It was only six months ago that Deliveroo proudly issued a press release stating that a 42% increase in gross profit to £91m “provided further evidence of the strength of [our] business model”.
The company had just filed its 2018 accounts with Companies House at the time, recording an astonishing 72% increase in turnover, to £476m. Not bad for a business that only delivered its first food order just six years earlier.
Deliveroo deserves to sport the ‘disruptor’ tag coveted by so many tech start-ups for the role it has played in reshaping the restaurant landscape during the last few years. Some 80,000 restaurants are now signed to its platform thanks to an aggressive expansion strategy that has seen rider networks set up in hundreds of towns and cities.
It has created tens of thousands of jobs, invested millions in technology development and allowed restaurant chains to access new revenue streams with relative ease.
But those who have spent any time analysing its balance sheet will also know that it remains hugely loss-making. Despite the gross profit it achieved, the company ended the year losing more than £230m in 2018 after £346m worth of administrative expenses were factored in.
Like a lot of early-stage technology businesses, I’m sure that is all part of the plan. Build scale, grow market share and attract investment first. Worry about turning those losses into profits second.
That’s all well and good until your ability to execute the scale part comes undone, which is exactly what has happened to Deliveroo given that a large number of its key restaurant partners simply aren’t trading at the moment.
Nobody at Deliveroo – or any business for that matter – could have predicted the devastating economic tornado currently taking hold, but on Friday afternoon we learnt just how fragile its position is when the CMA provisionally cleared a £440m investment from Amazon.
Without that investment, Deliveroo would have gone bust.
Amazon’s purchase of a reported 16% stake in the business was first announced last year and quickly caught the CMA’s attention.
It was concerned the deal could be bad for consumers by discouraging Amazon from re-entering the online restaurant food market and further developing its presence within the online convenience grocery delivery market in the UK.
The competition body was midway through the second stage of its investigation when it was forced to suddenly apply the brakes and abort its probe.
After Deliveroo’s financial advisers provided evidence that the company would not be able to survive without Amazon’s funds, it realised that the prospect of Deliveroo collapsing would be worse for competition than allowing the investment to proceed.
The CMA does not have a habit of making U-turns, but these are mad times we are living in. It didn’t take long for it to realise that dragging out the investigation any further would be spectacularly counter-productive.
But what does it say about Deliveroo’s financial model?
Critics will highlight that for all Deliveroo’s bravado around enormous revenue growth, the losses continue to stack up. Obviously the figures for 2019 aren’t available yet, but in 2018 it posted a net loss of £232m, up from a net loss of £199m in 2017. The year before that, the loss was £129m.
Interestingly, the CMA said its investigation found that “Deliveroo is, in many respects, a highly successful company which has grown strongly and now accounts for a significant share of the online restaurant platform market in the UK”.
Crucially, though, it remains a developing business and is therefore particularly reliant on continued investment to be able to support its operations.
With so much strategic focus on ramping up scale and inflating that top-line number, a significant and unexpected decline in revenue, as it has suffered in the past month, was never going to do anything other than expose the model’s vulnerability.
In a climate where the ‘cash is king’ mantra has never had more meaning, this probably explains why Deliveroo was on the ropes and wondering how it would live to fight another round barely a month into lockdown.
Analysis from research firm Capital Economics last year revealed that Deliveroo enabled restaurant partners in the UK to boost their sales by £1 billion in 2018, including £320m for independent restaurants.
The study also found that the company has helped create 25,000 jobs in the restaurant sector since it launched in the UK in 2013.
And if Deliveroo were to continue adding restaurants to its platform at the current rate, the food delivery company’s operations would help create almost 70,000 restaurant jobs in the UK in 2020.
Ironically, the enormity of its operation nearly proved its undoing, but it has also probably saved it.
Without Deliveroo in the market, some consumers would be cut off from online food delivery altogether, while others would face higher prices or a reduction in service quality.
The CMA described that as a “stark outcome”. They have probably called it right.