One of the most anticipated IPOs of the year, meal delivery service Deliveroo, has turned into an embarassing failure. The stock plummeted in the first hours of trading. This was partly due to the dual share structure that founder Will Shu implemented to cement his control over the company. But more importantly, it reflects market concerns over the long term profitability of the company.
Valuations up to 10 billion euros
In the run-up to the IPO the valuation of Deliveroo skyrocketed. At its peak, the company was valued at a little over 10 billion euros. But investors on the London Stock Exchange were merciless and didn’t buy into the ambitions of the company.
This became apparent when Shu was forced to downgrade the price range for the shares he was offering. This price range is used to gauge investor interest in the stock. Initially, it was set between 3.90 and 4.60 pounds. But the higher end of that price range needed to be lowered to 4.10 pounds. That may seem like a modest adjustment, but this translates into a total market valuation that is 1 billion pounds or 1,2 billion euros lower.
20 times the voting rights
Even that could not save the stock from being butchered in the first hours of trading, with price drops of up to 30 percent. This is a very strong signal that the market does not share Shu’s confidence on the future prospects of Deliveroo. Shu founded the company in London in 2013 and expanded it into one of the biggest names in the fast growing market of meal deliveries. The IPO should have been the crown juwel of that endeavour.
Part of this is due to Shu himself. He wanted to make sure he maintained control over the company, and introduced a dual share structure. The shares offered to the public are ordinary shares, meaning they offer one voting right per share. But Shu’s shares are worth 20 voting rights each. This way, he can make sure that an investor can build up a sizeable share of the company in order to start weighing in on the strategic decisions of Deliveroo. Now, they essentially get the message that their vote will have little to no influence. Not exactly an enticing prospect for a professional investor.
Couriers: employees or self-employed?
The biggest problem for Shu has to do with the future profitability of his company. Despite the fact that meal deliveries have been in high demand during the coronacrisis and the subsequent lockdown measures, the company has yet to turn a profit. Deliveroo reached the milestone of a 1 billion pound turnover, but heavy investments in tech and marketing ate up all the margins, and then some. This is not unusual in the industry, where all the major players are chasing market share in the hopes of finding profit later. And Deliveroo proved that it is able to reduce its losses considerably.
But large investors fear that Deliveroo will never be able to turn a profit. A lot, if not all, hinges on the position of the delivery riders. Currently, all the riders at Deliveroo work freelance for the company. Deliveroo argues that it does not employ them fulltime, and that the riders can do other jobs in between. The riders, on the other hand, argue that the company makes it difficult to do this, as its algorythm punishes riders that don’t respond fast enough by giving them less rides.
The debate has reached quite a few courthouses already, and the outcome of these cases does not bode well for Deliveroo. In Spain and the Netherlands, judges ruled that Deliveroo-riders are to be considered employees, with all the benefits that come with it. In Belgium, a judge is due to reach a verdict on the matter later this year. A story in Belgian financial daily De Tijd already makes clear that Belgian Deliveroo-riders are overwhelmingly at a disadvantage in the current situation.
Eat or be eaten
Is there no other way to run the business? A quick glance at Deliveroo-competitor Just Eat Takeaway.com suggests that there is. There, the riders are employed with interim contracts. The main question, however, is if Deliveroo can copy this model while maintaining its business model. Currently, the company was working towards the point where the main investments were done and it could start leveraging its scale to find a profit.
But if judges all around the world force Shu’s hand to hire al his drivers as employees, that plan is in peril. Shu has little room to move. He grew his company by presenting his service to customers as a cheap one. Those clients are used to that, now. So trying to raise prices in order to boost margins is a tough sell.
In any case, the whole market of meal deliveries is stuck in a “eat or be eaten” dynamic. Everyone assumes that eventually the playing field will settle around a few market leaders, who will take shape throug mergers and acquisitions. This has been amply demonstrated by Just Eat Takeaway.com, whose most recent feats include the takeover of its American competitor Grubhub. And then there is UberEats as a force to be reckoned with. The mission for Shu is clear: if he does not find a way to boost profitability in a way that can convince the market, he will quickly become the prey instead of the predator. And all the twenty-fold voting rights in the world will not be able to save his company then.
