Delivery Hero, headquartered in Berlin, Germany, is one of the largest online food delivery businesses in the world. What distinguishes Delivery Hero from other players in the space is the company’s focus on operating market leading businesses across a number of emerging markets.
The company went public in June 2017. Today Delivery Hero’s market cap is €9.7bn. Gross debt, composed of an RCF, Term Loan B and six different convertible notes totals €5.3bn. Net against €3.0bn of free cash, net debt totals €2.3bn, implying a total enterprise value of €11.9bn.
The key questions I’d like to address here:
All these online food delivery company stocks are down ~70%, what happened?
How has the online food delivery business evolved over time and where are we today?
What is Delivery Hero’s story and how is it different?
What are we really betting on? What’s priced into the stock?
The Market Context: A Growth Bubble Story:
One hedge fund letter that I’ve re-read and shared more than once was written by Parsa Kiai of Steamboat Capital in 2016. He offers insightful commentary, not about the macro-economic environment, per se, but about the preceding hedge fund investor zeitgeist and how solid ideas grow into mania:
Throughout the history of Wall Street, an original and thoughtful concept often generates exceptional results, at which point it attracts competition and capital to the point where the excess returns are eliminated. Given some of the structural characteristics in finance (such as upfront commission compensation and agent-principal issues) and the innate features of human nature, these once-sound theories frequently reach levels where it is more profitable to bet against them than on them. (…)
(W)e believe that William Thorndike’s book was groundbreaking by illustrating that the most successful CEOs in American history often possessed characteristics that were considered unorthodox or unusual in the mainstream corporate community, such as focusing on long-term cash flow instead of short-term earnings. While we believe Thorndike’s message is invaluable, we find that one phrase in particular has been erroneously misapplied in recent years: “the outsiders (who often had complicated balance sheets, active acquisition programs and high debt levels) believed the key to long-term value creation was to optimize free cash flow” (p. 10, emphasis added). It is true that some of the visionary CEOs profiled in “The Outsiders” at times did use significant debt or had businesses that were not appropriately captured by generally accepted accounting practices, but in recent years, Wall Street has inappropriately accepted that reckless indebtedness and opaque disclosure are tolerable when investing with “celebrity” CEOs. This was not the first time that investors became captivated with highly celebrated CEOs, as today’s “platform” companies existed before as utility-holding companies in the 1920’s and conglomerates during the 1960’s, along with several more recent iterations. LTV CEO Jimmy Ling, Tyco International CEO Dennis Kozlowski and Brazilian tycoon Eike Batista were all considered brilliant corporate leaders and capital allocators before the final dark chapters of their stories were written.
As we evaluated many of the companies that were led by highly-touted CEOs, we felt that legitimate questions were being left unanswered, notably: Why was Valeant’s acquisition disclosure and accounting so opaque and its free cash flow so difficult to reconcile? Was Altice CEO Patrick Drahi’s seemingly insatiable appetite for acquisitions and extreme price insensitivity a sign of brilliance or recklessness?
Parsa Kiai, Steamboat Capital Partners, LLC, 2015 Fourth Quarter Investor Letter
This brings more nuance to the Buffett-ism “what the wise do in the beginning, fools do in the end.” It’s that there’s some combination of (A) a conflation of surface level characteristics with deeper underlying fundamentals, and (B) an overriding of certain negative factors by the dominant narrative. Positive price action lulls normally skeptical investors into complacency and ironically provides a lower margin of safety for the buyer.
Which brings us, today, to the “compounders” idea. I can’t remember where I first heard the term, but suddenly about five years ago, it felt like “investing in compounders” became a description of an investment process that had meaning. In a 2015 note, Morgan Stanley attempted to define:
We define compounders as companies with high quality, franchise businesses, ideally with recurring revenues, built on dominant and durable intangible assets, which possess pricing power and low capital intensity. When evaluating these companies, we focus on franchise quality and durability, financial strength, industry position, and management quality
The Equity Compounders: The Value of Compounding in an Uncertain World, Morgan Stanley, April 2015.
At the time (and more or less up until the end of 2021), periodic returns of the S&P 500 were overwhelmingly driven by the Big Tech stocks (FAANG+). These companies were so dominant in market power, persistently generating high returns on capital and all growing significantly faster than the economy, yet were trading at very reasonable multiples. From a more macro-oriented perspective, in a world where slow growth, low interest rates and persistent deflation were the expectation, secular growth was the place to be.
Naturally, investors with some link to Silicon Valley figured this out first. Aside from the physical proximity to the Big Tech businesses, these investors were more fluent in analytical concepts like network effects, marketplace business models, winner-take-most equilibria, counter-positioning, etc. that were used to analyze digitally native venture-backed start-ups and were essential in understanding the market dominance of the Big Tech businesses. Importantly, these investors were also more comfortable with investing in business that were optically expensive, and in some cases burning lots of cash, but showed promise at the unit economics level. The analog to Thorndike’s The Outsiders here would be Hamilton Helmer’s 7 Powers.
How then, do you outperform in this environment? One answer is to go upstream: Rather than invest in secularly growing technology businesses that have already achieved scale, profitability and market dominance, an investor can put capital to work in the compounders of tomorrow by identifying the inevitable winners, whose (future) growth profiles will far exceed the FAANGs’.
The magnitude of the technological change should not be understated: the ubiquity of smartphones has in fact enabled consumer facing businesses to scale larger and faster than ever before. And so, particularly in nascent marketplace businesses, where scale potentially enables a self-reinforcing competitive advantage, the key to winning is eschewing any notion of short-term profitability to grow the market and establish dominance.
This obviously becomes increasingly risky if you follow the progression to its logical conclusion: let’s take the lens of unit economics: understanding a firm’s competitive advantage through an examination of unit economics is not new, i.e. it might be the most common-sense approach to most business analysis, as illustrated by Buffett’s repeated discussion of Coca-Cola’s revenue and costs per can. But, the point is, if you are able to earn excess returns by investing in a fast growing, cash-flow burning, company with profitable unit economics, a strong competitive position and a large TAM, maybe you can actually earn greater excess returns by investing in a fast growing, cash-flow burning, company with a line-of-sight to profitable unit economics, an uncertain competitive position and a large TAM (etc., etc.)? Stepping out further on the risk spectrum becomes validated by price action.
Increasingly liquid and robust private markets also opened up the universe of buyers. Perversely, while normally an illiquid investment would command a return premium, so called crossover hedge funds (Tiger Global, D1, Darsana, Coatue, etc.) liked the exposure on the merits and for the limited market-to-market volatility. Blue chip venture firms and highly successful newcomers (Sequoia, Andreessen Horowitz, IVP, Greenoaks) raised capital for larger and later rounds. And, private equity funds, like General Atlantic, Hillhouse, Blackstone, etc. raised larger pools of capital dedicated to “growth equity” investing.
Generally speaking, this progress-oriented long term-ism also came with a lot of warm glow and excitement, e.g. pulling from the Greenoaks website: “We believe a small handful of companies define each generation,” and “Our sole mission is to partner with these intensely focused teams for decades.” These sound a lot more socially attractive than say, “we buy cheap oil & gas stocks.”
Of course, many of these private investments were funded directly and via co-invest structures from the largest pools of capital like sovereign wealth funds, e.g. the Softbank Vision Fund funded by Saudi Arabia’s PIF. University endowments reported huge gains on their private investments in 2020 and 2021. The amount of capital raised with a focus on these areas was unprecedented:
Global Private Equity Report 2022, Bain & Company
And, going a full-180 from the “compounder” definition above, capital intensive industries were, in some cases, favored, as the ability to overwhelm the competition with the perception of endless capacity for pain was an asset. As SoftBank CEO Masayoshi Son allegedly told WeWork CEO Adam Neumann “In a fight, who wins — the smart guy or the crazy guy?”
When the COVID-19 pandemic hit in early 2020, global household expenditures contracted sharply and then shifted towards “COVID-winners,” mostly smartphone enabled ecommerce businesses. Optimistically, the perception was that this one-time exogenous shock hit the fast-forward button on the secular economic changes already underway and that, even if COVID went away, consumer behavior would be sticky. Many of these businesses went public either through IPO or through SPACs, as investor demand for companies that were secular winners had never been higher. Measures of retail participation in the stock markets hit a fever pitch. Momentum in financial markets becomes self-fulfilling.
Obviously, what was left out was a consideration of price. Valuations and the concepts used to justify those valuations bordered on the absurd. And, following a peak in November 2021, the reflexive dynamics all started working in reverse. Some market observers have claimed the inflection point was caused by the change in monetary policy. Others have focused on earnings degradation and a mean reversion in consumer spending, creating a wide gap of uncertainty over future growth rates for “COVID-winners.”
Whatever the cause, most public growth stock prices are down anywhere from 50-90%+. And, to bring things back to why we are here, publicly traded food delivery businesses Delivery Hero, Doordash, Deliveroo, and Just Eat Takeaway stocks are all down 65-75% since the middle of November 2021. Investors have gone from debating things like “who will be the eventual winner?” and “what’s the real TAM?” to now asking questions like “is this even a real business?”
A Brief Evolution of Online Food Delivery:
When I was an intern at Houlihan Lokey after my junior year in college, I thought the $40 daily dinner allowance was the peak of luxury. As the proletariat of the investment banking world, we analysts would pool together our orders on SeamlessWeb[1] and create a nightly buffet as the managing directors would leave us with our pitchbooks and spreadsheets. The value proposition for my employer was clear: they could keep the (highly paid) labor from leaving the office and Seamless would coordinate and consolidate the payment, expense reporting and delivery of our dinner.
In 1999, SeamlessWeb’s founder, Jason Finger, fresh out of law school and working as an associate in New York, didn’t just see the hole in the market, but also realized that restaurants in Manhattan (and later in other sufficiently dense cities like San Francisco) already had the delivery infrastructure to facilitate a large two-sided marketplace business, he just had to grind to put it together. Finger also realized that by focusing on corporate clients, customer acquisition costs were very low, and like many golden-handcuff oriented behaviors, ordering food online stuck with the lawyers and bankers in Manhattan after they left the desk: customers started ordering food to their apartments. Foreshadowing Uber’s business today, in 2003, Finger also planned to expand Seamless into an internet-coordinated black car service (“Seamless Meals and Seamless Wheels”), before killing the venture after allegedly being threatened by the mob.
Given the highly unique properties of the Manhattan market and the asset-light nature of the marketplace model, Seamless was always purportedly profitable and didn’t require a large amount of capital to grow in NY. But to grow outside Manhattan, Finger needed capital and sold the business to corporate caterer, ARAMARK, in 2006, for an undisclosed amount. Then in 2012, working with private equity firm, Spectrum Equity Investors, Finger spun the business back out.
Along the same timeline, in 2004, Matt Maloney founded GrubHub in Chicago. His entrepreneur-origin story is comically like Finger’s: Maloney wasn’t working as lawyer, but as a developer for Apartments.com and thought you should be able to order food online to an office with a credit card. Again, the marketplace model was very attractive: after getting the customer, they pass on the orders, restaurants would pay them a commission fee for bringing the orders, and then call it a day. From 2007-2011 GrubHub raised five venture capital rounds, including rounds led by Benchmark. They went out and acquired a number of marketplace food delivery businesses, culminating in a merger with Seamless in May of 2013. Pulling from the merger press release:
“The combined organization will enable diners and companies in more than 500 cities across the U.S. to order from more than 20,000 local takeout restaurants. In 2012, the online and mobile platforms of the two organizations sent approximately $875 million in gross food sales to local takeout restaurants, resulting in combined revenue well in excess of $100 million.”
Following the combination, GrubHub Seamless went public in August of 2014. By 2016, the company had grown wildly and was quite profitable: GRUB generated revenue of ~$493mm and EBITDA of $145mm in that year. Reflecting optimistic future growth, GRUB’s stock traded well north of 10X Sales.
But before GrubHub combined with Seamless, the seeds of counter-positioning had already been sown: After interning at Square in the summer of 2012, a Stanford GSB named Tony Xu came up with an idea for an iPad app for restaurants to log customer data. Xu and three Stanford classmates, as part of a group project, went around Palo Alto to test product-market fit. The story goes, as Xu describes in a Medium post, that they sat down with the owner of the Chantal Guillon Macaron Shop in Downtown Palo Alto. Instead of entertaining their idea, she told them about her main problem: a thick book of delivery orders with no drivers to fulfill them. The lightbulb went off and Xu bought the domain paloaltodelivery.com.
After seeing some initial success with Stanford’s student body, the team applied to YC and the company later know as DoorDash was born. And, so with it, the three-sided marketplace food delivery model: unlike Seamless/GrubHub which operated a two-sided marketplace matching customers and merchants, DoorDash also matched couriers (“Dashers”), which needed to be tracked just like rideshare drivers, but they also need to be routed to the restaurant and to people's homes representing an increased level of complexity. As the package is (usually) hot food, there's also an unbelievably operationally complex component here—the timing has to be perfect.
Xu wrote a Medium post after his post-YC-seed round saying “Ultimately, our vision is to become the local, on-demand Fedex. We are a logistics company more so than a food company. We help small businesses grow, we give underemployed people meaningful work, and we offer affordable convenience to consumers. We’re tackling some of the most difficult logistical challenges that come with on-demand delivery, both in engineering and operations.”
Counterintuitively, the DoorDash guys focused first not on competing with the legacy marketplace competitors in cities, but growing their way in the suburbs. This turned out to be game-changing. As, Annanth Aravinthan, Head of Business Operations at Uber Eats Canada, describes:
Suburban markets are great for unit economics for two reasons. Firstly, you tend to acquire more family type customers and families probably have a little bit less order frequency, but their average order value, their basket size, tends to be much bigger. It just makes sense; you are probably ordering for three or four people versus a young professional, downtown, that might be a single order. Basket sizes are one of the most important drivers of unit economics because out of every incremental dollar, anywhere from 30 to 40 cents goes directly to the bottom line, which is great, so it’s very accretive.
The second thing about the suburbs is that delivery drivers tend to just cost a lot less. One, delivery drivers tend to live in the suburbs and not downtown, so it’s a lot more convenient to work out of the suburbs; you don’t have to pay them as much to coax them to go into downtown traffic. The second thing is, when you look at the downtown core, the process of parking a car, picking up the food and then dropping it off, maybe being stuck in traffic, that requires a lot of time and energy and a lot of frustration on the driver’s side. On a per delivery basis, you actually have to pay a lot more. They are less efficient and they are a bit more frustrated than those in the suburbs where you are usually dropping off and picking up in a dedicated parking spot, like someone’s driveway or a parking lot. You get these really great efficiencies in the suburbs where you are making more revenue, you’re paying less on the driver side and that turns into much better unit economics
Annanth Aravinthan, Head of Business Operations at Uber Eats Canada, InPractise Interview, February 17, 2021.
The growth was crazy and, by the Summer of 2015, DoorDash covered 85% of the US population. In 2019, DoorDash delivered 263mm meals, generating GMV of $8bn.
Uber, having previously experimented with a number of delivery-oriented models, noted DoorDash’s success and made the judgement that they could compete successfully in this market with two distinct advantages: (i) market liquidity: effectively already having two-sides of the three-sided marketplace active is a great way to start & (ii) business development: by having a strong brand, Uber could more easily strike partnerships with large, in some cases, multinational restaurant groups. Uber launched UberEats in 2015, to compete not just with DoorDash and GrubHub in the United States, but to become the largest food delivery business in the world.
On the business development point, in early 2017, Uber signed an exclusive multi-geography delivery deal with McDonald’s. Uber made a huge advertising push with the agreement and it helped spring-board Uber’s launch in a number of markets. Uber management under Travis Kalanick, having largely won the war for global ride-hailing, started acquiring customers aggressively. As described by Andrew Maddox, Former Head of Uber Eats, London:
“We’d been launched as long as anywhere else, but we'd come in probably against the backdrop of Deliveroo and Just Eat being really locked in a competition already, so we came in as a third party. (…) So, the two of them were kind of locked in this competition and Uber Eats came in and just went absolutely ballistic and started offering incredible guarantees. Our launch guarantees were like, if your meal is not there within 30 minutes you get a whole free meal again. We very quickly realized that wasn't sustainable.”
Andrew Maddox, Former Head of Uber Eats, London, InPractise Interview, August 17, 2020
Because of their existing relationships with drivers and customers, the Uber Eats McDonald’s campaign and a willingness and ability to spend aggressively, Uber shot to a 20-25% market share in the UK and US with three years of entering the business.
Taking a step-back, let’s look more closely at this three-sided model. The following flywheel comes from DoorDash’s S-1:
Doordash management describe three virtuous cycles:
Local Network Effects: Our ability to attract more merchants, including local favorites and national brands, creates more selection in our Marketplace, driving more consumer engagement, and in turn, more sales for merchants on our platform. Our strong national merchant footprint enables us to launch new markets and quickly establish a critical mass of merchants and Dashers, driving strong consumer adoption.
Economies of Scale: As more consumers join our local logistics platform and their engagement increases, our entire platform benefits from higher order volume, which means more revenue for local businesses and more opportunities for Dashers to work and increase their earnings. This, in turn, attracts Dashers to our local logistics platform, which allows for faster and more efficient fulfillment of orders for consumers.
Increasing Brand Affinity: Both our local network effects and economies of scale lead to more merchants, consumers, and Dashers that utilize our local logistics platform. As we scale, we continue to invest in improving our offerings for merchants, selection, experience, and value for consumers, and earnings opportunities for Dashers. By improving the benefits of our local logistics platform for each of our three constituencies, our network continues to grow and we benefit from increased brand awareness and positive brand affinity. With increased brand affinity, we expect that we will enjoy lower acquisition costs for all three constituencies in the long term.
Let’s take the perspective of each of the stakeholders, i.e. the Consumer, Restaurant, and Courier:
The Online Food Delivery Customer: The Customer pays the Gross Order Value which includes the cost of food, taxes, fees and an option to leave a tip to the courier.
The industry argues that one compelling aspect of online food delivery is just how low penetration apparently is: In the US, for example, delivery jumped from 7 to 20% of total US restaurant spending in 2020. Off-Premises spend, which includes takeout and delivery, totaled ~$300bn. Of this amount, online food delivery apps only captured $21bn, implying less than a 10% market share.
Just to level set here: In the US, there’s roughly 120mm households. Let’s suppose that each household orders two meals a week, implying 11.5bn total orders per year.[2] Assume that, over time, online penetration reaches 60%. Using DoorDash’s 2021 average order value of $30.18, that implies a SAM of ~$210bn, which implies about 1/3 of US restaurant spend. Assuming DoorDash retains a 60% market share, that implies GMV of ~$125bn. In 2021, DoorDash’s GMV was $42bn, further implying about 7-8 years of 15%+ growth to reach market saturation, using the assumptions here. This is far more conservative than what the industry represents as the addressable market, but doesn’t seem like an unreasonable case.
Customers are generally acquired two ways: they’re given a free meal or they want food delivered from a specific restaurant. Merchant selection brings customers in the door but then customers are generally sticky on apps, assuming the experience isn’t a disaster. Pre-COVID, cohort spending analysis was very positive: customers tended to order delivery more frequently the longer they used the app. Naturally, COVID lockdowns put these numbers on steroids.
So, does food delivery compete with dining out? Before the pandemic, a November 2019 report from Morgan Stanley found that most consumers surveyed (46%) said ordering food delivery replaced a meal prepared at home, compared to 13% who said it replaced a meal eaten at a restaurant. Conversely, the main reasons for not ordering delivery among consumers who hadn’t done so were preferring to cook at home (43%), delivery being too expensive (37%), and preferring to dine at a restaurant (37%). The preference for dining out was by far highest among consumers aged 55+ (43%) and lowest among those in the 18-34 bracket (21%).
Ali Griswold's Oversharing: Does food delivery compete with dining out?
So, when we think about incremental share to online food delivery there’s effectively three buckets of share donation, firstly a long term adoption of the online platforms taking share from over-the-phone ordering, and then secondly and thirdly a long term trend away from grocery and the persistent oversupply in casual dining. So, while the merchant acquisition done by the 3-Sided competitors greatly expanded the market, the long tail of growth will likely be driven by age-cohort ecommerce adoption dynamics.
The Restaurant and Online Food Delivery: Merchants collect food revenue and tax, but are charged a commission fee based on an agreed-upon rate applied to the total dollar value of goods ordered.
The downside of the 2-sided marketplace model is that most restaurants aren't equipped or aren't even thinking about doing the logistics. If you’re a restaurant and you decide to start offering delivery, you're going to hire one, maybe two couriers, and you're going to use those heavily during the rush hours, whether that's breakfast, lunch, or dinner. The rest of the day they're going to sit around but then when you need them, you're only going to be able to fulfill a couple of delivery orders. This is a nightmare.
If the test for whether a multi-sided platform can create value is to what degree that marketplace can reduce transactions costs, it’s in the efficient use of courier capacity, where economic value creation is most obvious for the three-sided online food delivery business.
Unfortunately, optimizing your restaurant business for a world of omnichannel service is difficult. For the owners and chefs at many of the best restaurants in the world, this idea was anathema to what motivates them to be in the business in the first place. Towards the beginning of the pandemic, Gabrielle Hamilton, chef and owner of Prune, a beloved NYC restaurant, wrote as much in a New York Times piece:
I cannot see myself excitedly daydreaming about the third-party delivery-ticket screen I will read orders from all evening. I cannot see myself sketching doodles of the to-go boxes I will pack my food into so that I can send it out into the night, anonymously, hoping the poor delivery guy does a good job and stays safe. I don’t think I can sit around dreaming up menus and cocktails and fantasizing about what would be on my playlist just to create something that people will order and receive and consume via an app. I started my restaurant as a place for people to talk to one another, with a very decent but affordable glass of wine and an expertly prepared plate of simply braised lamb shoulder on the table to keep the conversation flowing, and ran it as such as long as I could. If this kind of place is not relevant to society, then it — we — should become extinct.
My Restaurant Was My Life for 20 Years. Does the World Need It Anymore? By Gabrielle Hamilton Published April 23, 2020
And, while the average order value is roughly ~2x an in-store ticket, according to a number of fast casual restaurants and publicly reporting online food ordering/delivery businesses, the added cost of the delivery driver (in-house or outsourced) on top of already thin restaurant margins makes for challenging unit economics (from the restaurant’s perspective) unless the majority of orders are incremental.
Which is the core of the platform’s pitch to the restaurant: that we’re bringing you business you otherwise wouldn’t have. The data on this is mixed and likely significantly obscured by COVID. To a certain extent, however, restaurant spend is zero-sum and it becomes a game-theoretic imperative to get on the apps. As the current CEO of Burger King in the UK describes:
“We were clearly marching toward digital before COVID. We bought the UK master franchise for Burger King only three and a half years ago and inherited many legacy systems. I am not making excuses, but changing legacy systems to contemporary applications is challenging. The most significant change for us over the past year has been the extraordinary growth of delivery. It is very unprofitable for us from a percentage margin point of view, but it is revitalizing our high streets which we previously thought were potentially dead and buried.(…) You have to embrace both digital and delivery. You have to find more profitable ways such as white label delivery or click and collect. You have to embrace them all because, if they are not coming to you, they will go to other people.”
Alisdair Murdoch, Current CEO of Burger King UK, InPractise interview, April 15, 2021.
Generally speaking, it seems like restaurants want to be on all three(+) platforms as “incrementality outweighs the benefits of the exclusivity.” Further, all the leading platforms are emphasizing advertising as an incremental revenue stream, where restaurants can further spend and optimize the distribution channel.
While this change in the industry likely benefits large chain restaurants and well capitalized restaurant groups who have the capacity to invest in change, I’m not sure this portends a bleak dining future overall. While the pandemic (and the sometimes nonsensical and schizophrenic government imposed pandemic rules) have been unusually cruel towards the restaurant industry, the truth is that most restaurants are crappy businesses and business failure rates are quite high in the restaurant industry. The reason why Gabrielle Hamilton is famous is because the experience of eating at Prune was exceptionally rare. There will certainly be demand for that going forward.
The Online Delivery Courier: Couriers are paid an amount based on the estimated duration and distance of travel and desirability of order as well as promotions. Platforms remit 100% of the tip provided from the consumer to courier.
I wanted to get an experience of what delivering for one of these platforms would be like, so I signed up to be a Dasher:
The author, as Dasher, about to deliver some Sweetgreen ordered on DoorDash.
I earned $28.59 for completing four deliveries in an hour. It was peak demand on a Sunday evening, so this performance is significantly higher than the average earnings for couriers on most platforms[3]. But, just on a back-of-the-envelope basis, if you were to earn $25 per hour, 8 hours per day, 5 days a week, over 50 weeks, you would earn $50,000 per year. This is a premium to the median earnings in the US, but obviously without healthcare or other benefits. This kind of work would be grueling for 8 hours a day, particularly when the weather was bad, but without a boss and flexibility of when you work, it seems like a pretty reasonable way to earn income part-time.
People in the industry think the platforms need less availability to make a market work:
“As a rule of thumb, if you can get a rider delivering two to three times per hour then you’re getting into a point where they can earn enough money to make it worth their while and you can drive enough volume through the platform to pay them.”
Philip Green, Former CFO at Deliveroo & Finance Director, EMEA, Amazon, InPractise Interview on August 10, 2020
Pulling it all together, as illustrated from a McKinsey study below, the unit economics are tight:
Numbers obviously vary based on the market and the platform, but the dynamics here are generally representative. Most platforms have been barely better-than-breakeven on a contribution margin basis today. The argument from the industry is that: markets will mature, spending on merchant and customer acquisition will subside, the cost of delivery will decrease as networks will be more dense and dominant players will be able to push a little price supplemented by ancillary and high incremental margin revenue streams like advertising. Leading players will be able to generate a mid-single digital margin on GMV, which looks pretty good from an EBITDA margin and return on capital perspective.
Online Food Delivery: Gen1 vs. Gen2 vs Gen3+
Let’s return to the evolution of the competitive landscape.
In the Spring 2020 edition of Graham & Doddsville, Alex Captain, formerly of Tiger Global and founder of Cat Rock Capital Management LP, pitched their largest position, JustEatTakeaway.com. Just Eat was a first mover in the UK, using a marketplace model similar to GrubHub, but focused first on bringing delivery online in small towns across the UK. Addressing the competitive dynamics of the market, Captain noted:
The US online food delivery market has been a competitive bloodbath, but we think JET’s markets in Europe are structurally different. We think the situation is comparable to that of Orbitz and Booking.com – both companies were online travel agencies, but they had very different business mix and market structures, which translated to radically different outcomes for shareholders. (…)
JET competes primarily against UberEats and Deliveroo in its core European markets. JET offers greater selection and lower average delivery fees than its competitors in these markets, and yet it earns a profit while its competitors endure significant losses. JET is able to accomplish this feat because it has much greater relative market share and because so many restaurants in its markets offer their own delivery, driving attractive unit economics for JET. This situation is clearly very different than GrubHub’s predicament in the US.
Under pressure from the new entrants mentioned earlier, in June of 2020, GrubHub sold out for $7.3bn to Just Eat. And, facing Captain’s worst fears, unrelenting competition in their core markets, Just Eat started spending and investing in 3rd party delivery capabilities:
Just Eat’s under enormous pressure. Back to your question what was it like when I came into the market, Just Eat was running at a 35% to 40% margin. There were some really nice comments made by the CMO about how they never use promo codes because it’s basically paying customers to use you and it’s the bad way to do business. They were getting written up by analysts as being incredibly nice, secure, high margin cash flow and they were going to get their position in the FTSE100 confirmed.
Then you have these two super aggressive loss-making tech companies come in and blow them out of the water, in the most affluent parts of the country, put huge downward pressure on margin, spend a ton of promo money, get the advertising, sponsor Love Island, cover buses in Deliveroo’s logo; they’ve come in and hit it hard. I think you’ve seen that, with Just Eat getting involved in these big consolidation moves in Europe and in America. You’ve seen it with their loss of margin. You’ve seen it with relationships with Greggs, KFC where, I assume, they’ve given them a very competitive marketplace fee to come exclusively or preferentially with their platform.
I think they’ve woken up to the fact that they’re in a pretty serious fight for their life. In the two, three years that I’ve been following it they’ve gone from probably a bit complacent to really deploying as much capital and innovation as they can, to stay relevant.
Andrew Maddox, Former Head of Uber Eats, London, InPractise Interview, August 17, 2020
Back in the US, DoorDash saw the acceleration of demand from COVID as an opportunity to push the pedal to the metal: in the two and three-quarters years from January 2018-October 2020, they grew from 17% market share to 50% market share. In 2020 alone, DoorDash grew GMV 3X y/y from 2019 and entered 2020 with close to a 60% share in food delivery in the US:
I think it’s worth nothing that, to a certain extent, while DoorDash was taking market share from GrubHub, Xu and Co. were mostly just expanding the market. This makes sense given the difference in what they offer the restaurant and the kinds of restaurants they target (and also in terms of the relative stickiness of consumers’ app preferences). In July of 2021, Cat Rock went activist on Just Eat Takeaway, urging them to sell GrubHub and refocus on their core European markets. In one of their presentations they note that, while GrubHub has lost market share overall, their position in their core metro markets of NYC, Chicago, Boston and Philadelphia were still quite strong:
So, you have a massive increase in competition and expansion of the market from aggressive fully integrated delivery guys. In response, marketplace competitors start investing in 3rd party delivery capabilities to defend their share, and meanwhile the logistics enabled players start to unbundle their services to grab share from typical marketplace merchants and win over restaurants who only want part of the offering e.g. white label delivery software. The result: all of the large competitors today are operating hybrid models.
There’s one more market development that I think is worth explaining: the evolution of so-called “quick commerce” delivery. Here I’m pulling from Prosus/Naspers’ deep-dive call series on Quick Commerce from March 30, 2022. Prosus owns iFood, the leading food delivery business in Brazil and is the largest investor in Delivery Hero.
In NYC terms, think of a web of bodega dark stores that’s fully integrated into robust delivery network that can get a customer a wide variety of stuff in as quickly as 10 minutes. As Prosus defines it:
Quick commerce is a term that is being used for the delivery of a mid-size selection of 2,000 to 3,000 SKUs in ten to 20 minutes. And quick commerce addresses many use cases. There is a traditional convenience shopping trip that would involve milk, butter, soda or candy. It’s a trip that many on this call would have done in the offline world through your local convenience store. There are occasions whose primary purposes are more closely aligned with meal occasions, be it ready to eat foods or delivering fresh ingredients to complete a recipe.
The following chart shows the evolution of the food delivery business and why quick commerce is attractive: notably that it expands wallet share for the online food delivery platform into grocery verticals and, given a higher level of frequency, provides more volume to your delivery network.
Prosus again, “The closest offline analogy we have to online quick commerce is your corner convenience store. It is far from perfect as a comparison as quick commerce can cover other areas of retail like grocery, pharmacy, pet food etc.” From a market cannibalization perspective, this cuts right into the supermarket, grocery share:
“I also think that the hyper-convenience is a secular trend that means a lot of different things. If you know that your groceries are coming in 10 minutes and it’s good quality, at the market price, without any premium on top and you are lazy, why would you want to go to the supermarket. But it also means, why do I do meal planning? Why do I buy for a whole week if I can get it for the same price in 10 minutes? I can just think about what I want to eat this evening or for the next two days.”
Paul-Louis Lepine Former Corporate Strategy at Glovo, InPractise Interview on May 16, 2021
From an operational logistics perspective, quick commerce is also relatively easier to implement than the fully-integrated online food delivery service. Prosus, again:
Why is quick commerce easier? I find the graphics on slide nine a helpful illustration. On the left-hand graphic go back to the early 2000s when 3P food delivery was king. There marketplace platforms served as marketing engines and sent consumer leads to a restaurant. The restaurant’s own drivers delivered the food in a hub and spoke fashion, picking up the food from a known restaurant and delivering it in a defined, well-known neighbourhood.
The middle graphic points to the complexity of 1P. In that context a delivery driver could start at a pizza restaurant, go to one house, then have to figure out where to park and pick up the food at a sushi restaurant, then go to a different house, potentially in an adjacent neighbourhood, and then on to a taco shop. It’s a very challenging logistics problem to solve, especially given the perishable nature of inventory. And batching orders to save cost is a real challenge.
By comparison, quick commerce in the graphic on the right by dark store is much closer from a logistics standpoint to third party food delivery. There you are sending a driver from a perfectly designed starting point, a store you designed and optimised for picking time. The driver executes in a hub and spoke fashion, travelling a neighbourhood they know very well, back and forth. It’s simpler and you can get efficiencies and order batching that are harder in a 1P restaurant food delivery model.
Personally, I have never ordered anything via an online quick commerce app. GoPuff, which last December had planned on raising $1.5bn in a convertible note at up to a $40bn valuation, started by delivering alcohol and vapes (hence the name) to college kids in the Philadelphia area. A younger colleague claims his friends use the service for similar use cases. A number of competitors report wildly different “typical baskets” in both composition of items and total order value. More on the target customer:
I do not know about age but there are two different target audiences. There needs to be a population with a high-income power level and there is a time sensitivity in an area. New York City, Istanbul and Tokyo contain Caucasians who earn large salaries, but do not have time to spend on commodities or run errands themselves. I am a heavy user of Getir and, when I crave Coca Cola, chocolate or ice cream, I cannot go or send an assistant to the grocery store to collect the items, so the app provides a convenient way to purchase.
The second demographic is students who do not know how to handle a budget. The third demographic are those who want affordable luxuries, and in this case, income power is not a concern. Once or twice a month they spoil themselves with an ice cream from Getir.
Mete Alp Oğuzer, Former Chief Technology and Project Officer at Getir, InPractise Interview, August 17, 2021.
While the jury is out on who can make this work at scale, the consensus industry view is that quick commerce should be marginally more profitable than the fully integrated online food delivery model (think 5-10% of GMV flowing to EBITDA, albeit with higher capital intensity) and fits nicely from an operational perspective with the existing platform businesses. As discussed below, Delivery Hero is making a concerted push.
Delivery Hero
Delivery Hero’s founder, Niklas Östberg is not a normal guy. Östberg comes from a small town called Skinnskatteberg in Sweden. Growing up, he was a competitive cross-country skier who attended a ski high school in Torsby, Sweden. His most notable accomplishment was, as a 15-year-old, coming in second in the Swedish youth championships, three seconds behind future two-time Olympic champion, Johan Olsson.
After graduating from the KTH Royal Institute of Technology in Stockholm in 2005, Östberg went to work as a consultant at Oliver Wyman in Zurich. In 2007, while still working as a consultant, he discovered Onlinepizza, a startup run by three students in Linköping, Sweden. He tried to buy the company, but couldn’t pay their ask and instead started a competing Swedish pizza delivery service called Pizza.nu. A year later, the two businesses merged. Östberg quit his consulting job and, as Chairman, expanded Onlinepizza to Finland, Poland and Austria. Östberg, so he claims, had a fundamentally different view on growth and expansion and in 2011, he quit the company, moved to Berlin[4] and started his own food delivery service, called Delivery Hero.
Unlike Onlinepizza, Delivery Hero raised venture capital and had an aggressive expansion plan from the start. The company ran its own food delivery service in Germany but also aimed to buy up competitors around the world. One of Delivery Hero’s first acquisitions, less than a year after launch, was buying Östberg's former company, Onlinepizza. After raising about €15mm through a Series B round, Östberg raised €25mm in a Series C, led by Kite Ventures in April 2012, €30mm in a Series D, led by Phenomen Ventures in July 2013.
Initially, Delivery Hero was focused on consolidating a number of delivery businesses close to home, in Europe. However, in 2014, Deliver Hero acquired Hellofood with operations in Argentina, Chile, Colombia, Ecuador and Peru and made an investment in Baedaltong in Korea. To fund growth, the company raised €88mm in a series E, led by IVP in Jan 2014, followed by an $85mm Series F just three months later led by hedge fund, Luxor Capital. Later in September 2014, Delivery Hero raised a $350mm Series G, led by Kite and IVP at a $650mm pre-money valuation.
In 2015, Delivery Hero, still private, raised €496mm in multiple tranches of funding led by Rocket Internet, and entered the MENA region with the acquisition of Talabat and Foodonclick, both with a number of businesses in the GCC region. In May 2015, the company acquired Yemeksepeti, the leading food delivery business in Turkey for $589mm. At the time, this was the largest M&A deal in the food delivery business outside of the Seamless/GrubHub merger in 2013. Post-deal, Delivery Hero was valued at $3.1bn.
At the time of the merger, Yemeksepeti was ~15 years old and was quite profitable. What’s notable here is that, similar to other businesses which depend on flexible low-wage labor, food delivery generally works well in emerging markets. Yet, increasing market penetration also comes with different challenges. For example, Delivery Hero’s Talabat is the number one player in Egypt where there already exists a high level of cultural acceptance of take-out and delivery. The challenge then is about aggregating demand and supply online:
In Egypt, again, because the labor costs are lower and the market is mature, and there are tons of drivers looking for jobs, it’s attractive on that front. Economics-wise, the only costly thing is the incentives needed to pay to acquire the users and keep them on the platform. But again, as we’ve seen with the positive economics that we have, those numbers are going down.
Amir Allam CEO & Founder of Elmenus, InPractise Interview on November 10, 2021
Delivery Hero continued to acquire and raise capital to fund growth. In 2016, the company bought Yogiyo in Korea and a large multi-geography portfolio company of Rocket Internet, Foodpanda, in early 2017. Naspers then invested €387mm into the company in a Pre-IPO round at a “similar valuation,” to the previous round. Post-IPO, in September 2017, Naspers would buy Rocket Internet’s stake directly to become the company’s largest shareholder.
All through the M&A frenzy, Delivery Hero was investing heavily, a la DoorDash, with great results: in 2017 the portfolio of businesses reached 42 countries, fulfilling ~200mm orders for >150k restaurants. Like-for-like growth was in excess of 60% y/y and importantly, they had the #1 position in 35/42 markets. In June 2017, they brought this story to public markets, raising €465mm in new equity at a market cap of €4.5bn
For the first few years after going public, management would put out some version of the following slide, showing its commitment to the priorities they outlined in the IPO:
Q1 2018 Results Presentation, May 9th, 2018
Namely, focus on growth, be the market leader or get out, invest in product, and grow into profitability. Around the time of the IPO, the last point alluded to a breakeven on a full-year basis in 2019. Over the next few years, the latter point would fade into the background as growth was further emphasized as the priority.
In December 2018, the company announced an important transaction: Delivery Hero would sell their operations in Germany, which include the Lieferheld, Pizza.de and foodora brands, and merge them with Just Eat Takeaway’s Lieferando.de brand. Delivery Hero received €508mm in cash and 9.5mm Just Eat Takeaway shares worth €422mm, giving Delivery Hero an 18 percent share in Just Eat Takeaway.
I think it’s notable that Östberg would sell the HQ geography of the company. On the merger call, management talked about the transaction as a straightforward economic proposition: they were getting more value than what they were selling. Later in 2021, Delivery Hero restarted operations in Germany, only to shut them down six months later and they have since monetized the JET shares (mostly for a lower value than at what price they received), but I think the deal is representative of Östberg’s philosophy and a core point of the thesis: there’s no empire building, just acting rationally.
The company has also made a number of minority investments in the space. Notably, in 2018, they invested €138.1 mm for 19.5% of Rappi, a Colombian on-demand delivery company headquartered in Bogotá, with main offices in São Paulo and Mexico City.
In 2019, Delivery Hero announced another important deal: the company would acquire Woowa Brothers, the owner of South Korea’s number one food delivery app called “Baedal Minjok,” for $4bn:
This was important because it took on South Korea as huge geographic exposure. In 2021, about 2/3 of Delivery Hero’s GMV was from Asia and >70% of Asia’s GMV came from Korea.
Baedal Minjok has ~90% market share in South Korea. At the time of the deal, 97% of the business followed the marketplace model, although Woowa had introduced a third-party logistics service as Uber had entered the country and Coupang, the leading South Korean ecommerce marketplace had entered the food delivery space with a logistics-oriented offering. But, despite the huge market share and asset light business model, the Woowa business was earning less than 1% of GMV as EBITDA.
Fast forward to the last twelve months, the South Korean business is still a work-in-progress but the progress is good: Share of own delivery orders doubled to 8% in June 2021 (vs. Jan. 2021), and own-delivery expanded to 29% in Seoul by tripling the number of merchants working with 3rd party delivery. Competitively, Coupang Eats’ market share gains have stalled out and Uber Eats has abandoned the country. EBITDA margins has already improved quite significantly and Delivery Hero is rolling out an advertising platform that seems promising.
Backing up a bit, the pull-forward in demand from COVID gave Delivery Hero’s overall business a massive tailwind: Total Orders and GMV were up +57% and +62% y/y, respectively in 2021 after being up +93% and +72% y/y in 2020 (all numbers PF for M&A). Revenue growth exceeded GMV growth as the company expanded take-rates across nearly all geographies. Still, the company was investing in growth and finished 2021 with a -2% EBITDA margin (as a % of GMV) and burned €1.3bn in cash.
One more acquisition post-COVID is worth mentioning: On the last day of 2021, Delivery Hero announced they were acquiring Glovo. Based in Spain, Glovo had operations in 25 counties and was generating ~€3bn in GMV. Delivery Hero first invested in Glovo in May of 2018, leading their Series C. By participating in the following three financing rounds, Delivery Hero already owned ~44% of the equity at the time of the transaction, which valued the business at €2.3bn.
About 60% of Glovo’s business comes from Western Europe. The company has successfully held the #1 market share in Spain, which is Glovo’s largest market by GMV, fending off fierce competition, partially due to its expanded product reach across food delivery and quick commerce. Essentially, it started off with a valuable McDonald’s partnership which launched its initial success:
Glovo’s success is based on several different factors. Firstly, product diversification; you could buy food, magazines, drinks, flowers. They carried many different kinds of products. (…) Additionally, they have a good offer of restaurants. They signed up quality and well-known restaurants and they had a very interesting offer for users. The Glovo app is very friendly, probably more than the Just Eat app. Then, finally, McDonald’s. McDonald’s is the key to everything. Glovo was the first aggregator to work with McDonald’s. The rest of the competitors started to working with McDonald’s much later. In addition, McDonald’s did a lot of publicity with their app, in 2018, with the McDelivery service, which relates directly to the Glovo app. They got a lot of new users, thanks to McDonald’s and other top restaurants. That was the main reason as to why Glovo have this market share at the moment.
Jaume Boada, Former Head of Sales at Just Eat, Spain, InPractise Interview on September 7, 2020.
Glovo cofounder Oscar Pierre was just 22 when he founded the company in 2015 and has looked at Östberg as an older mentor. There have been press reports about the company’s toxic culture and competition is still intense in many of Glovo’s geographies (including in Spain where Getir is spending aggressively on the quick commerce side). Once the deal closes later this year, the hope is that Glovo’s portfolio can mature in more experience and better capitalized hands.
In 2019, Delivery Hero started investing in quick commerce by rolling out “DMarts,” arguing that they would be “highly complementary and synergistic” to the core platform business. I think outside the pure-play quick commerce competitors they are the largest operator of quick commerce boxes globally. Management is pretty bullish on the opportunity set, making similar points to the Prosus presentation. Notably, they pretty clearly lay out that they’re operating at attractive unit economics in some scaled part of the store base:
We’ll see. Meanwhile, we are starting to see what post-COVID looks like in the core of the business:
In Q1 2022, overall group GMV increased +30.1% y/y and revenue was up +52% y/y. For the core geographies, this is looked more like +35% y/y growth (this removes the >+100% y/y growth from quick commerce) – still quite incredible. On the other hand, one of the core arguments for robust long term growth of the business, that is: looking at cohort analysis, it shows that users continue to use the product more (both as a function of online food delivery becoming a regular household purchase and as a result of the flywheel spinning as the business scales), went kind of flattish y/y. This makes sense to me as I imagine the cohort effects of COVID-lockdowns must have been incredible (and perhaps difficult to tease out what is scale/product vs. market).
For 2022, excluding the Glovo deal (which is supposed to close in 2H 2022), management expects GMV and revenue of €44-45bn GMV and €9.5-10.5bn, respectively, and an Adj. EBITDA margin of -1.0 to -1.2%. GMV growth implies y/y growth of about 25% on the low-end, so growth will slow through the year, but still great considering the pull-forward of demand in 2020/2021. On profitability, importantly, without the quick commerce spend, they’ll be roughly breakeven for the year.
Management has long maintained that the business will generate 5-8% EBITDA margins on GMV, which is consistent with what lots of other businesses in the space are saying (more on that in a bit). They even give you the levers:
This is a game of trying to get a nickel out of dollar and every penny counts.
Industry Consolidation => Profitability:
As shown above, the path to profitability in this industry is pretty well-recognized:
“You still need to see a lot of rationalization on promotion spend, sales and marketing, scaling up the driver supply side, so you don’t need to subsidize as much and you need to see take rates go up, so you need to see the discounts end for large chain partnerships and you need to see the scaling of the ad business. When all of those things come together, you will probably see a pretty good margin expansion, in a couple of years.”
Annanth Aravinthan, Head of Business Operations at Uber Eats Canada, InPractice Interview February 17, 2021.
For brevity, I have avoided discussing the Chinese market, but the data show that China has been basically ahead of the rest of the world in online food delivery penetration for the last 4-5 years. It has been suggested Sequoia was able to make a sharply contrarian and fairly high profile bet on Doordash given their perspectives on food delivery from their Chinese investment portfolio. Even prior to COVID, online delivery platform market share in all Chinese city tiers seemed to be breaking down along a 60/30/10 equilibrium (Meituan/Elle.me/Others, respectively) and edging towards better-than-breakeven profitability. The precedent market structures in OTAs, ride-hailing, etc. suggest the industry will mature along similar lines.
Shareholder driven consolidation already started to occur last year: In April 2021, Just Eat Takeaway said it's considering a full or partial sale of Grubhub, less than a year after completing its $7.3bn deal. This was interesting because it signaled the unwinding of a merger that kicked off a consolidation spree in the space. After Just Eat first announced its deal for Grubhub, Uber Eats bought Postmates for $2.65bn, DoorDash took out Wolt for €7bn and GoPuff acquired a pair of small British players.
In Early May of this year, Uber’s CEO, Dara Khosrowshahi sent a memo to all employees, that was widely circulated. “It’s clear that the market is experiencing a seismic shift and we need to react accordingly,” Khosrowshahi said. “We have made a ton of progress in terms of profitability, setting a target for $5 billion in Adjusted EBITDA in 2024, but the goalposts have changed,” Khosrowshahi said. “Now it’s about free cash flow. We can (and should) get there fast.” This prompted lots of other growthy businesses to address profitability in a way that was more timeline-oriented rather than theoretical. In the online food delivery space:
With Deliveroo as a possible exception, the companies listed above have large balance sheets, liquid public currencies, and the ability to weather sustained periods of unprofitability and cash burn. All are likely to be going concerns in five years. That can’t be said about many cash burning online food delivery business around the world, and certainly not of the 20 plus quick commerce delivery upstarts. Some will be acquired, some will run out of cash and go belly up. This is already happening:
1520 shutdown in December 2021 after running out of cash.
Buyk, a US subsidiary of Samokat, a Russian delivery startup, declared bankruptcy in March as sanctions restricted access to funding. Sanctions likely accelerated the inevitable.
Fridge No More, also backed by Russian investors, found itself in the same sinking boat as Buyk.
Gorillas dropped its 10 minute delivery pledge. Slower delivery speeds would reduce the number of delivery drivers needed, helping reduce costs.
GoPuff, with a paper valuation of $40 billion is struggling to find secondary investors willing to buy shares at valuations as low as $15 billion. The company is also rumored to be eyeing a 2022 IPO. Given the public markets are unforgiving of unprofitable tech right now, GoPuff’s S1 might get a WeWork like reception.
JOKR is looking to sell its New York City business, which has bled cash since launching June 2021. (Presumably it’s looking for a multiple on its app downloads.) JOKR’s investors are urging the company to focus on its business in Latin America where competitive intensity and labor costs are lower.
Instacart is joining the ultrafast delivery fray. In an attempt to fend off both Amazon and start-ups like Getir, the company will start building MFCs and offering 15 minute delivery. Instacart is piloting ultrafast delivery in partnership with grocer Publix in Atlanta and Miami.
Citing market turbulence and poor market conditions for tech stocks, on March 24th Instacart cut its valuation by 38% from $39 billion to $24 billion (or roughly two Getirs).
#117 - The Walking Dead; Below the Line from Kevin LaBuz, Mar 27, 2022
For the larger quick commerce businesses who have raised capital in crazy rounds in the past 18 months, the public comp disconnect implies that the next capital raise will be down-round or a sale:
Perhaps the most compelling suggestion that these businesses could be profitable is that they apparently already are in certain markets. From the Uber Investor Day presentation earlier this year:
Half of Uber’s top-20 delivery businesses are better than break-even on an EBITDA basis. It’s likely fuzzy EBITDA, but Uber Eats is widely #2/3 in markets, implying better returns for other players.
Thoughts on Thesis & Valuation:
In summary, the thesis is:
1- Online food delivery creates value for all three stakeholders (Customers, Restaurants, Couriers) of the ecosystem.
2- Like other marketplace businesses, local food delivery markets will tend towards a 60-30-10 market share-equilibrium. Investor pressure and market maturation will push markets towards less competition and towards profitability.
3- Delivery Hero’s management has a track record of acting rationally by optimizing its portfolio of businesses towards market-leading positions through M&A. We are putting our trust in management that they will continue avoid endless turf battles and make solid judgements about reinvesting in quick-commerce.
4- If all of the above is true, it doesn’t seem unreasonable that Delivery Hero can hits its long-term EBITDA profitability targets of 5-8% of GMV.
And, therefore what’s the stock worth?
If Delivery Hero can grow GMV at 15% per year from 2022 to 2027 and earn 5% EBITDA margins on GMV, they should generate EBITDA of about €4.9bn (current TEV = €12bn). At 15X, using current net debt and inflating the share count by 2.5% per year, you get a stock price of ~€240 per share (vs. €37 today). If you discount that back by 20% per year, that’s >€95 by year end 2022.
This is a risky proposition, as it has never been done, really. Thinking about the downside for a moment— they should burn something like €1.5bn this year, implying they have liquidity on the balance sheet of about two years at that burn rate. Unless management imprudently decides to push the accelerator button on the quick commerce spend, cash burn should go down quite materially in 2023. Long term capex spend should be roughly ~1% of GMV, so once scaled the business should generate a lot of cash.
As noted above, public comps’ valuations have come down materially:
All charts look like the one above. DoorDash now trades at 0.5X GMV (4X Sales). Just Eat Takeaway and Delivery Hero both trade significantly cheaper than that at ~0.2X and ~0.3X. Deliveroo trades for even less, as investors are noting their lack of market leadership in competitive markets vs. other well-capitalized players. The whole group trades cheaply to integrated “super-apps” Uber, Grab and GoJek. They’re all quite cheap if the business is profitable for the survivors.
[1] Note: Seamless wasn’t the first well-funded attempt at marketplace food delivery in the dotcom age: Food.com was started by former Microsoft employees, Gay Gilmore and Troy Hakala, who pivoted the business towards a recipe sharing social network site, sold to Scripps Networks in 2007.
[2] There’s probably good data on this, but I’m guessing the userbase follows a pareto efficient distribution: So, if 20% of the ~120mm US households are super-users and order 32 meals per month, that would be about 80% of the market implied by the assumptions above.
[3] Crushed it.
[4] Östberg has lived in Zurich for the past 14 years (where his children and ex-wife reside). He commutes to and works in Berlin Monday through Thursday living out of hotels and mostly in the office.
This is really great
Thanks James, really enjoyed reading this. Just wanted to share some questions, given the budget constraints in sales, promotions, and marketing, will this not slow down growth of DH? especially since a large percentage of their traction is inflated by vouchers and discounts, this could destabilise their unit economics at scale. My second question is on the logic of EBITA and profitability, shouldn't EBITA be based on profitability of revenue rather than profitability of GMV?