer and has a statutory deadline of June 2020, could leave Deliveroo hamstrung for as long as a year.
“I assume the regulator would not want Deliveroo to go bankrupt, which is worse for consumers,” said one investor. “It’s a bump in the road rather than a real blockage, but it’s annoying. Clearly this is a distraction.”
The CMA said that while its investigations followed a statutory timetable, “we work as quickly as we are able to whilst ensuring that our investigations are as thorough as they can be. It’s also the CMA’s responsibility to look at how this deal could affect customers, and that’s exactly what we’re doing here.”
Another question mark hangs over whether Deliveroo will seek alternative sources of funding during the investigation.
Some investors believed that Amazon could offer Deliveroo a convertible loan, which would revert to equity if the CMA cleared the deal. However, Amazon denied a Bloomberg report last week that it had offered such a loan, implying that to do so would break the CMA’s rules.
“We continue to comply with the Initial Enforcement Order issued in June, which requires the parties to operate separately and restricts the parties from entering into non-ordinary course agreements like a loan,” Amazon said. “Deliveroo and Amazon have been working closely with the CMA and will continue to do so.”
The CMA has not published specific guidance on whether a loan would be allowed in this case, however, and its rules can vary from one investigation to another.
That uncertainty has only added to Deliveroo investors’ frustration. “We are in the dark,” said one.
The post Deliveroo in limbo as rivals and regulators close in appeared first on Financial Times.