Why has Deliveroo’s flotation failed to deliver?

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One of the most highly-anticipated IPOs of 2021 was Deliveroo – the London-based takeaway delivery service, and one of the UK’s most popular app-based companies.

As a celebrated ‘unicorn’ there was a lot of speculation about what the flotation would mean for the business and the sector as a whole – as well as the future for the UK ‘tech bubble’.

Deliveroo officially floated on the London Stock Exchange on March 31 2021. However, it was a disaster for the firm.

Deliveroo Holdings Plc collapsed in its LSE public debut – and its stock price plunged as much as 31% in its first minutes of trading. This was one of the worst performances in decades for a big UK tech firm offically listing. The stock closed 26% down at a price of 287.45 pence.

To find out what went wrong for Deliveroo, Business Leader spoke to some industry experts.

Why have UK users shunned the brand?

Alongside the news that Deliveroo’s shares fell more than 30% in conditional trading on its floatation debut, UK diners have stated high commission fees, worries over the wrong order arriving and anxiety about the handling of personal data are all driving them to shun the service.

In fact, SevenRooms’ new nationally representative study of UK consumers revealed 1 in 5 UK consumers want to see a legal cap placed on the commission fees charged by services like Deliveroo and Uber Eats.

The study from the guest experience platform for the hospitality industry looks at how our takeaway habits have been impacted by the last 12 months.

Danilo Mangano, General Manager Europe at SevenRooms said: “The last year has seen more people ordering delivery than ever before, but it also has put the spotlight on third-party marketplaces and the impact these services are having on restaurants and the wider industry. Deliveroo’s stock market debut is a reflection of questions around the treatment of drivers and company governance, but also concerns felt by the wider UK public around high commission fees, anxiety about the handling of personal data and the overall experience they will receive when using third-party delivery apps.

“Our recent study with YouGov revealed that 1 in 5 UK consumers want to see a legal cap placed on the commission fees charged by third-party services like Deliveroo, while the same proportion has more confidence they will receive the correct order if they opt to order directly with a restaurant, instead of using a third-party service.

“For restaurant operators, the pandemic has served to show the value and importance in establishing and building direct relationships with guests, but this doesn’t come from relying solely on third-party providers to facilitate delivery or takeaway alone. Evidently, UK consumers are looking for more out of their relationships with restaurants, and this is now playing out at a critical time for third-party delivery marketplaces like Deliveroo.”

Investor revolt?

Aside from the company’s relation to its users and the wider food delivery sector, the major issue stemming from Deliveroo’s LSE debut was the role of its investors. Business Leader delved into what went wrong with the firm’s investor relations.

Following the news that Deliveroo’s shares have plunged 30% at its trading debut, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, gives his thoughts on what went wrong and what’s next for the company.

He said: “Deliveroo stock sank by 30% on the very first trading day, as some large-scale investors, such as Aberdeen Standard Life, Aviva, Legal & General Investment Management and M&G, opted not to take part in the IPO due to local pressure.

“Currently, there are two particular reasons the investors opted out: first, there is a conflict regarding the working conditions for delivery workers, and second, the stock’s double structure.

“There were two large investors, however, namely T Rowe Price and Fidelity, that did not sell any shares during the IPO and that can boost the market’s confidence.

“Previously, Uber faced a similar issue regarding employee categorization. The UK Supreme Court acknowledged Uber drivers as employees that are eligible for minimum wages, paid vacation and retirement pension. This was just a temporary anti-driver for Uber stock though. Nevertheless, the same issue may prove critical for Deliveroo, as it may prevent the company from breaking even as soon as possible.

“As for the double-class stock structure, while the investors were against it, this helped the CEO to continue taking control over the business. At the same time, the US Treasury bonds yield rose in March, which led to growth stock rotation. Meanwhile, the competition suffered a stock fall in March, with DoorDash shares losing as much as 23% since early March.

“All these factors led to a somewhat poor performance on the first trading day. This, however, may just be temporary volatility, as fundamentally the company is reducing costs and can grow rapidly.”

Ben Gallagher, co-founder of B+A a creative management consultancy that counts Nike, Kellogg’s and Clinique amongst its clients comments on the Deliveroo IPO listing: “Investors are rightly nervous about Deliveroo’s IPO and should also be nervous for the future of any business that has grown fast using a ‘gig economy’ business model. These models have been built around upon so called ‘freelance’ or independent workforces – large numbers of on-demand staff that are called upon to perform a task at a given moment.

“Proponents of the model such as Uber and Deliveroo claim it puts control and independence into the hands of the independent worker. But we are hearing all too many stories of workers having to commit to insufferably long hours to make enough money to survive. Furthermore, by classing these workers as non-Full Time they are unable to agitate for change, unable to negotiate benefits or mobilise to support each other.

“If you were to be very blunt you could claim that these workforces are simply a technology enabled version of the Victorian sweat house – entirely at the mercy of the employer. This feels in direct conflict to a world that is beginning to demand that all businesses are more human – in what they offer and how they treat their staff. The employer brand is today as important as the consumer facing brand. As this trend grows, so too does the strength and voice of the workers at Deliveroo. So the risk to all those investing in Deliveroo (or others like this) is of course that if the workforce are able to break free from the ‘low pay low commitment no rights’ model Deliveroo has grown with, will the business be able to survive, let alone scale and generate profit as fast as it has to date.”

Andrew Missingham, co-founder of B+A, added: “The recent UK Supreme Court ruling, stating that Uber drivers are “workers” (and thus valid claimants of all of the respect and benefit that this status accords), has not only called into question two foundational principles of gig economy businesses such as Deliveroo and Uber (that workers are a) “off balance sheet” and b) “software”) but it’s also it’s forced them to focus on the important bit that’s really powering them. It’s not the algorithm, it’s not the code, it’s not the logo, it’s the people.

“Either as workers or as customers, both need to be treated with care and respect. In the long term, any business’s brand is worthless without this buy-in. And as Deliveroo are finding out, any business that forgets or ignores this is on shaky ground, that seems to be getting shakier by the day.”

Professor John Colley, Associate Dean of Warwick Business School and an expert on IPOs, said: “It is little surprise that investors appetite is limited for the Deliveroo IPO. It is a narrow margin loss-maker that is likely to face higher costs due to worker’s rights across Europe. There are also concerns as to whether this type of business model can ever return much profit. It would have to deliver a lot of meals at high margins of which there is no sign yet.

“Another major issue may well be the governance concerns relating to founder shares voting power. In the UK investing institutes are more concentrated and are used to having a say in changing management if a business is badly run. So being lumbered with a founder they can’t shift however bad the performance will not go well.

“A number of potentially very large investors decided to sit this one out. Those who invested for the price ‘pop’ have paid the price in losses. This does not augur well for future tech or gig economy launches in the UK. Nor indeed SPACs which again are likely to be seen as poor value and high risk by late investors in the UK.”

Deliveroo’s unclear path to profits lowers share price

On the big day for Deliveroo – what happened? Business Leader got some analysis from Hargreaves Lansdown. Sophie Lund-Yates, Equity Analyst gave her thoughts.

Deliveroo’s price isn’t quite as tasty as it was hoping for, coming in at the lowest end of an already narrowed range. This isn’t hugely surprising given the substantial background noise surrounding the company. The biggest concern is regulation around worker rights. The flexible employee model of Deliveroo’s riders is a huge pillar of the group’s plans for success.

If forced to offer more traditional employee benefits, like company pension contributions, Deliveroo’s already thin margins would struggle to climb, and the road to profitability would look very tough indeed. Throw in the recent developments at Uber, and general market volatility, and the net effect is one of increased anxiety. Sadly for the group, anxiety doesn’t tend to inflate share prices.

Deliveroo is yet to turn a profit, which makes it very difficult to value on a traditional basis. But a market cap of £7.6bn means the company’s worth 6.4 times last year’s revenue, which is some way above rival Just Eat’s 4.8 times, despite the lower price. That means there’s pressure for Deliveroo to deliver the goods, or its share price will be in the firing line.

Some of the excitement is justified. Deliveroo has been seriously buoyed by lockdowns, and as restrictions ease, we could see a permanent increase in demand for delivered food. This is one of Deliveroo’s strengths – it offers higher quality restaurant options than some peers, which, coupled with its personalised app content and hyper-localised delivery approach, could hold it in better stead. The cash hoard from the IPO will be used to fund expansion too, particularly in areas like its delivery-only ‘dark’ kitchens, which offer restaurants a way to expand without having to invest lots of cash. It could also be used to pay for acquisitions. All in, Deliveroo should have decent firepower to chase growth.

The pandemic has offered a structural growth opportunity, but it’s worth asking if lockdowns mean things are as good as they will ever be for a takeaway service. The longer-term outlook depends on how demand holds up in a post-pandemic world, and if that road to profitability looks any clearer.”

Deliveroo community offer

Deliveroo customers were able to register their interest in the IPO on the Deliveroo App until 30th March. The retail offer is being administered through PrimaryBid. Prospective investors are able to invest up to £1,000, although this can be scaled back if there’s lots of demand.

What is unconditional/conditional trading?

When a stock lists for the first time, there is a period when trades made are conditional. During this time until unconditional trading starts, the company can cancel the IPO and void any trades made. If this were to happen, any money would be returned to investors to the account where they purchased the shares. The conditional trading offer ends tomorrow.

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