Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m sharing a deep-dive on Deliveroo, one of the most iconic European consumer startups which made its public debut last week.

Deliveroo's public debut was a nightmare. Deliveroo started to trade publicly on March 31st and lost almost 28% of its market capitalization in two days. As a result, Deliveroo is now valued at $5.1bn enterprise valuation implying a 27% discount compared to Deliveroo's last funding round in Jan. 2021 at a $7bn valuation.

In the past 3 weeks, I worked intensively on a Deliveroo's deep dive. I wanted to publish it before the IPO. Nevertheless, while working on the company, I discovered many uncertainties related to the business and I decided to postpone its release to integrate in my paper the public reception of the IPO. I was not disappointed.

Digging into Deliveroo's history and future prospects has also been a great way for me to make sense about this complicated IPO.

I will break down this paper into the following sections:

• Deliveroo's History & Overall Opinion on the Company: (i) founding Deliveroo and reaching product market fit, (ii) an agressive international expansion and diversification in other product lines, (iii) the covid crisis as a turning point in Deliveroo's history, (iv) a number of unsolved concerns explaining the IPO's debacle → part I (in this post)

• Deliveroo's Explicit Future: (i) doubling down on dark kitchens with Deliveroo Editions, (ii) a white label offering with Deliveroo Signature, (iii) going after the online grocery market, (iv) a pay to pay less subscription with Deliveroo Plus → part II (coming next week)

• Deliveroo's Implicit and/or Extravagant Futures: (i) bringing non food brands & influencers in the food space with a business in box offering, (ii) going horizontal beyond food delivery, (iii) moving towards a super app, (iv) building a verticalized SaaS for restaurants → part II (coming next week)

Part I - Deliveroo's History & Overall Opinion on the Asset

Founding Deliveroo and Reaching Product Market Fit

Key learnings:

• Deliveroo was founded by Will Shu, an American who immigrated to the U.K.. Will was born in the U.S., studied and started his career there. He immigrated to the U.K. for professional reasons during his time at Morgan Stanley.

• Will founded Deliveroo with an insight based on a geographical asymmetry between the food delivery market in New-York where he started his career and London where he started Deliveroo.

• In its early days, Deliveroo was a successful marketplace because it created an unique qnd new type of supply for its customers: they targeted restaurants that did not offer delivery by providing them with a turnkey delivery solution. Like Postmates and DoorDash in the U.S., Deliveroo increased the market size of the food delivery market by unlocking a liquidity that was previously inexistant.

• You know when you have product-market-fit. Deliveroo's first iteration of the product was terrible. For instance, you had to zoom-in to click on the order button on your mobile. Nonetheless, the number of customers kept on growing and retention rates were strong.

Chronology:

• Deliveroo's founder and CEO, Will Shu started his career in investment banking in 2001 in New-York. In New-York, at Morgan Stanley, he discovered the food-delivery market in a city in which most restaurants were already offering delivery. Food delivery was obviously a perfect solution for dinner when you were working late.

• In 2004, Will moved to London for his job and discovered a geographical asymmetry. The food delivery market was almost non existant in the U.K.. His colleagues used to go to Tesco to buy a prepared meal for their dinner when they had to stay late.

• In 2005, JustEat came to the U.K. to grow the food delivery market but the experience remained unsatisfactory. JustEat had a light marketplace model on which it aggregated the existing supply of restaurants which had their own delivery fleet. The service quality from one restaurant to another was extremely variable and it was impossible to order from most restaurants you knew in your neighbourhood.

"Grubhub’s original model was a marketplace for consumers to order food from independent restaurants that already had their own delivery fleets. Though this was a game-changer for consumers, it constrained supply to only listing restaurants that could perform their own deliveries. This was a mistake. Postmates and DoorDash were the first to realize that if they could provide the broader group of restaurants that did not do delivery with the ability to do deliveries, they could dramatically increase the number of restaurants that could exist in the marketplace, thereby leapfrogging Grubhub’s selection (and liquidity)." -Sarah Tavel commenting a similar situation in the U.S. (you can replace Grubhub by JustEat and Postmates/DoorDash by Deliveroo)

• Will decided to start Deliveroo a few years later in February 2013 on the premise that a better food delivery experience should be created: restaurants from your neighbourhood should deliver to your home in less than 30 min with a reliable quality service. Will kickstarted the business in one neighbourhood in London. He signed the first restaurants and spent the first 9 months doing deliveries himself to ensure his model worked. Will cofounded Deliveroo with a tech friend Greg Orlowski. Greg was based in Chicago and developed the first version of the Deliveroo platform.

• In the beginning of 2014, Deliveroo raised a £2.7m series A led by Index with Danny Rimer and Martin Mignot. At the time, the company had expanded to 50 restaurants, 5 neighbourhoods and had 8 employees. The product market fit was there. Deliveroo was expanding the food delivery market by targeting restaurants that were not previously offering delivery. Consumers were willing to order on Deliveroo even if the purchasing journey was tough. In 2014, to test international expansion, Deliveroo expanded to Brighton to gather feedback on what it takes to open in a new city.

An Agressive International Expansion and Diversification in Other Product Lines

Key learnings:

• Deliveroo is one of the first European startups which demonstrated that you can blitzscale a heavily operational business all over Europe. In one year, the company opened 11 markets in Europe, Asia and the Middle-East. Thanks to Deliveroo, expansing agressively is no longer something that entrepreneurs fear and many companies have followed the same path in the past few years (Tier and Voi in the free floating scooter market and more recently Gorillas in the grocery delivery market).

• Deliveroo expanded its business through market expansion in new geographies and by adding services for restaurants. In 2017, Deliveroo launched a dark kitchen service, a procurement service for restaurants, a white label offering, asp ecial offer for restaurant with their own delivery service and a rescue team to help restaurants in dire straits.

• Building a startup is not a soap opera and Deliveroo hit many potholes during its ride. In 2016, Deliveroo's cofounder and CTO, Greg left the company to work on other projects. In 2019, Deliveroo had to stop operating in Germany. We don't have a lot of data on unit economics but before 2020 the path toward profitability was hard to perceive: in 2019, Deliveroo's operating loss was £317m for £772m in revenues. I won't even mention all the controversies around the Deliveroo's gig economy model.

Chronology:

• In 2015, Deliveroo raised a $25m series B led by Accel to scale international expansion. In one year, the company expanded into Australia, Belgium, France, Germany, Hong Kong, Ireland, Italy, the Netherlands, Singapore, Spain, and the United Arab Emirates. Deliveroo also opened 28 other cities in the UK. Later in its history, Deliveroo also expanded in Taiwan (Sep. 2018) and Kuwait (Jan. 2019).

• In February 2016, Greg left Deliveroo to work on other projects. He notably worked for almost 2y as CTO at Peanut, a vertical social network for women (also backed by Index).

• In Sep. 2016, Deliveroo launched Deliveroo for Business to serve workers ordering at the office. In 2018, 7k companies were using the service. In 2019, 10k. Since then, it expanded to provide food delivery to hotels and events. Businesses can also order fruit baskets and snacks delivery for their offices.

• In Apr. 2017, Deliveroo launched Deliveroo's Editions kitchens. Today, Deliveroo has 250 Editions kitchens available in 8 markets worldwide. It's a turnkey real estate solution for restaurants who want to launch a dark kitchen, a delivery only kitchen. Deliveroo takes care of the real estate, the site management and the software to manage deliveries while restaurants only focus on preparing the food.

• In May 2017, Deliveroo acqui-hired a NY-based food delivery called Maple. The startup was developing a full stack approach offering food sourcing, food preparation and food delivery inhouse. Maple ceased its operations in the U.S. and joined forces with Deliveroo. The technology was released for Deliveroo Editions kitchens (Aug. 2017) and Deliveroo's restaurant partners (2018) to help them predicting food purchasing, streamlining their food preparation processes and optimising their operations for food delivery.

• In Nov. 2017, Deliveroo launched Deliveroo+ which is a monthly subscription to get unlimited delivery above a certain order size. Adding a subscription to a food/grocery delivery business has now become a standard to lock-in customer with what I call a "pay to pay less" subscription. The more you order in a single month the more savings you made with your subscription. Doordash and goPuff that we also covered in this newsletter have also similar subscription.

• In Apr. 2018, Deliveroo launched a perks website to support its restaurants partners beyond increasing their topline thanks to food delivery. Restaurants could use this website to cut their energy bills, offer benefits to their employees, etc.

• In May 2018, Deliveroo started to offer free accident insurance to its 35k riders to protect them (up to £7.5k in medical expenses) and their earnings (up to 75% of average gross income) in case of an accident on the road.

• In Jun. 2018, Deliveroo launched Marketplace+ to add restaurants with their own delivery fleet to the Deliveroo's platform. These restaurants are able to serve their order either via their own delivery fleet or via Deliveroo's fleet of drivers. At the time it has increased the restaurant supply by 50% from 10k to 15k restaurants.

• In Aug. 2018, Deliveroo partnered with OpenClassrooms to give free access to the education platform to its riders. Deliveroo also started to offer scholarship to the riders who wanted to attend universities but didn’t have the budget. It was described as key for riders because "on average, riders work with Deliveroo for fewer than 15 hours a week, half are already students and 40% have caring responsibilities". In Jun. 2020, Deliveroo also partnered with EduMe: its riders can use the platform for training and continuous learning. These two initiatives are now gathered under the Deliveroo Academy umbrella to support riders with 300 free online training courses. It's noteworthy that a Metro's survey showed that 40% Deliveroo's riders were interested in starting their own business.

• In Dec. 2018, Deliveroo launched a brick and mortar Deliveroo Food Market in Hong Kong with 15 dining concepts that will be available for both delivery and on-site consumption.

• In May 2019, Deliveroo raised a $575m series G with Amazon as well as existing investors T Rowe Price, Fidelity and Greenoaks. Amazon had failed to launch a food delivery business called Amazon Restaurants both in the U.S. and in the U.K.. The competition was too intense and established even for the best logistic company in the world.

• In Jul. 2019, Deliveroo signed an exclusive partnership with Pret a Manger to deliver their products all over the U.K..

• In Jul. 2019, Deliveroo introduced a "Food Procurement" service to help restaurants make savings on their costs of goods sold. Using the leverage of the Deliveroo's network, restaurants can make savings on numerous sourcing items (raw ingredients, cleaning supply, packaging).

• In Aug. 2019, Deliveroo acquired Cultivate which is a software development and user experience design house based in Edinburgh. Deliveroo used the acquisition to build a tech hub in Edinburgh with 50 talents including engineers, product managers, user researchers, and designers and data scientists. Cultivate was already working for Deliveroo before the acquisition and continued to work on projects related to the Deliveroo's platform (improving the payment experience for both riders & restaurants, adding data & planning features for restaurants etc.).

• In Aug. 2019, Deliveroo announced that it was ceasing operations in Germany. The startup had been operating in Germany since Apr. 2015. In 2018, Deliveroo had already reduced its spectrum of operations to large cities like Berlin, Munich, Cologne, Hamburg and Frankfurt. Deliveroo had to lay off 100 employees and to stop working with all its riders. Competition was too intense and Deliveroo did not manage to reach sufficient scale in the German market to make its operations sustainable over the long run.

• In Aug. 2019, Deliveroo launched a Restaurant Rescue Team to help restaurants which were close to bankruptcy or already bankrupted to offer them a second life in Deliveroo's dark kitchens.

The Covid Crisis as a Turning Point in Deliveroo's History

Key Learnings:

• In 2020, Deliveroo had a strong year driven by the covid pandemic which accelerated market adoption of delivery services "by about two to three years" and helped Deliveroo reach profitability in Q2 and Q3 at a consolidated level.

"Throughout the second and third quarters of 2020, we recorded positive Adjusted EBITDA at the consolidated level, demonstrating profitability at the operating level in 11 of our 12 markets, while continuing to accelerate new consumer adoption of our platform." - Deliveroo's S1

• Deliveroo entered the grocery delivery category by striking deals with numerous high profile retailers. It was the most promising market expansion since the creation of the company.

Chronology:

• In Apr. 2020, Deliveroo ceased operations in Taiwan because it did not find a satisfying legal structure for its contracts with riders.

• In Apr. 2020, Deliveroo laid off 15% of its workforce (350 employees) to control its long-term cost structure following the arrival of the covid crisis in Europe.

• The covid crisis was a turning point in Deliveroo's strategy to expand its operations to grocery delivery. The startup managed to sign with large retail chains in the past 12 months including Morrisons (70 essential items available from 130 stores in Apr. 2020), Co-Op (400 stores in Aug. 2020), Waitrose (600 products from 30 locations in Oct. 2020) and Aldi (400 essential grocery items from 130 stores in Nov. 2020). By the end of 2020, the grocery segment was already generating 10% of Deliveroo's UK revenues.

• More broadly, Covid has accelerated the consumer's adoption of food delivery services: new consumers joined food delivery platforms, basket size and frequency increased, and people were also buying a wider range of products etc. “Our initial analysis suggests that Covid-19 has accelerated consumer adoption of these delivery services by about two to three years” said Will Shu.

• In Jan. 2021, Deliveroo raised a $180m pre-IPO funding round at a $7bn valuation led by Durable Capital and Fidelity. In the press release, Deliveroo highlighted 4 main growth areas: (i) grocery, (i) dark kitchens, (iii) its white label offering and (iv) its consumer subscription.

• In Feb. 2021, Deliveroo launched a more aggressive consumer subscription dedicated to families and couples. It's a £3.49 monthly subscription to get free delivery for orders over £25 (vs. £11.95 for the original Plus subscription that gives you access to free delivery on all orders). - source

• On Mar. 31st 2021, Deliveroo went public on the London Stock Exchange at the lower end of its IPO range (£3.90 price per share) implying a $10.4bn market capitalization and raising $2.1bn in funding. Deliveroo lost 24.6% of its market cap. on the first day of trading and a further 4.1% on the second day ending the week at £2.82 per share. Its market capitalization plummeted to $7.5bn.

Unsolved Concerns Explaining the IPO's Debacle

Don't get me wrong! I love Deliveroo. It's a company that has brought a lot to the European startup ecosystem. They have played a key role in increasing our entrepreneurs' ambition. It has built the playbook to scale complex operations and a city-by-city model. It has contributed to create the food delivery category and built a great ecosystem around it (the Deliveroo's startups mafia, partnering with startups in adjacent markets, etc.)

Nonetheless, Deliveroo went public with a lot of uncertainties around its core business and an unproven market expansion in the grocery category:

• Deliveroo is the European Grubhub. Not the European DoorDash. As a marketplace, you should aim to become the 1st player in your category by a wide margin. Sarah Tavel (GP at Benchmark) said in her Hierarchy of Marketplaces that "the bigger you are than the #2 in a given market or category, the less you need to subsidise growth, and the more value you are able to create and capture." There is a premium to lead the category and this premium increases with the advance you have against your competitors. When you look at Deliveroo's market share in its 12 markets, it's never the leading player. UberEats, JustEat and local players are always dominating Deliveroo.

• Deliveroo has lost its initial differentiation compared to alternatives solutions. In Europe, Deliveroo unlocked a new segment of the food delivery market with its turnkey solution (software + driver fleet + marketplace) for restaurants which did not have the resources to build their own delivery fleet. As a result, Deliveroo was able to build a differentiated supply of restaurants which didn’t use to deliver. During its first years of existence, Deliveroo just had to onboard this new supply to grow its business exponentially. Overtime, this differentiation disappeared when competitors like UberEats and JustEat adopted the same tactic. There is no longer a key reason for a restaurant to have an exclusive partnership with one food delivery platform and most restaurants are working with several platforms. I think that Deliveroo Editions and all the solutions offered to make restaurants more efficient are solutions to rebuild differentiation, but so far it has not been significant enough to make a difference.

• Deliveroo was not in good shape before 2020. The covid crisis gave a second breath to the company. Nonetheless, the core business is still under construction and new adjacencies have not yet changed the equation. As I mentioned, Deliveroo started the year by laying off 15% of its employees when the covid pandemic arrived in Europe and announced the retreat from a second market after Germany which was Taiwan. After the first wave of uncertainty, Deliveroo experienced a strong business boost and was able to expand massively its operations in the grocery categories - overnight, retailers were demonstrating interest in working with delivery partners. The GMV grew from £2.48bn in 2019 to £4.08bn in 2020, a 64.5% YoY growth rate (vs. 58.0% between 2018 and 2019) when the revenues increased from £772m in 2019 to £1.19bn in 2020 (+54.3% growth). It's a good growth acceleration but it's below other peers (e.g. JustEat, UberEats, DoorDash).

• There is a huge regulation risk on the current work status of Deliveroo's workers all over Europe. Like Uber, Deliveroo has faced and is facing several lawsuits all over Europe that are questioning the independent rider status. I will just give you three recent examples.

  • Two weeks ago and following a U.K. Supreme Court Decision, Uber had to reclassify all its U.K.’s 70k drivers as workers meaning that they will receive at least minimum wage, will have vacation pay and access to pension plans.

  • In Spain, the government also announced two weeks ago that it will implement a law to requalify all drivers as employees. Deliveroo is arguing that (i) riders want flexibility and it would be nonsense to hire them through full time contracts and that (ii) the State in collaboration with gig economy stakeholders should implement new schemes to give more security to riders.

  • Following the Takeaway.com's acquisition, JustEat started to roll-out the Takeaway's platform model in its core markets in which riders are full time employees. For instance, in France, JustEat is planning to recruit 4.5k riders with a hourly wage and associate social benefits.

  → Drastic changes in the status of riders could significantly impact Deliveroo's unit economics and could even make the business unsustainable.

• European public investors are not as attracted by and not as knowledgable about tech stocks as their American counterparts. Several public investors decided to boycott the IPO because of issues surrounding the treatment of its riders and because of the golden share given to Deliveroo's founder to preserve the voting control on his company. This disappointing IPO is also a disillusion for the whole European ecosystem. If we want to compete with the American and Chinese tech ecosystems, we need to have an attractive and welcoming public market for tech companies. Deliveroo is a high profile European tech startup and I'm afraid that this episode could demotivate other European startups to go public in Europe.

I will publish the second part of this article next week. It will cover Deliveroo’s future. I looked at their expansion plan in the S1 and also looked into my crystal ball to make some predictions.

Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋