Deliveroo $7bn valuation...Really?

Please find updated post here: https://newmooncap.substack.com/p/deliveroo-7bn-valuationreally

What about Deliveroo? $7bn valuation! And it is profitable!

I find this valuation pretty absurd, although I am pretty sure whoever made this investment in Durable would still make money in the IPO pop.

I have a few concerns:

1. Notice that Deliveroo only said it is profitable on an operating level. What does this mean? Does this exclude corporate HQ costs such as restaurant and courier acquisition?
2. How profitable would Deliveroo be post-Covid? I am guessing Covid benefited the company’s unit economics by increasing AOV, willingness to pay a delivery fee, and reducing CAC (S&M).
3. MOST IMPORTANTLY, we know that Deliveroo is only profitable because the company do two things: (1) charge a high delivery fee, (2) lower courier fee per hour, and (3) shrink courier radius to ensure higher drop velocity and therefore further lowering delivery fee per drop
• This should allow Deliveroo to be profitable on a per drop basis as I have mentioned in my previous post…but is it sustainable?

To summarise, I believe the only reason why Deliveroo is profitable is because they (1) raised their delivery fee, (2) lower courier cost per hour, (3) shrinking courier radius to increase drop per hour and reduce cost per drop, (4) benefited from higher AOV due to Covid, and (5) lower CAC due to Covid.

Interesting that the company has to have so many tailwinds in order to make the math work…on an operating level.

What is the cost of each of these actions?

1. High delivery fee: JET is coming with 0 to low delivery fee. Deliveroo will lose customers over time if it doesn’t match the fee
2. Lower courier fee per hour: the courier base will shrink post Covid when people can get normal jobs or drive for Uber
3. Shrinking courier radius: this effectively shrinks restaurant inventory for each customer
4. Covid related higher AOV: this should revert after Covid. Also with TKWY potentially attacking the B2B business, Deliveroo might see negative mix shift here
5. Lower CAC due to Covid: should revert after Covid 

Here are other concerns

Why did Deliveroo decide to rollout white label with Nandos? As I have said in my previous post, this is a terrible idea as it effectively commoditizes Deliveroo and people that want Nandos are no longer acquired by Deliveroo. At some point, all the food delivery players would do this and Deliveroo can lose the majority of its volume in the snap of a finger.

My guess was that JET was going after Nandos with extremely attractive take rates for exclusivity. Deliveroo could not match that take rate and had to do white-label (which is admittedly a superior long-term value prop to chain restaurants) to keep the (delicious) chicken chain. But this also means that Deliveroo probably understands that “hell is coming” in the UK and it has to approach things in a different way to survive.

I mean…if white label is SOOOO profitable and amazing, why not roll it out with the other chains? And why is it only NOW that they decide to do this?

$7bn valuation…really?

Now lastly, and this is a short point…$7bn valuation for Deliveroo is pretty insane to me. Durable probably makes money, but this feels a bit like Softbank-Wework to me.

Deliveroo is in a terrible position in all of its markets. It is never the #1. It is the #3 in its main market. It is losing share in most markets.

It faces a lot of competition from JET with its aggressive strategy in basically all of its market.

It’s business might be deemed illegal in a few years. Spain has already said what it is doing is illegal. JET approaching this market with a hired courier approach does not help Deliveroo’s case.

We do not have latest data, but I am guessing gross profit double from 2019. So $7bn valuation on about $375mn of gross profit. About 19x gross profit.

I don’t know…19x gross profit for a business with these sorts of characteristics and headwind at what might be its PEAK demand due to Covid doesn’t sound like value investing to me.