14 August 2017 - Financial Times
Delivery Hero shifts up gear as Amazon threat looms
By Guy Chazan in Berlin
Looming threat from Silicon Valley forces greater agility in race to deliver food
The start of 2008 was a hairy time for Niklas Östberg. He had just sunk all his savings into a pizza delivery start-up in his native Sweden. Then weeks later, Just Eat, a much bigger rival, entered the market.
“I thought — oh my God, I’ve lost all my money,” Mr Östberg says.
He considered giving up, but instead “speeded up”. His company grew into Delivery Hero, the world’s largest and fastest-growing takeaway app, which in June went public in Frankfurt, raising €1bn.
The success of the initial public offering — its shares were more than 10 times oversubscribed — reflects the popularity of a sector that has become an investors’ favourite.
It was the fourth online food delivery portal to float since 2014. The largest five companies in the sector globally — Just Eat, GrubHub, Delivery Hero, Deliveroo and Takeaway.com — are worth more than €15bn. Delivery Hero alone has a market capitalisation of €4.9bn.
“People are not cooking any more”
That success is based on a simple idea — the eating habits of young, urban professionals have changed radically. “People are not cooking any more,” says Tobias Göbbel of consultancy Roland Berger. “They’re much more oriented towards takeaway food.”
He cites a recent YouGov poll that found 39 per cent of Germans prefer to eat at home, and only 7 per cent in restaurants. And increasingly, people are using apps to buy their pizza, pasta and stir-frys, rather than picking up the phone. Delivery Hero’s orders rose 69 per cent year on year in 2016 to 171m, while revenues soared 79 per cent to €297m, faster than any of its listed peers.
The company’s aim is to become the go-to food app in every market it operates in. To that end it has expanded aggressively, buying premium food site Foodora and Middle East operator Talabat in 2015 and foodpanda last year. The funds raised in June’s IPO will give it the firepower for even more deals.
“You want to reach the scale where all restaurants have to be on your site, even when your commissions go up,” says one Delivery Hero investor. “It’s winner-takes-all economics:”
But there are plenty of rivals pursuing the same aims. In its home market of Germany, Delivery Hero is part of a duopoly with Lieferando, a Berlin start-up acquired by Takeaway.com in 2014. Some 30 per cent of Delivery Hero’s revenues come from Germany and Korea, another highly competitive market: Andrea Ferraz, an analyst at Morgan Stanley, says its marketplace margins might not exceed 30 per cent if no clear winner emerges in those countries.
“We have to deliver food in 30 minutes and it has to be hot.”
Perhaps more troubling is Uber and Amazon’s push into food delivery. UberEats is growing fast, as is the Amazon Restaurant delivery service.
Mr Östberg, Delivery Hero chief executive, is relaxed about the threat from Silicon Valley. “They don’t have the same variety or coverage,” he says. And they will struggle to match Delivery Hero’s expertise in logistics, he adds. “People are happy if they get their Amazon parcel in two hours: we have to deliver food in 30 minutes and it has to be hot.”
Amazon could be a threat, says Lucas Boventer, an analyst at Warburg Research. “But Delivery Hero has first-mover advantage and that’s a big benefit to them. They also have a broader geographical footprint than their rivals.”
Indeed the company, which boasts Rocket Internet, the Berlin-based incubator as an investor, prides itself on its huge reach: thanks to acquisitions, it is present in 42 countries. Just Eat, by contrast, is in 13, Deliveroo in 12, Takeaway.com in 10 and GrubHub in two.
Delivery Hero cannot stand still
But the looming Amazon challenge means Delivery Hero cannot stand still. Mr Östberg says he wants to offer more variety — not just pizza and curries, but salad bowls, for instance. He also wants to provide more recommendations for customers, based on order their history.
And he is expanding the logistics side of the business — not only matching customers with restaurants but also physically delivering food using Delivery Hero’s own couriers.
“In order to . . . be able to promise customers they’ll get their food in, say, exactly 22 minutes, you need control,” he says. “And for that we have to do more logistics ourselves.” Ms Ferraz believes delivery will make up about 11 per cent of the company’s orders by 2019 and account for close to 30 per cent of revenue.
But running a delivery network is a lot more complex and costly than operating a simple, asset- light marketplace — and more logistics will depress margins. Asked if Delivery Hero will be as profitable as Just Eat, which had a group wide ebitda margin of 31 per cent last year and 51 per cent in the UK, Mr Östberg demurs. “It depends on how large logistics will be as a proportion of our business,” he says. “In delivery, you make more revenue . . . but you have higher costs.”
He says the company will only turn a group-wide profit in 2019. But earnings are not the priority and investors understand that, he says. “We’d rather improve the service to get people on the platform . . . make it bigger and cheaper,” he says.
The inspiration for that comes from the 800lb gorilla that seems to loom large over every conversation about e-commerce these days. “It’s a little bit more Amazon thinking,” Mr Östberg says.