The Business Of

Deliveroo | Outlook

Happy Friday All!

Nearly there! So yesterday we answered the question of how a company that makes no profit can continue to survive. And we saw the importance of venture capital. However, we were left with a second question of, well - when are these companies like Deliveroo expected to be profitable? And that’s what we’re going to dive into today! So without further ado…

Party Like It’s 2026

Back in March 2022, Mr Shu (CEO) laid out plans for Deliveroo to finally reach breakeven (meaning they’ll stop making losses) in the second half of 2023. He also stated a longer term target to reach an Adjusted EBITDA margin of ~14% by 2026 (from the 2021 Adjusted EBITDA margin of -7%).

And in order to achieve this goal, Mr Shu said there were levers the company could pull in 3 key areas…

So without further ado… let’s get stuck into those 3 key areas!

Key Area 1 - Revenue

In terms of Revenue, there are two main levers the company are looking to pull; (i) increase the average order value, and (ii) increase revenue from advertising.

Okay, so first off - how can Deliveroo increase their average order value? Well, there are 2 main ways - upselling and cross-selling.

Upselling would be where Deliveroo suggests restaurants to us that are on the more expensive end. We’re then more likely to order from these more expensive restaurants and rack up higher order values. Deliveroo’s commission would then be a higher amount.

Cross-selling on the other hand is where Deliveroo suggests items for us to add to our basket when we’ve clicked ‘Checkout’. You can see this in the screenshot below. By suggesting these ‘staple’ items like milk, tomatoes, pasta - things people get often - Deliveroo are again trying to increase the value of our orders.

The second lever the company are keen to pull when it comes to revenue is advertising. At present, the company does surprisingly little in this area. However, in the screenshot below, you can see an example of how Deliveroo does currently make money through advertising. In the ‘Featured’ section, restaurants pay for their ads to be well-placed on the home page. How much the ‘Artful Blend’ paid for this slot, I have no idea - but you can see why this restaurant paid Deliveroo for this slot - I might never have heard of them otherwise!

Where exactly Deliveroo are going to place more ads on their app is yet to be seen. However, one thing is for certain - prepare yourselves for more upselling, cross-selling and ads!

Key Area 2 - Gross Margin

With regards to Gross Margin, one of the main levers the company is looking pull here is to increase rider network density (basically have more riders closer to restaurants). Why would they want this? Well, because Deliveroo pays their riders more if they have to travel further to get to the restaurant. So having more riders closer to the restaurants reduces this expense!

Let’s see how this works using a few numbers. Stay with me… I said only a few!

In the table below, we can see that for a £55 order, if Deliveroo pays out £11 (of their £18.75 revenue) instead of £13.50 (because riders are travelling less distance), their gross profit rises. They keep more! And this brings up their gross margin from 28% to 41%.

So, that’s the plan. All looks good. What’s the issue? Well, the main problem is that if riders know that they’re going to be doing smaller-distance jobs that earn them less money, they may pack their bags (and bikes) and go ride for another company! It’s going to be an interesting balancing act for Deliveroo, trying to reduce costs… without having their riders say bye!

Key Area 3 - Marketing and Overheads

Finally, with Marketing and Overheads, Deliveroo believes they’ll be able to drive operating leverage as their revenue continues to grow. What this basically means is that the company will grow their marketing costs at a slower rate than their revenue growth. As we looked at on Wednesday in the ‘What Are Their Costs’ section, this is what the company have already been doing - decreasing marketing costs as a % of sales! Here’s the chart again…

Buy or Sell…?

Whether Deliveroo can in fact deliver (pun executed) on their plans and become a sustainably profitable company is up for debate. But you can bet that their investors will be keenly tracking the company’s progress and hoping that Will Shu and his army can avoid these potential speed bumps along the way…! Otherwise, we may see more share price misery in the coming years.

Signed, Sealed, Deliveroo’d - The Weekend’s Yours!

So that brings us to the end of Week 2 of The Business Of newsletter! This week we’ve dug into;

(i) what food delivery companies do,

(ii) how they make money,

(iii) how much it costs to operate their business model,

(iv) what they do with their losses, and

(v) what the future might look like for Deliveroo!

But it’s not quiteeeee the end. Because we have the second edition of our Career Talk newsletters being released in a couple of hours!

And today we’re diving into Venture Capital. I’ll be chatting to my friend, Alex Stroud (Principal @ Concentric)…

… about how we got into his role, what advice he’d give students wanting to get into venture capital, what skills/books he’d recommend, and then finally explaining what kinds of things venture capital firms look for when they’re investing in start-ups (like Deliveroo once was). It really isn’t one to miss!

3rd Mar 2023

Nigel Jacob CFA