June 28, 2021
After a boom in ordering in throughout lockdown, Deliveroo has decided to IPO.
June 28, 2021
With restaurants closed and everyone facing endless nights in, it’s hardly surprising that takeaway services have surged in popularity. Even before the pandemic, however, Deliveroo was a household name. They've competed for years against their main rivals Just Eat and Uber Eats to be the face of the UK online food delivery market. Its purpose is to serve as an intermediary between customers and restaurants, with their app allowing their users to select and order from a litany of cuisines while their fleet of drivers (facilitated by an efficient delivery algorithm named Frank) ensures that food arrives on time.
They describe themselves as operating out of a hyperlocal three-sided marketplace between riders, restaurants and customers. The market isn’t an easy one, and the difference between failure and success comes in the thinnest of margins. Their approach to maximising profit revolves around getting the most value possible out of each of their three customer stakeholders. In order to appeal to customers, Deliveroo is aggressive in on-boarding restaurants so as to offer the most diverse menu options possible in 12 global markets. They have also launched Deliveroo Plus, a subscription service that offers benefits such as free delivery to encourage customer loyalty. Finally, in 2020 they made a major move into grocery delivery, an area they report is the fastest-growing part of their business. today, restaurants represent an approximate £350bn market opportunity, while groceries are worth over £800bn. By focusing on short-term-need grocery consumerism, Deliveroo is offering something unique and filling a previously unrecognised gap in the market. While big delivery providers such as Ocado generally encourage big-basket orders and require delivery slots chosen days in advance, Deliveroo can deliver essential missing ingredients from brands such as Sainsbury’s, Waitrose and Whole Foods faster than if the customer chose to go to the shops themselves.
Working closely with restaurants is their next major strategy for success. They claim that 90% of its restaurant partners had no delivery option prior to Deliveroo, and so an increased volume of orders in return for a percentage of the sale is an appealing deal. For more established businesses such as Nandos and Wagamama, as well as independent restaurant partners who might not be able to develop the technology independently, Deliveroo also decided to this year launch a white-label service called Signature. Signature allows restaurants to retain control over customer experience by using Deliveroo’s tech but hosting orders on their own domain. Deliveroo earns a lower commission rate for this (due to the fact that they longer responsible for customer acquisition) but in return they get to host some of the biggest names in the game, and many of these restaurants still choose to use Deliveroo’s rider network. A more established service is Deliveroo Editions, launched in 2016, which offers select restaurants use of some of their 220 global dark kitchens. Competitors now have similar offerings, but the opportunity for restaurants to break into new regions that their delivery radius normally wouldn’t cover is one that Deliveroo uses well to sell themselves to popular restaurants.
Their final strategy for profit is a controversial one, and comes from how they classify their delivery riders. In a monumental UK Supreme Court decision, Uber was in February stripped of its right to classify all of its drivers as ‘self-employed contractors’, a loop hole that allowed them to avoid having to pay holiday or minimum wage, or employer’s national insurance contributions. Deliveroo still operates under this system, purporting that it appeals to many gig-economy workers who require flexible hours, but with public opposition growing it is unclear how long Deliveroo will continue to get away with a system they view as critical to one day becoming profitable.
The reason Deliveroo has surged to the headlines recently is their decision to IPO. More to the point, it is their March 31st IPO listing on the London Stock Exchange and subsequent share price plummet that marked yet another disappointing listing in the tech sector. The company had originally hoped for a share price of up to 460p, but went into trading with an offer of 390p and by closing shares were being sold for just284p. At the time of writing, Deliveroo shares are trading at 260p per share. So over £2bn has been wiped off their £7.6bn valuation during its first day of trading. And this comes after Deliveroo used the ‘failing firm’ defence in April 2020 to secure £75m in funding from Amazon, transforming it from close to going bust (in part due to a lack of preparation for the loss of major restaurant chains due to the pandemic) to being well on track to IPO. A further£130m was then raised in January from existing investors including Durable Capital Partners and Fidelity Management, a move that took advantage of the increased popularity and demand for delivery apps that has arisen as a result of COVID-19.
Their IPO story, therefore, was a warning to both the tech sector and the London Stock Exchange which has been making moves to become more appealing to technology companies and had hoped to attract more unicorn companies thanks to Deliveroo’s unusual decision to list with them. Tech companies are infamous for overvaluing their shares when they blowout, as is exemplified by Uber which offered a valuation of over $100bn in its IPO offering only to see it fall to $76bn following its first day of trading. The reason for this is that tech companies claim to have high growth potential rather than immediate profitability, and so rely largely on speculation when asked to comment about future growth. In 2018, the percentage of tech companies in the US that didn’t make a profit and went public was 83%, and this has corresponded with an increase in IPO failure that has been seen over the past 5years.
Deliveroo itself was quick to blame short sellers for the events which have since been dubbed the ‘worst IPO in London’s history’, while others raised concerns about the company’s roadshow. One person working directly on the deal was quoted saying ‘at least three hedge funds have very actively gone short this morning, enabled by banks outside of the syndicate [of the IPO]’. There were concerns prior to listing, however, for example the fact that its advisers, who collected £49 million in fees from the company and several million more from Deliveroo’s selling shareholders, refused to identify the three ‘anchor investors’ they claimed were supporting the IPO other than that they were based outside of the UK and that one was already a shareholder. Many also took issue with the uncertainty of the market and the fact that, even despite substantial growth during the pandemic, Deliveroo still records heavy losses and cannot guarantee that it will maintain this level of demand when lockdown restrictions ease.
Many potential investors also took issue with the dual-class share structure that its chief executive, Will Shu, insisted on. That decision led to Deliveroo not qualifying to be listed in the FTSE 100 index and thus deprived it of investment from passive tracker funds, something that many large British fund managers took objection to. Several tech investors expressed frustration over this, accusing fund managers of ‘posturing over ethical issues such as worker treatment in order to attack the UK government’s plans to ease more dual-class listings’. They say this outcome for Deliveroo will push more UK entrepreneurs to go public in more tech-receptive markets such as New York and Amsterdam, the opposite result than was hoped for by those involved in rejuvenating the London exchange.
So is London to blame for Deliveroo’s IPO? The short answer is no. There have been numerous successful tech listings on the London Stock Exchange over the years, including Deliveroo’s own biggest rival Just Eat which floated on the exchange in 2014 and last year generated£2.1b in revenue, a 61% increase year on year. Other companies include Ocado ,which went public in 2010, and Boku, a US based carrier billing company that listed in 2017 and saw a 24.6% first day increase. Trust pilot also picked London for its £1b listing and went public just a day after Deliveroo. Their IPO raised approximately £473m in total and shares climbed 16%. Looking forward, companies including PensionBee, Music Magpie, Wise and Pod Point can be expected to join it. As said by Danni Hewson, financial analyst at stock broker AJ Bell, “Deliveroo’s dismal float shouldn’t be viewed as a yard stick by which future tech IPOs will be measured, nor should its experience deter other tech companies from choosing to list in London.”
That isn’t to say that London’s stringent standards haven’t diverted many tech startups towards US and other international markets. Cazoo, which went public through a SPAC on the New York Stock Exchange, specifically sighted London investors’ approach to tech companies as one of the main reasons for their international listing and over the last 20 years just 43 of the UK’s 1,200 fastest-growing tech firms have listed in London. Since Brexit, the UK has sought to establish itself as an attractive listing destination that can rival both the US and Europe. This has been seen as especially important since Amsterdam overtook London as Europe’s top share trading centre this year. They have done this by overhauling many of the restrictions placed on the traditionally conservative sector, including: introducing dual-class ownership, reducing free float requirements and liberalising the rules regarding SPACs.
Proponents of this claim it is a necessary move in order to stay competitive given the recent upsurge in SPAC listings which, in 2020, accounted for nearly half of all fundraising in the IPO market, almost 6x as much as they raised in 2019. These blank-cheque vehicles are less risky for the company than an IPO because it allows for the price to be negotiated before a deal is announced and is much faster to process than a traditional IPO. Founders, especially Silicon-Valley types, are also known to oppose challenges to their authority and ability to drive the direction of the company, and so dual-class shares which allow them to have enhanced voting rights within the company is a definite selling point for the exchange.
Critics of the reforms, however, raise concerns that the move could reduce stakeholder power in potentially dangerous ways. Even without these reforms, the LSE was already experiencing its strongest year since 2006, with 11 IPOs raising £3.24 billion in the year to Feb. 24 2021 thanks to companies such as Dr. Martens and Moonpig Group. While the changes would boost London in it’s fight for European market dominance, that risks coming at the cost of quality control. The FCA’s job is to bothfoster growth and protect investors, and so the volatile nature of SPACs and the risks associated with hyped evaluations and systems designed to benefit companies rather than shareholders are ones that have to be carefully considered.