This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
The online food delivery market may be worth close to $100 billion and many of us may have become accustomed to nipping downstairs to pick up our lunch from a cyclist or ordering dinner through a mobile app, but the industry has only captured a small slice of the opportunity on offer.
With the market ripe for the taking, companies are starting to make major efforts to grow internationally. Recent reports that Uber and Deliveroo are in early-stage talks about teaming up have got markets preparing for what could be the industry’s biggest ever deal, and the strongest signal yet that consolidation is to remain on the horizon for the foreseeable future.
The sector has evolved down two channels, which are increasingly blurring into one. The first are platform-based firms like Just Eat, which don’t deliver the food from the restaurant to the customer but simply provide the platform that small chains with their own delivery operations need to automate transactions and reach a wider audience. The second has been about providing the actual delivery services to restaurants that lacked them and opening up a second stream of revenue for restaurants that previously wouldn’t have dared entrusted their ‘ravioli with foie gras and white truffle’ or ‘beluga caviar and pearls’ with a Deliveroo or Uber cyclist.
Both have their benefits and their drawbacks, but the gap between the two has widened. Platform-based firms have been able to grow at a faster rate – Just Eat became a member of the FTSE 100 late last year – because they can operate on a national level as they simply deploy their platform to wherever it is needed, whereas firms like Uber and Deliveroo have much more labour-intensive operations and are limited to entering major cities where there is enough riders and restaurants.
Read more on Just Eat joining the big league
Both types are increasingly stepping on one another’s toes. Just Eat, for example, has tentatively started to provide delivery drivers for restaurants that want them, while Deliveroo has begun accepting chains that have their own drivers. And Delivery Hero, which listed in Frankfurt last year and represents the most formidable competition in Europe outside the UK market, also adopts a ‘hybrid’ model of offering a scalable platform with a fleet of delivery drivers.
With no market yet mature, and some yet to even get off the ground, the industry has realised the battle will not be fought on a national level but on the international stage. Just Eat, Deliveroo, Uber, Delivery Hero and Takeaway.com all operate in multiple countries to further encroach on one another’s territories.
With the market heating up and everyone eyeing the menu – including Amazon as it continues its boundless expansion – we have a look at a possible tie-up between Uber and Deliveroo and the effect it could have on the rest of the market.
Is Uber buying Deliveroo?
Both companies are currently keeping quiet, but numerous (albeit unnamed) sources have confirmed that Uber has made an early stage approach to acquire Deliveroo since being first reported by Bloomberg.
Both companies are currently private so public information is slim but some form of announcement is expected in the coming weeks once the pair have sized each other up. Although attention is on a possible merger there is growing expectation that Uber could look to make a sizeable investment and partner with Deliveroo rather than buy-up the whole company – and that is partly down to price.
How much is Deliveroo worth?
Deliveroo has grown substantially since being founded in 2013, with its latest fundraising last year valuing the business at $2 billion. However, it is important to remember that Deliveroo is not up for sale and that it would demand a significant premium should it consider any offer.
Multiple reports have emerged implying Deliveroo’s management and existing shareholders – including the likes of T Rowe Price and Fidelity, who invested last year – would hold out for a price no less than $4 billion. A hefty sum for Uber, which is one of so many companies attracting investor interest despite still being deep in the red.
This price tag has raised the likelihood that, should any deal be struck, Uber makes a significant investment in its British counterpart to create a formidable partnership – it doesn’t need to own all of the company to control or influence it. While the price will be a sticking point (it always is), everything remains on the table from a full-on takeover to a joint venture, or very possibly nothing at all.
Why does Uber want to buy Deliveroo?
There are clear reasons why a combination of UberEATs and Deliveroo is enticing. Both need to catch up with the vast lead that their platform rivals have gained – Just Eat comfortably holds more market share in the UK, Europe’s most mature market, than Deliveroo and Uber combined – and to accelerate their expansion into Europe.
Uber is best known for its ride-hailing services that have upheaved incumbent taxi drivers in cities around the world, but the launch of a standalone UberEATs delivery service app in 2016 turned what was initially a very limited side offering into an important source of growth.
One reason for the heightened focus on UberEATs is because it has had a much more troublesome time with its core business – Uber’s general manager for the UK said he ‘absolutely accepted’ London’s decision to temporarily withdraw its licence last year and it has recently sold-off its ride-hailing services in Southeast Asia, China and Russia.
Another is because it sees a correlation between its two businesses, either entering a new city with its ride-hailing service and following up with UberEATs afterwards or vice-versa, and its delivery service is active in less than half the amount of cities its ride-hailing service is in. Whereas previously it would use its ride-hailing market to introduce UberEATs it has increasingly started launching its delivery service in locations where it has no presence and last year one-third of all new UberEATs customers had never used its ride-hailing service before.
Fusing Uber’s strengths in the US with Deliveroo’s in Europe
Uber’s main market is in the US, where UberEATs is the fastest growing company in the sector but still far behind much larger competition like GrubHub. Deliveroo may have no presence in the US but it does have the operations to help complete UberEATs’ European jigsaw. While UberEATs is in the likes of the UK, France, the Netherlands, Poland and Belgium, Deliveroo offers additional territories including Germany, Ireland, Spain and Italy.
Uber chief executive, Dara Khosrowshahi, has put UberEATs at the top of his growth agenda, and the head of the delivery service at a global level, Jason Droege, told the Financial Times in March that Europe was ‘super important’ to the company’s ambitions.