After a truly extraordinary year for the public equity markets, startups are increasingly viewing Wall Street as the golden ticket opportunity to secure heavy funding and a sky-high valuation. Deliveroo, one of the more established tech startups, announced on the 8th of March that it would go public via an IPO. The British food delivery had hopes that it would share the fate of its American rival DoorDash, which saw rapid growth in stock value following its public listing. However, in a gloomy turn of events, Deliveroo’s stock did not fare so well and slumped following its heavily-anticipated market debut in what some are saying was London’s “worst IPO in history”. (1)
Deliveroo is a London-based online food delivery company founded in 2013. The platform serves as an intermediary between customers and restaurants, it takes a commission on each delivery that it makes. Since it was founded, Deliveroo has expanded globally and currently operates in over 200 locations across the UK, France, Spain, Hong Kong and more. A poster child of the increasingly popular gig economy, Deliveroo officially employs 2,300 staff, but separates it from others is its business model, which hinges upon the “self-employed” couriers that the firm contracts. As of 2016, the number of self-employed couriers was 30,000. (2)
The online food delivery market received a significant boost during the pandemic and the subsequent lockdown regulations. As dine-in services were not permitted, delivery platforms such as Deliveroo quickly gained a monopoly over restaurant sales as it became the only form of distribution available. Hence, Deliveroo’s gross transaction volume grew by 64% in 2020 from £2.5 billion to £4.1 billion with its revenue also growing 54% to £1.2 billion. (3)
Despite the revenue growth, Deliveroo has still yet to turn a profit. In 2020 the company loss was recorded at $309 million inn2020, which was considerably less than the $438 million in losses which it recorded in 2019. Most of the operating expenses are incurred from Deliveroo’s expansion into foreign markets, which recently added the inclusion of Taiwan and Kuwait. (4)
A historic IPO
Before its IPO announcement, Deliveroo was already the recipient of multiple rounds of private funding. One of Deliveroo’s top investors is Amazon, which acquired a 16% minority stake in the food delivery company in 2020. The firm’s latest round of private funding the business was valued at upwards of $7 billion. (5)
Despite not yet having turned a profit, Deliveroo announced its IPO with great optimism. The listing was primed as being London’s largest in three years and was initially expected to raise $1.4 billion, making the firm’s valuation close to $12 billion. Deliveroo’s unwavering optimism in the face of unprofitability is explained by the firm’s belief that the online food market is still relatively nascent – as online food deliveries continue to transform the Food & Beverage industry and Deliveroo continues to occupy market share, the firm remains confident that it is just a matter of time before it is able to generate steady profits. (6)
It is highly likely that Deliveroo’s enthusiasm is also fueled by the success of its American counterpart, DoorDash, which enjoyed an 85% rise in stock value upon the release of its IPO. Given their similar business models, it is not unreasonable to predict that Deliveroo’s stock may see a similar uptick in value. (7)
To Deliveroo’s dismay, its stubborn optimism was soon revealed to be blind naivety. Stocks shot down as soon as trading began, eventually closing at 26% below the company’s listing price on March 31. This marked the worst performance of an IPO on the London Stock Exchange in years. Deliveroo’s stock commenced trading at £3.90 per share, which was already at the lower end of the proposed price range, as the company had previously stated that it could debut at up to £4.60 per share. Clearly, even that price was more risk than any investors deemed worthwhile.(8)
What went wrong?
No one individual factor caused Deliveroo’s stock to plummet. Instead, the firm’s catastrophic primary listing was as a result of many unfortunate circumstances.
When an IPO fails, it is common that the first instinct is to look inwards for answers. Indeed, Deliveroo’s unprofitable business model was a cause for concern. When every food delivery that Deliveroo coordinated ended up chipping away at the company’s balance sheet, it is of course difficult for potential investors to be overly excited. (9)
The recent court ruling concerning The employment status of Uber drivers compounded the structural issues within Deliveroo as it added regulatory pressure on the company. The popular taxi company must now recognize its drivers as employees of the firm, as opposed to being considered self-employed, and hence must provide benefits and protections under the same regulations that any other firm would. This strikes a question mark over the gig economy as a whole, as many businesses have used their large networks of “self-employed” workers as a method of keeping operating expenses down. (10)
Pointing out the limited rights given to Deliveroo couriers and the regulatory risk that this poses, many institutional investors announced that they were not interested in investing in the firm’s IPO. With the added costs of providing employee benefits and protection for its couriers, labour overheads could be increased by up to 30%, generating a bleak outlook for the firm’s future profits. (11)
As is always the case, market setting has a large role to play in the success of a company’s debut. Following the widespread release of vaccines and the resumption of restaurant dining seemingly etching closer, investors seem to be noticeably less keen to invest in online delivery services. Many predict that the heavy demand for online deliveries will be reduced without the help of lockdowns. DoorDash, which closed 86% above their IPO price on the first day of trading, has subsequently fallen by 24% this month. (12)
Timing is so important in the world of public markets, and the ship had sailed for the prospect of a successful IPO for Deliveroo. With increasing regulatory pressures and the sustainability of its business model at risk, it seems that the juggernaut of the food delivery industry now has larger issues to worry about.