Delivery land-grab still in full swing
One of the differentiating factors of Just Eat compared with its rivals Deliveroo, UberEats and Amazon is that it has a true virtual model. It simply acts as an online marketplace linking hungry customers with their local take-away operators. It certainly does not dirty its hands (and diminish its margins) by handling the actual deliveries.
It did give it a go some years ago in a trial – no doubt prodded by the incursions of Deliveroo and Uber – but decided that there was no money in it and so it abandoned the experiment. Its former CEO David Buttress was absolutely adamant that the company was not going to go down this route in the UK as there were plenty of other opportunities for the business.
He has certainly been proved correct if we look at the state of the business. It has continued to produce 40%+ year-on-year revenue growth. It currently processes eight of the 25 takeaways ordered by its average customer a year. This has contributed to it earning a market capitalisation of over £5 billion.
As well as the lack of profitability generated when handling the whole delivery infrastructure Buttress also recognised that the best service is inevitably offered by organisations that employ their own drivers rather than farming it out to a third-party. Certainly service was an issue in the recent survey undertook by Propel and Piper. Among the 2,000 customers surveyed the rating out of 10 for UberEats was 6.67, for Deliveroo it was 5.75 and for Amazon a lowly 5.20. None of these scores are exactly ringing endorsements of any of the delivery services presently offered.
Against this backdrop it was something of a surprise therefore when Just Eat recently made the announcement that it would be investing as much as £50 million in its own delivery service to take on its rivals. Less of a surprise was the fact the City was spooked by the news. It knocked more than £700 million off the Just Eat valuation as it considered the thinking behind the company’s move and the implications of such a move.
It does rather suggest the company recognises it has to react to the growing might of its rivals. Deliveroo raised further funds at the back end of last year as it builds out its capability and also invests in its interesting Editions kitchens business. It is a similar situation at Uber where the company’s new CEO has expressed his full support for the UberEats division and given the go-ahead for a roll out of the service to 100 more cities – including 40 in the UK.
These moves combined highlight how the temperature continues to rise in the food delivery sector. As much as operators dislike having a third-party suck margin out of their businesses within an already tough trading environment it seems there might ultimately be no choice but to engage with delivery. It’s a painful reality that consumer trends are dictating that there will be few parts of the market that can remain completely disengaged from the home delivery phenomenon.
One consolation might be that with Just Eat entering the fray – and looking to take share from its rivals with a competing full service delivery offer – there might be some easing up on the high charges that are typically demanded by Deliveroo and UberEats. Despite taking as much as 30% of the order value in many cases none of them exactly rolling in profitability. Regardless of the apparent fragility of the model the land-grab is still very much in full swing.
Entering this very competitive part of the market by Just Eat is certainly puzzling. Unless it knows something that we don’t and that there are genuine concerns over the 40% growth that it has enjoyed and which, most importantly, its investors have now come to expect. Their confidence has driven it to the £5 billion valuation, based on a pretty high multiple of earnings.
The one thing we can be sure of is that food delivery looks set to continue to be one of the most exciting parts of the leisure and hospitality industry even though it is the consumer who continues to be sole beneficiary of the exercise.