Deliveroo keeps on growing – but when will it turn a profit?

Deliveroo is still growing its sales and competing with rivals Uber Eats and Just Eat for market share. But will it ever make a profit? Rupert Hargreaves reports.

Delivery group Deliveroo (LSE:ROO) is continuing to expand its product offering and its total order volumes, even as the boost to demand created by lockdowns tapers off.

The company was founded in 2013 by Will Shu and Greg Orlowski. Its first few years were challenging, but the pandemic changed everything. With most restaurants forced to close, stuck-at-home consumers had no choice but to order their meals through platforms like Deliveroo, Uber (NYSE:UBER) and Just Eat Takeaway.com (LSE:JET)

The group’s Gross Transaction Value (GTV) – the total paid by consumers – jumped 45% year-on-year in the second quarter of 2020, 65% in the third quarter and 77% in the fourth quarter. 

Some analysts had expected growth to slow as the world adapted to the new normal, but Deliveroo’s GTV continued to expand, rising by 114% in the first quarter of 2021 and 70% for the year as a whole. 

Diversification is helping Deliveroo to grow in a tough market 

Deliveroo’s motto is 'proper food, proper delivery’, but it has been diversifying into other markets to increase options for users. 

A user in London opening the app today can order a range of products including fresh bread, alcohol, toiletries, condiments, pet food and even tobacco products, all to be delivered within 20 minutes. The firm is continually increasing the number of options on the platform in London and other regions. 

During the first quarter of 2022, the firm expanded its Deliveroo Plus collaboration with Amazon Prime in France and Italy, and started a pilot with WHSmith to trial delivery from 10 branches across the UK. 

Deliveroo’s concerted efforts to give consumers more choice seem to be yielding results. GTV expanded 12% year-on-year in the first three months of 2022, and 3% on the final quarter of 2021 when the omicron variant hit consumer confidence.

The company believes growth will continue throughout the rest of the year with GTV rising by 15-25%.

Despite healthy sales growth, profits remain out of reach 

As these sales figures show, the demand for Deliveroo’s services is certainly there. Trouble is, the business is bleeding cash in the form of marketing costs. It is battling its main rivals, Uber Eats and Just Eat for market share, and the fight for eyeballs shows no sign of calming.

What’s more, Deliveroo and its peers rely heavily on “gig economy” labour. Pressure is only set to keep growing on them to increase pay and benefits for their workers. The firm is already having to work hard to retain and attract new riders in a tight labour market, only adding pressure to its finances. 

As marketing costs build, the business expects to deliver an adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margin of -1.5% to -1.8% this year – in other words, a loss. 

It is also unclear how consumers will react in the coming months as the cost of living rises. When every penny counts, platform users may rethink their spending habits and cut back on little luxuries like takeaways. 

Deliveroo has shown the market that its business model has a future. But it is proving harder to earn an income from meal delivery. The company ended 2021 with no borrowings and £1.3bn in cash, which should be enough to fund the business for a few years at least. However, until the group can prove it is a self-funding sustainable enterprise, it seems likely investors will continue to treat it with scepticism.

Recommended

Why UK firms should start buying French companies
UK stockmarkets

Why UK firms should start buying French companies

The French are on a buying spree, snapping up British companies. We should turn the tables, says Matthew Lynn, and start buying French companies. Here…
28 Sep 2022
Three funds for investing in Japanese value stocks
Japan stockmarkets

Three funds for investing in Japanese value stocks

Japanese stocks have fallen out of favour with investors, but they are looking ripe for recovery, says Max King.
28 Sep 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
How the end of cheap money could spark a house price crash
House prices

How the end of cheap money could spark a house price crash

Rock bottom interest rates drove property prices to unaffordable levels. But with rates set to climb and cheap money off the table, we could see house…
28 Sep 2022

Most Popular

Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
How much is King Charles III worth?
UK Economy

How much is King Charles III worth?

What will King Charles III inherit from the late Queen? Will he have to pay inheritance tax? And how large is his personal fortune and estate?
23 Sep 2022
Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022