Deliveroo and Just Eat face deadlines to deliver profits
While adjusted earnings suggests some recent improvement, the food delivery sector’s actual losses are higher. File photo: Gareth Chaney/Collins
A challenging period for Europe’s food delivery firms has left investors questioning whether they can turn a profit, as demand fades from pandemic-era levels.
Delivery Hero, Just Eat, and Deliveroo have lost more than 75%, or over €45bn, in combined market value since a September 2021 peak. Concerns about their longer-term potential are mounting.
The sector “needs to regain trust with shareholders again” given the performance over the last two years, said Elias Halbig, a portfolio manager at Union Investment in Frankfurt. “There is still much to do in order to achieve profitability on a sustainable basis.”
Down more than 25% this year, Delivery Hero and Just Eat’s share performance contrasts with strong gains US peer DoorDash, which along with taxi hailing firm Uber has seen its share price at least double.
Uber’s food delivery service, Uber Eats, operates in key European markets such as Britain, Spain, and Germany but data showing its performance is scarce. Deliveroo meanwhile is up 60% this year, but remains about 65% below its August 2021 peak.
While adjusted earnings suggests some recent improvement, the sector’s actual losses are higher. Delivery Hero, for instance, recorded a loss of €821m before income tax in the first half even as adjusted earnings swung to positive, dragged by items including interest costs and share-based compensation.
“Some investors rightfully question the validity of the profitability and free cash flow targets, given that they are adjusted measures,” Bernstein analyst William Woods said. For management, providing guidance on an unadjusted basis could be an important step to lure additional investors, he added.
The next leg of margin improvement will be more difficult, after companies already curtailed marketing spending, raised service charges and abandoned deep discounts. Analysts said that boosting operational efficiency — like stacking nearby delivery orders in one go — will become more crucial.
As companies shore up profits, sales growth comes under heavier pressure. The value of orders recorded on Just Eat’s platform is forecast to decline this year as customers curb spending on restaurant takeaways amid high inflation. Gross merchandise values, or GMV, for the other two are expected to rise, but well short of the levels seen in 2020 and 2021.
Growth could still be hard to come by. Key European markets have been well penetrated after a period of supercharged expansion, said Mr Woods, who forecasts an annual GMV increase of 5% or less for Deliveroo and Just Eat for next five years.
Still, many of the challenges may be factored into valuations. Delivery Hero and Just Eat’s forward price-to-sales ratios are more than 60% below their three-year average levels, while Deliveroo’s multiple is less than one-third of the level when it was listed in 2021. Valuation multiples that are based on profits are more volatile due to companies’ limited profitability.
The three European firms have sought to narrow losses, with analysts expecting them to generate positive free cash flow next year. Competition also shows signs of easing after firms cut back on customer subsidies and exited non-core markets.
On top of that, growing optimism about potential monetary easing could give the sector an uplift next year. Deals may provide a boost, too, with Delivery Hero in talks to sell part of Southeast Asia operations and Just Eat eyeing a sale of Grubhub in the US.
“I do think that will be something that will re-ignite investor interest in the space — if we were to see anything more material in terms of consolidation,” said Citigroup analyst Monique Pollard.
Separately, Delivery Hero sites in Berlin and Barcelona were hit by a second wave of European Union competition raids last month as regulators hunted for evidence of illegal pacts to share sensitive commercial information and avoid poaching their rival’s staff.
The European Commission has said the investigations were an extension of similar raids carried out in 2022, which focused on the carving up of markets in two member states.
Berlin-based Delivery Hero confirmed that the EU had conducted new raids, adding that it’s co-operating with the commission. The firm’s Glovo unit in Spain said in a separate statement that its Barcelona site was targeted. Both were involved in the EU’s investigations last year.
The competition scrutiny follows a tough time for the delivery industry, with pandemic-era lockdowns ending and takeout orders declining sharply.
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