9 March 2021

Will Deliveroo’s IPO bring home the bacon?

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Deliveroo is riding high (pardon the pun) as a result of the pandemic. It’s been taking over 6 million orders per month, distributing over £4.1bn from food outlets in 2020, primarily in the UK, with Deliveroo taking up to 25% of that value in fees from the food providers. Apparently not everyone took lockdown as an opportunity to learn new cooking skills.

Now it’s being floated on the London Stock Exchange in an IPO valued at somewhere between £5-£10bn, depending on who you ask. The financial establishment is terribly proud of itself for ‘winning’ the listing, claiming it highlights the attractions of the City relative to Europe post-Brexit. But will it deliver tasty returns for investors?

Yet, 8-year-old Deliveroo has consistently failed to post a yearly profit. That’s apparently ok – its prioritising growth over returns. Although revenues in the pandemic year rose 55%, it still lost £224m in the last quarter. It remains to be seen just how resilient user engagement will be once the economy reopens – especially after 12 April when pub gardens reopen.

The whole proposition of Deliveroo and competitors like Just Eat is that the online food delivery market will continue to grow to infinity. Fantastic. What’s not to like or even question about Gen XYZ and their inability to feed themselves. And apparently it’s not about delivering them a pizza, but being able to collate data to target more junk food at them and lining them up for robotic drone deliveries tomorrow. (Always tomorrow.)

Let’s be brutally honest – the takeaway food sector has been around for years, and isn’t really that disruptive. There was a time, a long, long time ago when we walked or drove to the Chinese or the chippy. Now Deliveroo picks up food from its own dark ‘editions’ kitchens flipping out Micky Dees’ burgers or another brand’s Peri-Peri Chickens. Apparently Dark Kitchens – cheap and easy to run – are a massive differentiator when it comes to the long-term returns from Deliveroo.

The company has done “tech”: “Frank” is an algorithm based on predictive tech to “efficiently” distribute orders based on the position of restaurants, riders and customers. Smart tech means they’ve been able to cut preparation time by 20% enabling everyone to get more delivery work, make more food, and get food faster. So what?

Moreover, Deliveroo is also a classic case-study of 2020s finance. Call something disruptive, and no matter how base and blasé its business model is, it will soon be worth billions. Well… perhaps it’s time to step back and smell the coffee – from which ever high street shop you wish it delivered from.

Just apply some simple tests – The Blain DuB-De-PreP test (say it fast – sounds better.)

Deliveroo may be disruptive, but is it a Dull, Boring, Defensible, Predictable and Profitable stock? No. Its not.

Are there any barriers to entry into Deliveroo’s market? Nope. Anyone can deliver take-away food. Mini-cab drivers have been doing it for years. Now there are a plethora of other firms including larger, better funded firms like Uber Eats, Door Dash, and big ad spending Just Eat. All of these firms compete for clients with deals and advertising spend. All of them compete for delivery staff. All of them compete to get restaurants into their dark kitchens. In a market with room for maybe two competitors, Deliveroo is at number three.

Are the risks limited? No, there are major extrinsic risk factors including health and safety, regulation, and market risk. In addition, delivery drivers are increasingly demanding better pay and conditions – which are being agreed by the courts. A business model founded on ripping off cheap gig economy workers will fail when the courts mandate pension plans. To be fair, its delivery riders have been allocated stock.

Is Deliveroo in possession of a strong balance sheet? Can any firm which consistently fails to post profits be called strong? And just how dependent on capital markets conditions is the firm? If interest rates rise and the current tech bubble bursts then how is the firm going to attract the ongoing capital markets infusions it requires to cover up its long-term losses?

Let’s say it triples its market share, and keeps its cost base low and turns profitable next year? What stock multiple should it command? Something massive because it’s such a secure business, or something low to reflect the obvious weakness?

Nor can I get myself particularly enthused about Deliveroo’s management. If I was talking about a founder who fundamentally loved and understood the rich culinary history of the UK (in other words, someone focused entirely on delivering the best Curry, Chinese, Thai and Pizza), I might get it, but Will Shu was an investment banker posted to London peeved at the lack of quality delivery options to Morgan Stanley’s Canary Wharf offices.

Looking at the rest of the board I’m not getting that strong governance and passion vibe – I’m seeing a firm providing junk food hits to folk who should be eating healthy, meaning food delivery firms as probably a fail on the S of ESG – unless they can show me 80% plus of their revenues are organic salads grown by vegan cooperatives…

All of which means I’m not terribly excited about Deliveroo. But, having worked in Canary Wharf late into the evenings many times in the past, I can understand exactly why it might have seemed a good idea at the time.

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Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge (www.morningporridge.com).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.