The lockdown has shown the fatal flaw in Deliveroo’s business

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The coronavirus lockdown should have been a businesses bonanza for Deliveroo. Instead, it nearly collapsed.

In 2013, sceptics told Deliveroo founder Will Shu that his idea for an on-demand delivery company would never go. British people wouldn’t want food delivered to their homes, they claimed. With the benefit of hindsight, they were incorrect about the food but right about Deliveroo. Last month Deliveroo – once valued at $2.2 billion – was obliged to admit that it would face financial ruin without a significant cash injection from Amazon.

On the face of it, the food delivery startup should have stayed pandemic-proof. With the world on lockdown, Deliveroo’s couriers, gig economy key operators, would keep people fed and help restaurants remain in the market. But from the moment Nando’s closed, Deliveroo went into an economic death spiral. Just weeks into lockdown, as a restaurant after restaurant followed suit and takeaway orders dried up, Deliveroo was on the edge of collapse.

Although it wasn’t coronavirus that hobbled Deliveroo: it was its small margins and the crippling charges of facing both in its home market and abroad. In the UK, there are three prominent performers in the market; in the US there are half a dozen, in Europe, there are over 20. These companies are the heart of the gig economy: recognised for shaping how we eat and travel, as well as for offering their couriers zero contract hours, no sick pay or compensated vacations – and fighting governments in court to stop that from changing. It is these low-cost workers, not app technology, that are the key to delivery companies making a profit on every order. The global market for takeaway delivery was worth £4.2bn as of February 2018, according to global information company NPD Group. Deliveroo’s aim was to claim as much of that market as possible.

In the last few years, the three influential UK players have involved in a price fight that analysts have labelled as a “race to the bottom”. In a business where there is no clear prevailing business, the winner is the one left standing. So JustEat, Deliveroo and Uber Eats have competed for market portion and emptied their pockets to offer lower rates to bigger marketing operations and restaurants in a bid to capture enough customers to boot the others out of town.

The company came up with a three-pronged approach in 2019 to fight off the competition, the aspects of which were somewhat nebulous: it said it wanted to target “switchers” (people who already use other delivery services); to “win” every area it operates in, and to make certain that the food it has on the place is the best quality. Practically, this suggests one thing: more advertisement spends. Deliveroo launched its first national TV campaign in 2019, spending money on targeted advertising as well as normal TV spots and hired its first CMO.

Although Deliveroo has not confirmed ads spend for 2019, a report by Digiday declares it spent a stated £10m annually on media in 2018 when it hired agency the7Stars, and that the expense was up year on year. This, coupled with rapid global expansion, shows just how far Deliveroo had departed from the strategy is followed in the early days – described by insiders at the time as “notably capital efficient” – when it spent nearly nothing on marketing and preferably concentrated on growing by word of mouth.

Deliveroo and its opponents take a 30 per cent cut on average from restaurants, but in the case of big-ticket brands, they offer specific discounts to take orders that will come from having well-known people on their sites. At the beginning of 2020, JustEat looked like it was gradually winning the battle; prying McDonald’s out of its exclusive arrangement with Uber Eats and converting another partner. Alongside Greggs, McDonald’s is the most famous food brand in the UK – and JustEat has them both. A consolidation with rival firm Takeaway was agreed in 2019 (this was delayed by a CMA examination and then green-lighted provisionally in April), making it the largest online delivery company outside of China, exceeding Uber Eats. 

The final aim of all three of these companies is to do enough to become part of people’s daily routine: if one of them can provide all your favourite restaurant food and discount code considerations, in theory, you’ll apparently not bother wasting time downloading and registering with another app to find out what it can offer instead. But the coronavirus pandemic blew this basic consumer theory straight out of the water, as people quickly found themselves bereft of real-life restaurants and unwilling to make up for it by regularly splurging on takeaways. Data from SimilarWeb, which tracks downloads and smartphone activity across Europe, shows that the average daily users in France, Spain and the United Kingdom for Uber Eats and Just Eat dropped by between two per cent to as much as 23 per cent in March, compared with the averages for January and February. The data also explains Deliveroo use fell in France and Spain, although there was a tiny increase in the United Kingdom in March.

This looks counterintuitive. When the coronavirus lockdown began, many countries admitted Deliveroo and its rivals to operate as normal and classed couriers as frontline workers. This provided a lifeline for ailing restaurants across the country who had to shutter under government rules. But the growth in deliveries simply never happened. Although people were ordering takeaways, the struggling restaurant sector was crumbling under the social distancing measures, and quickly reduced their menus.

Once the lockdown finishes and life returns to something like regular, the fight to control the takeaway market in the UK will ramp back up again. But this time, because of Amazon, Deliveroo may no longer be on the back foot. Amazon has flirted with the takeaway sector unsuccessfully earlier, but it did not have Deliveroo’s knowledge of scaling from scratch. And Deliveroo will be able to support thin margins for far longer if it persuades Amazon to keep backing it.

Higher concentration in the area is predicted as market analysts at Jefferies, a financial services company, says touting a potential tie-up between Uber Eats and Deliveroo in the next 2 years.