A Deliveroo board member has defended the food delivery startup's low margins and said it should IPO
- UK food delivery startup Deliveroo is a homegrown tech unicorn, raising £285 million last week at a valuation of £1.48 billion.
- But its most recent results show big losses alongside massive growth for 2016, and a gross margin percentage of just 0.7%.
- Deliveroo investor and board member Martin Mignot has said he is still bullish on the startup, and that it plans to take on the €1 trillion combined grocery and food delivery markets.
- Mignot said the firm would hopefully go public within a few years.
But when the startup also reported its annual results last week, critics pointed to an alarming figure: Deliveroo's gross profit margin stands between 0.7% and 0.8%.
Why does this matter?
Deliveroo's gross profit margin is its revenue minus how much it costs to make food deliveries. The higher the gross profit margin, the more fundamentally efficient the company looks. A low gross profit margin, like Deliveroo's, suggests it will be hard to scale the company, because it isn't making enough money to spend in other areas, like marketing.
The company works by allowing customers to order food for delivery via its app. Deliveroo then puts the order in with the restaurant, sends a rider to collect and deliver it to the customer, and charges a commission fee to the restaurant, which is often passed on to the consumer.
Critics latched onto the 0.7% number to query Deliveroo's viability as a business.
Martin Mignot, a partner at Index Ventures and a Deliveroo investor and board member, said Deliveroo's accounts don't show the full story.
"When people look at the margins today, there's a little bit of a disconnect, especially when lots of [commenters] were looking at a snapshot of annual accounts from last year," he told Business Insider. "The accounts lump together some very mature zones, and some new zones with vastly different economics."
Put simply, Mignot suggested that Deliveroo's margins are higher in markets where it's been operating longer. The accounts don't break out different markets individually.
"The longer you have been operating in a market, the more volume you’ve got, and the more data you’ve got — like how long restaurants will take to prepare food," he said. "Those variables are going to impact demand and supply. The longer you have been operating, the better you become at forecasting those elements and the more efficient you become."
Mignot said investors had access to more contextual data about how Deliveroo is improving its efficiency. Public commenters and journalists were simply going on gross margin and revenue figures from Deliveroo's public accounts
He added:"I don't really feel people can have an informed opinion."
He also pointed to the fact that two mutual funds joined Deliveroo's latest investment round, which was announced after its results: T.Rowe and Fidelity. Fidelity is particularly known for investing in high-growth unicorns which are likely to IPO. While Mignot said this signalled confidence in Deliveroo, it's worth noting that Fidelity and other mutual funds aren't too bullish on another of its hot tech investments — Uber.
Deliveroo wants to grow by adding masses of users
One theory about how how Deliveroo will grow is that the firm will aim to become a monopoly in food delivery, then jack up the commission it charges restaurants. Deliveroo doesn't reveal its commission fee, but restaurant managers say it's around 20% per order.
Another theory is that it will expand into different types of delivery, not just food.
The ambition is actually much bigger, according to Mignot.
Deliveroo wants to kill home cooking.
"I don't think the company will do grocery delivery," he said. "Deliveroo's mission is to make on-demand food so much more convenient and better than it actually makes less sense for people to cook at home. They would only do it as a hobby. That's really the vision: it's all about reducing costs for restaurants."
The thinking is that getting food delivered is still seen as a luxury. If Deliveroo can make the entire process cheaper, it can theoretically attract more customers who have the finances to make orders more frequently.
"There's more margin, you can reduce the the price, and potentially pay riders better," said Mignot. "It's definitely an Amazon-type [strategy] — we want the lowest price, greatest selection and the best service. It's very much the Amazon playbook applied to on-demand food."
Co-ordinating drivers, food orders, and restaurants is so difficult, he added, that most competitors like Just Eat won't bother trying. Just Eat also lets you place takeaway orders, but doesn't have its own fleet of drivers to deliver the food to you. The firm went public in 2014, and reported revenue of £376 million on pretax profits of £91 million for the full year 2016, with a gross profit margin of 91%.
"When you're listed and have a high margin like Just Eat, you have a great business with high margins, why go after that seemingly complex, seemingly low margin business which people are still skeptical about?" Mignot said. "By the time [Deliveroo] becomes very profitable, it has a product you can't replicate."
As for Uber and Amazon, both of which have launched food delivery services, this is "a good sign it's a large market."
Mignot added: "Deliveroo has remained ahead of anyone else in Europe in the markets they operate ... they were first and they have obsessive focus. It's all they do — no taxis, they don't sell books, all they do is on-demand food delivery for restaurants."
There is another big risk factor for Deliveroo: its riders. The company is awaiting a tribunal decision on whether its riders, currently classified as self-employed contractors, are actually workers entitled to the minimum wage and other rights. If the tribunal rules against Deliveroo, it's likely its human labour costs will go up considerably.
The focus is on growth and an IPO
Deliveroo is focusing on scaling right now.
"Obviously the idea is in the next few years, hopefully the company can be in a position to IPO then, at that stage, the public market will want to see a clear path to profitability," said Mignot.
He pointed to Delivery Hero, which went public in June this year but was not profitable. The firm yesterday posted a 66% year-on-year increase in revenue for the first half of 2017 to €246.5 million (£216 million).
"The valuations are generous for this company, because people believe they can keep on growing and improve their margins," Mignot said. "We are betting on the same trajectory."
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