Deliveroo - London's IPO Nightmare

Emerging from a truly extraordinary year for the public equity markets, startups are increasingly viewing Wall Street as the golden ticket to secure heavy funding and a soaring valuation. Within the more established end of tech startups, Deliveroo 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 explosive growth in stock value following its public listing. However, in a gloomy turn of events, Deliveroo’s stock slumped following its heavily-anticipated market debut in what some have deemed London’s “worst IPO in history”. [1]

Company Background

Deliveroo is a London-based online food delivery company founded in 2013. The platform serves as an intermediary between customers and restaurants, taking a commission on every delivery that it makes. Since its conception, 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 its business model hinges upon the “self-employed” couriers that the firm contracts. As of 2016, the number of self-employed couriers stood at 30,000. [2]

The online food delivery market had received a significant boost from the pandemic and the subsequent lockdown measures. As dine-in services were suspended, delivery platforms such as Deliveroo quickly gained a monopoly over restaurant sales as 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, and its revenue grew 54% to £1.2 billion. [3]

Despite the revenue growth, Deliveroo has still yet to turn a profit. In 2020 the company recorded a loss of $309 million inn2020, which was still substantially less than the $438 million in losses recorded in 2019. Most of the operating expenses are incurred from Deliveroo’s expansion into foreign markets, which recently included the likes of Taiwan and Kuwait. [4]

A historic IPO

Before its IPO announcement, Deliveroo had been the recipient of multiple rounds of private funding. Amongst 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 valued the business at more than $7 billion. [5]

Despite never having turned a profit, Deliveroo announced its IPO with high hopes. The listing was primed to be London’s largest in three years and was initially expected to raise $1.4 billion, giving the firm a valuation of up to $12 billion. Deliveroo’s stubborn optimism in the face of unprofitability is explained by the firm’s belief that the online food market is still in a relatively nascent stage – as online food deliveries continue to disrupt the Food & Beverage industry and Deliveroo continues to occupy market share, the firm is confident that it is just a matter of time before it is able to generate steady profits. [6]

There is little doubt 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 would see a similar uptick in value. [7]

To Deliveroo’s dismay, its unwavering optimism was soon revealed to be blind naivety. Stocks plunged as soon as trading began, eventually closing at 26% below the company’s listing price on March 31. This would mark the worst performance of an IPO on the London Stock Exchange in years. Deliveroo’s stock began trading at £3.90 per share, which was already at the bottom 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 was too much risk for investors to process. [8]

What went wrong?

No one factor single-handedly caused Deliveroo’s stock to plummet. Instead, the firm’s catastrophic primary listing was an intersection of many unfortunate circumstances.

When an IPO fails, it is the first instinct to look inwards for answers. Indeed, Deliveroo’s unprofitable business model was a cause for concern. When every food delivery that Deliveroo coordinates end up chipping away at the company’s balance sheet, it is difficult for investors to be overly excited. [9]

Deliveroo’s structural issues are compounded by regulatory pressures, sparked by the recent court ruling concerning the employment status of Uber’s drivers. The popular taxi company must now recognize its drivers as employees of the firm, as supposed to being self-employed, and hence must provide benefits and protections like any other firm. This strikes a question mark over the gig economy as a whole, as many businesses have relied on their large networks of “self-employed” workers to keep operating expenses down. [10]

Pointing out the limited rights given to Deliveroo couriers and the regulatory risk that this poses, many institutional investors had announced that they would not be investing in the firm’s IPO. The added costs of providing employee benefits and protection for its thousands of couriers, which could increase labour overheads by up to 30%, generates a bleak outlook for the firm’s future profits. [11]

As always, market setting plays a large role in the success of a company’s debut. Following the release of vaccines and the resumption of restaurant dining etching closer, investors seem to have lost their appetite for online delivery services. Many predict that the heavy demand for online deliveries will not be able to be sustained without the help of lockdowns. DoorDash, which closed 86% above their IPO price on the first day of trading, has since fallen by 24% this month. [12]

Timing is everything in the world of public markets, and the ship had unfortunately sailed for Deliveroo’s prospects of a successful IPO. With mounting regulatory pressures and the sustainability of its business model at risk, it seems that the food delivery juggernaut now has bigger issues to worry about.