The lockdown has shown the fatal flaw in Deliveroo’s business
The coronavirus pandemic should have been a goldmine for Deliveroo. Instead, it nearly destroyed the £1.8 billion British food delivery giant. This analysis reveals how razor-thin margins, brutal competition, and over-reliance on restaurant partnerships created a perfect storm that brought Deliveroo to the brink of collapse—and why Amazon’s intervention may have saved more than just one company.
The Pandemic Paradox: When Growth Markets Collapse
Deliveroo’s Pre-Crisis Trajectory
When Will Shu founded Deliveroo in 2013, sceptics dismissed his vision. British consumers wouldn’t embrace home food delivery, they argued. Seven years later, those critics appear both right and wrong. Whilst food delivery exploded across the UK, Deliveroo’s business model proved fundamentally flawed when tested by crisis.
The company’s valuation peaked at $2.2 billion (€1.9 billion), positioning it as one of Europe’s most valuable food-tech startups. Yet by April 2020, just weeks into Britain’s first lockdown, Deliveroo faced financial ruin without Amazon’s emergency cash injection.
The Great Lockdown Test
COVID-19 should have been Deliveroo’s moment. With restaurants forced to close dining rooms and consumers confined to their homes, food delivery became essential infrastructure. Governments across Europe classified delivery drivers as key workers, acknowledging their critical role in maintaining food supply chains.
But the expected boom never materialised. Instead, Deliveroo entered what executives privately described as an “economic death spiral” when major restaurant partners like Nando’s shuttered operations entirely.
The Fatal Flaw: Margin Compression in a Crowded Market
Europe’s Delivery Wars
The fundamental problem wasn’t technology or logistics—it was economics. Deliveroo operates in one of the world’s most fragmented delivery markets:
- UK: Three major players (Deliveroo, Just Eat, Uber Eats)
- Europe: Over 20 significant competitors
- US: Six primary platforms
This fragmentation has created what industry analysts call a “race to the bottom”—a destructive price war where survival, not profit, determines success.
The 30% Commission Trap
Deliveroo typically charges restaurants a 30% commission on orders, but this headline rate masks the reality of competitive dynamics. To secure premium restaurant partners, platforms offer substantial discounts:
- McDonald’s: Extracted from exclusive Uber Eats arrangement by Just Eat
- Greggs: Also secured by Just Eat
- Premium brands: Receive preferential commission rates
These partnerships require platforms to sacrifice margins for market share, creating an unsustainable cycle of cash burn.
Strategic Missteps: From Capital Efficiency to Cash Burn
The Marketing Arms Race
Deliveroo’s early success stemmed from what insiders described as “notably capital efficient” growth—minimal marketing spend with organic, word-of-mouth expansion. By 2019, competitive pressure forced a dramatic strategic pivot.
2019 Marketing Escalation:
- First national television campaign launched
- Hired first Chief Marketing Officer
- Estimated €8.5 million annual media spend (up from previous years)
- Agency partnership with the7Stars for targeted advertising
This three-pronged strategy targeted “switchers” (existing delivery users), aimed to “win” every operational market, and promised premium food quality. In practice, it meant one thing: massive advertising expenditure at the expense of profitability.
The Gig Economy Foundation
Deliveroo’s business model depends entirely on what economists call “labour arbitrage”—extracting value from workers classified as independent contractors rather than employees. This classification allows platforms to avoid:
- Guaranteed minimum wage
- Sick pay and holiday entitlements
- Pension contributions
- Employment rights and protections
Multiple European courts have challenged this model, with ongoing legal battles threatening the industry’s cost structure. The European Commission’s proposed Platform Workers Directive could force reclassification across the EU, fundamentally altering unit economics.
COVID-19’s Unexpected Impact
The Data Doesn’t Lie
SimilarWeb tracking across France, Spain, and the UK revealed counterintuitive user behaviour during lockdowns:
March 2020 vs January-February Average:
- Uber Eats: 2-23% decline in daily active users
- Just Eat: Similar decline patterns
- Deliveroo: Fell in France and Spain, marginal UK increase
Why the Boom Became a Bust
Several factors converged to undermine expected growth:
Restaurant Closures: When anchor tenants like Nando’s completely shuttered, platforms lost their most popular offerings. Consumers couldn’t order from closed restaurants, regardless of delivery demand.
Menu Reductions: Operating restaurants drastically reduced offerings to manage social distancing requirements, limiting consumer choice and order values.
Economic Uncertainty: Despite being home-bound, consumers reduced discretionary spending on premium takeaways, favouring essential purchases.
Supply Chain Disruption: Restaurant supply chains faced significant challenges, affecting food quality and availability.
Amazon’s Strategic Intervention
Why Amazon Invested
Amazon’s investment in Deliveroo wasn’t altruism—it was strategic positioning. The e-commerce giant had previously attempted food delivery through Amazon Restaurants but lacked the local market knowledge and operational infrastructure that Deliveroo possessed.
Strategic Benefits for Amazon:
- Immediate access to established European delivery networks
- Restaurant relationship infrastructure
- Local regulatory compliance expertise
- Consumer behaviour data in food delivery
Competitive Implications
Amazon’s backing provides Deliveroo with crucial advantages:
Financial Resilience: Access to Amazon’s resources allows Deliveroo to sustain thin margins longer than pure-play competitors.
Technology Integration: Potential synergies with Amazon’s logistics, AI, and cloud infrastructure.
Market Positioning: Association with Amazon enhances consumer and restaurant confidence.
Market Consolidation: The Inevitable Future
Just Eat’s Ascendancy
By early 2020, Just Eat appeared to be winning the UK market through strategic partnerships:
- Secured McDonald’s (UK’s most recognisable food brand)
- Retained Greggs partnership
- Completed merger with Takeaway.com (pending CMA approval)
The combined entity became the largest online delivery company outside China, surpassing Uber Eats in scale and geographic reach.
Predicted Consolidation
Financial services firm Jefferies predicts significant market consolidation within two years, potentially including:
- Uber Eats-Deliveroo merger: Combining the second and third-largest UK players
- Technology platform consolidation: Reducing operational redundancy
- Geographic market division: Reducing head-to-head competition
Lessons for the European Gig Economy
Regulatory Reckoning
The pandemic exposed fundamental vulnerabilities in gig economy business models. Proposed EU legislation could force platforms to:
- Reclassify workers as employees
- Provide standard employment benefits
- Meet minimum wage requirements
- Ensure workplace safety standards
Sustainable Business Models
Deliveroo’s near-collapse demonstrates that venture capital-subsidised growth without clear paths to profitability cannot survive external shocks. Successful platforms must:
- Achieve genuine unit economics profitability
- Diversify revenue streams beyond commission fees
- Build sustainable competitive advantages beyond price competition
- Develop resilient supply chain relationships
Future Outlook: Post-Pandemic Competition
The Amazon Advantage
With Amazon’s backing, Deliveroo enters the post-lockdown period with significant advantages:
Extended Runway: Can sustain losses longer than independently funded competitors.
Infrastructure Investment: Capacity to build advanced logistics and technology capabilities.
Market Positioning: Enhanced credibility with restaurant partners and consumers.
Market Dynamics
The UK food delivery market will likely emerge from the pandemic more consolidated, with stronger players and clearer competitive positioning. The “race to the bottom” may transition to competition on service quality, technology, and operational efficiency rather than pure price competition.
European Implications
Deliveroo’s experience offers lessons for the broader European startup ecosystem:
- Unit economics matter: Venture-backed growth without profitability paths remains vulnerable
- Regulatory compliance costs: Gig economy models face increasing regulatory scrutiny
- Market consolidation: Fragmented markets tend toward oligopoly over time
- Strategic partnerships: Corporate backing can provide competitive advantages beyond pure financial resources
Quick Facts
Company: Deliveroo Founded: 2013 Founder: Will Shu Peak Valuation: €1.9 billion ($2.2B) Market Position: UK’s second-largest food delivery platform Key Investor: Amazon (2020 rescue funding) Primary Competitors: Just Eat, Uber Eats Business Model: Commission-based restaurant delivery platform
Market Data:
- UK Market Size: €3.6 billion (2018, NPD Group)
- Typical Commission: 30% of order value
- Driver Classification: Independent contractors
- Geographic Presence: 200+ cities globally
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