Techcrunch is reporting that Deliveroo has raised $385 million on a valuation ‘over $2 billion”. This was a Series F round and takes the total funding for Deliveroo to $860 million. This comes after Deliveroo released it’s Calendar Year 2016 results which revealed a £129 million loss, which was up from a £30 million loss in 2015.
The company is now in 12 countries, 150 cities and the number of riders it had increased to 26,5000. It has previously raised £208 million in 2016, which represented 29% of the company.
Analysis of the Deliveroo Financials
Last week Deliveroo released their latest accounts which was for the calendar year 2016. Deliveroo reported sales of £128,564,142 against a cost of goods sold of £127,476,267 for a margin of .7%. It was then hit by administrative costs of £142,195,507, for a loss of £129,076,986.
In an article with Business Insider, Deliveroo Board member Martin Mignot stated that the raw sales and costs of goods sold are a combination of mature and new markets and that the margin in mature markets are higher. This is probably a combination of effects from better efficiencies along with the ability to extract higher commissions from the Restaurants.
“The longer you have been operating in a market, the more volume you’ve got, and the more data you’ve got — like how long restaurants will take to prepare food,” he said. “Those variables are going to impact demand and supply. The longer you have been operating, the better you become at forecasting those elements and the more efficient you become.”
The future for Deliveroo
Deliveroo is planning to use the funds to grow 3 aspects of the business –
- “Deliveroo Editions” – The ‘container kitchens’ that are satellites of existing Restaurants.
- Grow it’s tech team in Artificial Intelligence and real-time logistics algorithms.
- Expand into new cities and countries.
In the medium term, Deliveroo faces challenges around the legal status of their riders. Deliveroo maintains that their riders are independent contractors, whereas many of the now 30,000 riders are trying to claim employee status, making them eligible for sick and holiday leave. There are also concerns that many of the riders on earning below the minimum wage. The issue is so severe that Deliveroo even has a Modern Slavery Statement on it’s website. A classification as workers would see riders also eligible for a minimum wage and other benefits which would significant impact the losses that Deliveroo is currently experiencing. In the UK, the Central Arbitration Committee is investigating what the actual status of Deliveroo riders is. In France, Deliveroo agreed to provide free healthcare to bike riders injured on the job, after protests about pay and conditions in Paris. In Australia, the Sentate Committee on Corprate Avoidance of the Fair Work Act has looked at the gig economy and sees big problems with the Deliveroo business model and the way that it remunerates riders.
Deliveroo has approximately 3 years of runway after the last round of funding, but that is assuming the losses continue at the same rate, which is unlikely as expansion will see further large increases in administration costs against a razor thin margin.
The long term, however is a lot more rosy for Deliveroo, although less so for Restaurants. As it builds it’s monopoly, (it is crushing Just Eat in a lot of countries and UberEats is struggling to compete) it will be able to increase margins. We also see the removal of the delivery riders as being inevitable.
Deliveroo and self driving vehicles
No analysts are yet factoring in self driving vehicles as a delivery mode for Deliveroo. This will dramatically change the economics in favour of Deliveroo. It may not be self driving cars, it may be restaurant delivery drones, but either way, the days of the delivery driver are limited, and possible to less than 5 years. This will be the game changer that I suspect the investors in Deliveroo are banking on for the stellar returns that they are hoping for.
Deliveroo and vertical integration – What if they started to cook the food?
Another not insignificant risk for Restaurants is that Delvieroo spends the next 3 years shaping consumers to purchase their food from Deliveroo. A lot of the process revolves around minimising the Restaurant’s brand and increasing the brand of Deliveroo, hence the packaging, the app and the call to action around Deliveroo. This creates the opportunity for Deliveroo to employee contract labour to prepare the food themselves, just in the way that Supermarkets introduced house brands. This is especially easy if Deliveroo has access to modular and scalable kitchen infrastructure – just like…
Deliveroo Editions and the Death of local Restaurant as we know it
Deliveroo in their fillings discussed 3 strategies to continue it’s growth –
- Further improvements to its online presence
- Expansion of its distribution networks; and
- Large-scale, high-impact marketing campaigns (to build the Deliveroo brand).
It mentions that will continue to offer the best customer proposition, driving lower prices for customers – which is a particularly difficult proposition for Restaurants as they struggle with already thin margins.
Deliveroo plans to expand it’s Deliveroo Editions, which are extensions of existing Restaurants, except cooked in pre fab metal containers. Many customers are unaware that the food that they are receiving is actually coming from a pre fab container, rather than from the Restaurant itself. This will accelerate the trend towards factory kitchens which have different cost structures. We believe that it will not be too long before we see Deliveroo Editions only Restaurants being created. These have minimal rent, much lower costs in terms of wages and lower running costs. From here it is a logical next step to contract out the labour in the kitchens and deliver generic cuisine based meals.
The impact on the traditional Restaurant industry could be dire. More competition will force more restaurants to ditch the traditional dine in / take out combination in favour of the cheaper container food and as that grows in popularity, we will see the slippery slope that will lead to decreases in portion sizes and quality as restaurants struggle in the battle for margin. The Daily Mail is reporting a growing swell of opposition to the Deliveroo factory food, because of a range of issues:
- It isn’t clear the food is coming from a container and not from a real Restaurant;
- The increase in bike traffic because of the deliveries, which can go until midnight; and
- Lack of infrastructure in container kitchen hubs, meaning that food waste builds up.
What should your Restaurant do?
Restaurants need to have an action plan around how they best deal with deliveries. There are a range of options, many of which can lead to higher margins for the restaurants and better quality food for the customer.
- Look at performing delivery itself, some Restaurants are building up a skillset around deliveries. (Some have to if they are suing Grub Hub / Just Eat / Menulog)
- Some restaurants are building strong take out only businesses, increasing revenue from customers who don’t want to dine in, but want to eat at home. (Listen to our podcast on the economics of delivery vs take out)
- Look at using a Free Restaurant OnLine Ordering system.
- Look at customer data ownership. Deliveroo does not share customer contact details, so effectively they are building up a database of who eats what and how often and leaving Restaurants out of the picture. At what cost is that?
If your looking for a free Deliveroo alternative check out our Free Restaurant OnLine Ordering system.