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

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.

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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.