The Business Of

Deliveroo | What Are Their Costs?

Morning All!

So yesterday we looked at How Deliveroo Makes Money - and saw that food delivery companies actually take more from restaurants (in commissions) than they do from us (in fees). Making for some disgruntled restaurant owners…

Today we’ll be seeing what costs are needed to operate this delivery company. So without further ado…

Errr Where Did All That Revenue Go?

Okay, so whilst we’ve highlighted the attraction of the marketplace business model, the costs to operate them do vary by company. For instance, whilst Airbnb and Deliveroo both connect parties (home owners-renters and restaurants-consumers), Airbnb has very little further cost in turning that connection into a transaction. Home owners and renters communicate with each other about whether pets are allowed, where the key is, and all sorts of other details!

However, in order for Deliveroo’s parties to connect and transact, there is a crucial third side… the rider!

And this crucial third side, comes at a cost. Paying the rider is actually Deliveroo’s biggest cost and is accounted for in their financial statements as COGS (cost of goods sold). In 2021, gross margin was 28% (meaning COGS were 72% of sales). This means that for the £55 order we mentioned yesterday, whilst Deliveroo takes £18.75 of that as their revenue, they only keep on average £5.25 after paying for the rider and credit card fees - ouch!

The reason COGS continues to rise rapidly every year is because these costs are variable. They increase as sales increase. As more customers order food from Deliveroo, of course Deliveroo makes more commissions and fees. But more customer orders also means more rider trips - which Deliveroo have to pay the rider for. On Friday, we’ll talk about ways the company is hoping to improve their COGS and hence gross margin!

Delivering The Punchline

As we can see above, the other main cost for Deliveroo is marketing and overhead. In order to acquire more customers and compete against peers like Uber Eats and Just Eat, the company continually needs to invest into marketing - you may have seen or walked past the ads below!

Overhead costs refer to expenses like salaries and rent, which are of course critical when running a huge organisation! These costs (both marketing and overhead) are less variable than delivery costs. As more customers order food from Deliveroo, Deliveroo doesn’t have to spend more on marketing or move into a bigger office! This has its benefits because if the company does go through a tough time, and sales decline, management can cut back on marketing expenditures and fire employees. And this is exactly what we saw just last month when the company announced that they would cut 9% of its workforce - around 350 employees - due to the cost of living crisis affecting customer demand.

The less-variable nature of marketing and overhead costs can be seen above. Management have been able to reduce marketing and overhead costs as a % of sales from 51% down to 34% in just 4 years. However, because of its variable nature, COGS has fallen less considerably from 81% to 73% over the same 4 year period.

Hold On, COGS is 73% of Sales and Marketing & Overhead is 34%…

… that’s >100% of sales! So yes, whilst over the last 4 years, Deliveroo’s costs have grown slower than sales (and hence margins have improved), the company’s Adjusted EBITDA margin is still negative at -7.2%. So despite the massive growth in revenue over the last few years, Deliveroo still does not make a profit!

I’m tempted to talk more about Deliveroo’s profitability now… but I’ll save it for tomorrow and Friday and spread out the fun!

1st Mar 2023

Nigel Jacob CFA