Delivery companies still fighting to turn a profit

Anecdotally, we knew that much of the developed world spent most of lockdown on the sofa, watching TV and eating takeaways. Just Eat Takeaway (JET) and Deliveroo (ROO) have provided more evidence of this with their recent half-year results. JET’s total revenue was up 52 per cent to €2.6bn (£2.2bn) while Deliveroo saw sales jump 82 per cent to £922.5m.

The surge in demand was driven by government enforced lockdowns, but both companies were keen to focus on “consumer engagement after re-opening” and post-pandemic prospects. Delivery companies know their investment cases reside on customers permanently changing their relationship with food delivery. Beyond debates about what proportion of recent growth represents a Covid bump and how much reflects long-term trends, perhaps the biggest question for investors is how profitable these businesses could ultimately be? That’s presuming they can turn a profit at all. 

On 11 August, Deliveroo reported that first-half gross transactional value (GTV) was £3.4bn, a 99 per cent rise on the same period last year. Encouragingly, the second quarter figure was up 81 per cent, despite the reopening effects which started in June and the tough compares from last year when the UK and other international markets were deep in the first lockdown. Thanks to these strong numbers, Deliveroo upgraded its full-year GTV guidance to a 50-60 per cent increase, up from the 8 July guidance of 30-40 per cent.

Pre-tax losses reduced only slightly from £128m last year to £105m. These figures haven’t dampened its valuation though.

The twin effects of improved GTV guidance and the announcement earlier this month that German rival Delivery Hero had purchased a £300m stake in the company has helped bump Deliveroo’s share price up 12 per cent in the last two weeks.

Broker AJ Bell said: “German rival Delivery Hero’s decision to take a sizeable stake in the business has helped lift the share price and kick-start its rehabilitation and there is at least nothing in Deliveroo’s first half results to undermine that process”. Deliveroo is now trading back at its IPO price.

JET told a broadly similar story to Deliveroo’s, although the numbers were slightly less impressive. Its GTV, excluding its Grubhub acquisition, was up 45 per cent to €14.1bn. But JET’s operating loss jumped from €11m last year to €355m in H1 2021. The reason for this was a big increase in courier costs, which rose 358 per cent. JET had to hire delivery drivers because prior to lockdown it had chiefly relied on restaurants to deliver their own food. When restaurants closed during the months’ long lockdown, this model fell down.

JET sees its strength in its size. The food delivery game is essentially about who can gain the most market share and create some kind of “network effect”. A clear market leader would in theory be able to increase fees, cut back marketing, and enjoy higher utilisation of delivery drivers, all of which would help generate profit.  As the largest delivery platform in Europe, Canada and Australia, JET thinks it is best placed to achieve this.

However, stripping out marketing costs from the current set of results, then Deliveroo looks best placed to turn a profit. Without the £291m of marketing in its first half, Deliveroo would have made £186m of profit before tax. If you take out the €295m of marketing spend from JET, it would still have made a loss before tax of €100m.

But in the longer-term, analysts see the story a little differently. The consensus is that Deliveroo losses before tax will be £242m at the end of the year before improving to £70m losses by the end of 2023, according to consensus forecasts. Meanwhile, JET is expected to report a profit before tax of £53m in 2023, having posted losses £611m at the end of this year.

Deliveroo is currently trading at 7.7 times its half year revenue whereas Just Eat is at 6.4. Heady multiples to accompany the heady top-line growth. Although Deliveroo is more expensive we prefer its investment case and rate it a buy, while we rate JET a hold.