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Delivery Hero, Peers Are Stuck in a $50 Billion Rut
Combined value of three European firms remains 75% below peak
Weak profitability, growth slowdown dent investor interest
By Henry Ren
8 december 2023 at 13:32 CET
Updated on 8 december 2023 at 15:35 CET
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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 SE, Just Eat Takeaway.com NV and Deliveroo plc have lost more than 75%, or over $50 billion 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.”
Uber Eats' European Rivals Yet to Recover From Rout
Total market value of three food delivery firms still 75% below peak
Source: Bloomberg
Down more than 25% this year, Delivery Hero and Just Eat’s share performance contrasts with strong gains US peer DoorDash Inc., which along with ride hailing firm Uber Technologies Inc. has seen its share price at least double.
Uber’s food delivery service, Uber Eats, operates in key European markets such as the UK, 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 Ebitda suggests some recent improvement, the sector’s actual losses are higher. Delivery Hero, for instance, recorded a loss of €821 million before income tax in the first half even as adjusted Ebitda 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.
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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 takeouts amid high inflation. Gross merchandise values (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 Bernstein’s 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 reignite investor interest in the space — if we were to see anything more material in terms of consolidation,” said Citigroup analyst Monique Pollard.