Since their public listings, Europe and USA’s top online food delivery companies have amassed over $20 billion in collective operating deficits. This is due to intense competition for market dominance. The shares of Deliveroo, Just Eat Takeaway, Delivery Hero and DoorDash – the four biggest independent, publicly-listed food delivery firms in the US and Europe – trade significantly lower than their peak values during the pandemic. Investors are critically assessing their business models.
The companies, which benefited from amplified growth during the pandemic, now face a more challenging economic landscape impacting consumers. The cumulative annual operating losses of these four businesses now stand at $20.3 billion, according to data obtained by the Financial Times and industry watcher theDelivery.World.
The $20.3 billion figure includes the seven years since Deliveroo, Delivery Hero and DoorDash made public listings, and after Just Eat Takeaway was established post a 2020 merger. The sum includes significant reductions relating to takeovers and stock-based payouts.
Investors have shifted their appetites from funding losses to seeking “sustainable, profitable growth” in food delivery companies due to increasing interest rates, says analyst Jo Barnet-Lamb from UBS. Uber, a competitor, doesn’t reveal Eats’ profitability, but announced its first-ever year of group profitability in 2023 due to efforts to bolster margins, described by the company as a turning point.
Over the years, venture capital firms have heavily invested in so-called gig economy companies who used these funds to offer discounted food deliveries to attract customers and gain market share. Even though operating expenses, including marketing costs, remain significant, investor focus has turned to profitability as interest rates increase.
Additionally, the industry continues to face persistent scrutiny from regulatory bodies and labour organisations focusing on worker welfare. Critics argue that higher wages for delivery staff would deter consumers due to increased costs of food delivery.
Despite these hurdles, optimism prevails among stock market analysts about the potential for improved financial performance. In April, the three European companies forecasted to join DoorDash in achieving annual free cash flow positivity this year.
The industry emphasis has shifted to prioritising free cash flow, following a long tradition of companies in the sector focusing on an adjusted measure of profits such as earnings before tax, interest, depreciation and amortisation, which omitted various costs like legal provision.
Yet, several individuals are sceptical of adjusted earnings metrics as an accurate reflection of a business’s profitability, according to Joseph McNamara, an analyst at Citi. Amanda Benincasa Arena, a partner at management consultancy Aon, argues that operating losses provide the most uniform outlook across all companies, reducing adjustments and other non-cash and non-operational effects.
Thus, businesses showing a higher cash inflow than expenditure emerges as the next significant assessment, McNamara further comments, indicating that the phase of indiscriminate growth has ended. Despite consumers having less disposable income and enduring higher charges due to diminished discounts and increased inflation, they continue to utilise the services, states Giles Thorne, an analyst at Jefferies, reinforcing the sector’s future potential.
Even though the online food delivery sector benefitted from pandemic effects, the growth rate of sales have dwindled in the subsequent years. Companies are exploring new income channels to boost growth, including grocery delivery and advertising businesses with substantial margins.
Uber attributed the expansion of its service offerings to enhancing its total sales, user base expansion and economies of scale improvement. Some companies are exiting specific markets and others are focusing on areas where they believe they can prevail, as the maturing industry experiences a consolidation phase.
DoorDash, focused on the US market, previously informed the FT of its plans to venture into new markets, while Delivery Hero announced plans in May to offload its Taiwan operations to Uber to channel resources elsewhere. Earlier in January, this German group sold its minority stake in Deliveroo, listed in London.
However, some historic deals have negatively impacted the companies’ returns, with industry valuations falling dramatically leading to write-downs.
Just Eat Takeaway’s losses in 2022 and 2023 were partially attributed to a total of $6.5 billion in devaluations of the businesses it had purchased, with the majority related to Grubhub, which it has found challenging to divest since 2022, and Just Eat. Added to this, Delivery Hero has also declared substantial recent devaluations amounting to nearly $1.7 billion in 2022 and 2023.
According to Aon’s Ms Benincasa Arena, such impairments could imply that the results of a company’s merger or acquisition may not meet their expectations. Repetitive devaluations may signal a company’s entry into improper markets via acquisition or poor execution of operations once established in these markets.
Operational profits have also been adversely impacted due to expenses associated with employee share awards. Indeed, DoorDash in 2023 reported upwards of $1 billion in such expenses.
In response, Deliveroo stated its continued progression towards achieving its strategic objectives and asserted its confidence in delivering profitable growth. DoorDash mentioned its colossal investments in aiding merchants to establish thriving businesses and anticipates to achieve profitability over time as per the generally accepted accounting principles.
According to Emmanuel Thomassin, CFO at Delivery Hero, the organisation’s operating losses incorporated components that were not viewed as operationally pertinent to measuring the company’s economic growth. Instead, more concentration is laid on other parameters like free cash flow.
Just Eat Takeaway communicated its satisfaction over having made substantial enhancements in its fiscal performance across all its segments and achieving a positive free cash flow status in 2023. In a statement released after this story was first published, JET declared the company’s operating losses over the previous years were primarily due to impairment expenses linked to intangible assets following equity-funded acquisitions, stating this had no correlation with the actual profitability of their operations over those years. The company, in fact, preferred to assess its profitability basis adjusted Ebitda. – Copyright The Financial Times Limited 2024.