Has the food delivery story stalled?

Covid cast a pall on many businesses but there were winners and food delivery drivers were amongst the lockdown heroes. I remember the unholy glee felt by the entire family when that insulated bag stuffed with carboard cartons walked through the garden gate after what seemed like months of home-cooked meals.

Everyone seemed to get in on the action, and the number of options available to order via apps like Uber, Just Eat and Deliveroo exploded. As restrictions lifted some investors began to ask whether the momentum could continue or if the reopening of bricks-and-mortar hospitality would put a spoke in the wheel, but habits had been formed and home working seemed to offer another outlet.

“Food delivery companies have been beguiling investors for years with their growth story and promises of profitability.”

Even in Huddersfield, which has some great independents but has never really been a focus for big restaurant franchises, Wagamama came to call. Its arrival was met with excitement from my noodle-loving kids but after just three months the noodles disappeared and with rather less fanfare than when they arrived.

Bricks and mortar back on the menu

The Restaurant Group’s latest interim results told the tale; the company would continue with plans to open bricks-and-mortar restaurants but its rollout of dark kitchens would cease because of the “…delivery market softening.”

That softening’s been measured by the CGA’s Hospitality at Home tracker, which found delivery and takeaway sales for restaurants and pub groups were down by 19% in July compared to the same month in 2021, and it was the ninth month in a row that the tracker recorded a year-on-year decline.

But it noted that takeaway and delivery sales were still considerably up on pre-pandemic levels, despite the current cost-of-living crisis which has dented consumer confidence and eroded discretionary budgets.

Growth in the UK delivery market

Source: Lumina Intelligence

Food delivery companies have been beguiling investors for years with their growth story and promises of profitability. Here in the UK the sector last year was valued at a whopping £10.5 billion, and the market is predicted to grow by over £4 billion in the next couple of years.

Is growth the answer?

But is growth all it’s cracked up to be? Deliveroo’s latest update highlighted an issue that’s long troubled many investors. Whilst revenue shot up profitability went the other way, begging the question “does the marketplace really work?”

“No one doubts that food delivery is here to stay but there are a great number of variables companies need to consider.”

It’s a question that’s dogged supermarkets as they’ve shifted more of their business online. If basket sizes are substantial the metrics work out but if people order small amounts the costs become prohibitive.

No one doubts that food delivery is here to stay but there are a great number of variables companies need to consider, not least increased courier costs, something that ate into Just Eat’s Northern European revenues over the first six months of the year.

The trick, unsurprisingly, is to find a model that can neutralise any rise in costs or falls in order size.

“Investors wonder how the consumer will respond: will they be prepared to loosen the purse strings now there’s less demand on it or will they remain cautious?”

Scale is important: it’s why Just Eat, Uber and Deliveroo have spent billions on mergers, acquisitions, and tie-ups. But not all the pieces fit seamlessly into the jigsaw and mistakes have proved costly, with Just Eat recently taking a £2.5 billion hit after it wrote down the value of US subsidiary Grubhub and sold off its stake in Brazilian based iFood in a bid to improve profitability.

Uber’s going its own way with shares in the company picking up after it announced a 10-year deal with Nuro in the US to use its autonomous vehicles to make deliveries, eventually cutting out courier costs altogether. It also delighted its patient investors with the news that it should finally become profitable this year, one of the reasons its share price hasn’t experienced the same brutal falls as Deliveroo and Just Eat with both down over 70% since this time last year.

Will consumers have to pay more?

Inflation has clearly been forefront in investors minds over the past year and despite government intervention the next twelve months look likely to remain difficult for consumer-facing stocks. Investors wonder how the consumer will respond: will they be prepared to loosen the purse strings now there’s less demand on it or will they remain cautious? And if they do splurge, are they more likely to plump for one real night out rather than a couple of takeaway meals?

Subscriptions might ultimately be the smart way of persuading people to pay more for the service they receive once inflation returns to “normal” levels because something has to give – especially if workers get more rights and unions become further entrenched in gig economy. Deliveroo is heading for a showdown with IWGB in the Supreme Court as the union tries to get drivers classed as workers. Such a move would prove costly, and it was this black cloud that put many institutional investors off the company at its IPO.

Consumers are unlikely to be prepared to pay much more than they currently do for the service they currently receive, and realistically competition watchdogs are unlikely to look fondly on any major merger moves, which creates a conundrum which is unlikely to be resolved quickly.

Past performance is not a guide to future performance and some investments need to be held for the long term.