How Deliveroo can Achieve Profitability
I built a Python script to scrape Deliveroo's website, recreated their business model, and simulated 250,000,000 orders to answer one question: how can Deliveroo become profitable ?
I scraped Deliveroo's website using Python, recreated Deliveroo's business model, and used simulation to analyze 250,000,000 orders to answer one question: Is Deliveroo profitable in France?
The answer? My research shows that the company is profitable in Paris but not in France. The reason is that in Paris, Deliveroo has sufficient orders to pass the "minimum required number of orders" to break even, but Deliveroo does not have sufficient orders at a European level.
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To become profitable, the company needs to increase the number of orders by 2.46% ceteris paribus. However, I believe this to be quasi-impossible as the industry is highly competitive, and the CAC is high.
According to their annual report, Deliveroo claims it will become profitable by driving sustainable growth and strengthening levers of profitability. In short, this means scaling markets, expanding geographically, and selling advertisements. The first two options will be tough as they will require significant marketing to establish and maintain market-leading positions. Additionally, selling advertisements to restaurants may prove to be tough as restaurants are already annoyed by the fees platforms take.
To increase revenue, I believe that Deliveroo needs to evolve its business model and create new, high-margin revenue streams that either increase revenue per order or are detached from the order's value. I suggest that Deliveroo leverage its core defensible asset, the deliverers, to pivot its business model and create a fast last-mile logistics network by partnering with transport companies like FedEx or La Poste. This would enable Deliveroo to increase revenue without spending money on marketing and overhead. Also, it would create a win-win situation for deliverers and transporters.
Let's dive in 👇
How Deliveroo can Become Profitable
A bit of Context
Over the past decade, the food delivery industry has experienced a surge in investment from venture capitalists. In 2018, VC firms invested $11 billion into food delivery companies. In 2021, European VC firms pumped $4.7 billion into European grocery delivery companies alone. These investments are made with the guiding principle that perpetual scale will eventually lead to profitability. However, is perpetual scale the solution to profitability?
I asked this question to a senior strategy associate at one of the well-known food delivery companies, who told me that they were profitable in certain cities because they reached the "minimum required orders" in those cities.
This led me to wonder: what is the minimum required amount of orders for a delivery platform to become profitable? And more generally, how can Deliveroo achieve profitability?
I used Deliveroo as a case study to answer these questions for two simple reasons: I found more data on them and they did not have an anti-scraping framework on their website 🤖.
In order to answer this question, however, I first had to understand how Deliveroo made money.
Deliveroo’s Profit Equation
The (Simple) Logic
To simplify, Deliveroo generates revenue by charging a percentage of the order value as fees to both the restaurant and the customer. The amount of revenue collected per order depends on the total value of the order and the percentage charged to the customer.
On the other hand, Deliveroo incurs costs from two sources: fixed costs and variable costs. Fixed costs are taken from the company's financials, while variable costs come from the cost of goods sold (COGS), which is how much they pay the driver. However, the amount paid to a driver depends on the distance traveled.
Therefore, Deliveroo's profit depends on two factors: the basket value and the delivery distance. These values were simulated using probability distribution functions in line with the data collected, as outlined below.
Now that I had a profit equation, the next step was to obtain the average delivery fee and average delivery distance (and the relationship between those two variables). To do this, I coded a web scraper that went on Deliveroo's website and simulated orders from all 20 arrondissements in Paris. I did this multiple times in the evening and during the day to gather as much data as possible. With all this data, I was able to find the average delivery distance in Paris, the average delivery fee, and the correlation between those two. This was the last component I needed before being able to run my Monte Carlo simulation.
Simulating 250 000 000 orders
At this point, I had a profit equation that relied only on distance and basket value. Thanks to my web scraping, I obtained the distribution of delivery distances and simulated the distance of 20,000 orders based on the distribution of the real-life data. External data sources gave me the average basket value, which I simulated using a probability distribution function.
Now that I had everything I needed, I could do my Monte Carlo simulation. For each run, I simulated 20,000 orders and wrote down the break-even number of orders ("minimum required number of orders").
I ran this simulation 1000 times and found that the average number of orders necessary for Paris to reach the break-even point is 4,597 orders per day.
To calculate the break-even point in France, I ran the simulation 1000 times with 250,000 orders per run. The result? Deliveroo needs at least 195,780 orders per day to be profitable in France, or 1,677,905 orders per year.
To interpret the results of this analysis, we need to compare our breakeven point of 1.68 million yearly orders in Paris to the average number of Deliveroo orders per year in Paris. Basing myself on their annual report and weighing their total number of deliveries on a variety of factors, I calculated 5.53 million orders per year. This would mean that Deliveroo in Paris is more than three times the estimated breakeven point, generating a profit of roughly €79k per day.
While Deliveroo is seemingly profitable in Paris, the same cannot be said about France. The breakeven point for France was 71.46 million orders per year (as a quick sanity check, Gira Conseil found that 250 million meals had been ordered on food delivery platforms in 2019). Using the same methodology as above, from the annual report, we find that Deliveroo currently delivers 69.74 million meals per year across France.
On top of that, our model is not calibrated for France. Outside of Paris, delivery distances are likely to be much larger than the ones simulated in this research. However, Deliveroo’s delivery fees are capped. Thus, the costs incurred by Deliveroo are likely to be much higher than calculated above, pushing profitability further away.
Deliveroo's Path to Profitability
Deliveroo claims that it will reach the breakeven point between Q2 2023 - Q3 2024. According to their annual report, they plan to achieve this in two ways: driving sustainable growth and strengthening levers of profitability.
Driving Sustainable Growth
Driving sustainable growth translates to increasing the number of deliveries by expanding internationally and increasing their market share in all markets. However, I do not believe that international expansion is the right strategy as it will undoubtedly induce additional localization costs.
On top of that, basing a path to profitability on the adoption of market share in a highly competitive, commoditized industry is a very risky strategy. To quote the Chief Executive of GrubHub, "diners are becoming promiscuous." Diners compare different apps to find the cheapest option. In such a market, price is the only differentiator. As a result, it's very difficult to establish yourself as a market leader and gain additional market share with discount codes or other costs.
Strengthening Levers of Profitability
The company has identified three main levers of profitability: new high-margin revenue streams, optimization, and scale. The viability of scale has already been debunked in the above section, so let's focus on new revenue streams and optimization.
To increase revenue, Deliveroo could create new high-margin revenue streams that either increase revenue per order or are detached from the order's value. However, creating a revenue stream detached from the order's value would require €352M in revenue to offset the missing revenue from orders. Deliveroo plans to sell advertisements and preferred ranking to restaurants on their platform, which would require selling every restaurant an advertisement worth about €2,378/year. Convincing restaurants to spend more money may be difficult, given their existing resentment towards delivery platforms that squeeze their margins.
Regarding optimization, there are two main elements: creating a more efficient logistics network and using technology to improve operations. These objectives aim to reduce the time between order and delivery. However, since delivery drivers are paid by distance and not time, optimizing delivery time does not necessarily lead to cost savings. Deliverers also do not need optimization as they often wait for hours before receiving a delivery. Lowering their pay would be difficult due to labor laws and Deliveroo's current legal issues in France. Therefore, optimizing delivery costs is largely impossible. Advertising and overhead costs are also difficult to optimize and were not addressed in the 2021 annual report.
Overall, the levers of profitability identified by Deliveroo are either not actionable or have little impact. In order for Deliveroo to be profitable, I believe the company needs a fundamental shift in its business model.
Evolution of Deliveroo’s Business Model
At its core, Deliveroo is a demand coordinator. They coordinate a delivery service among multiple groups (deliverers, restaurants, and consumers) and in doing so generate indirect network effects.
However, their core defensible asset - the inexpensive deliverers equipped with hauling capacity - sits idle much of the time. The deliverers are defensible in the short term as they will select whichever platform generates the most revenue for them, and when they are delivering, they can only work for one platform at a time. This means that if Deliveroo could enable deliverers to earn more money, they will stay.
Thus, to create a new revenue stream and reach profitability, I believe that Deliveroo needs to leverage its technological expertise in last-mile logistics coordination to expand on its core defensible asset.
Concretely, this translates to adding a fourth agent that would benefit from last-mile logistics, such as a transport company like FedEx, USPS, La Poste, etc. After the lunch rush of food deliveries, Deliveroo deliverers could continue to earn money throughout the afternoon by delivering small packages.
This would be beneficial for Deliveroo as they would be able to charge for such a service, and similarly, there may be an arbitrage opportunity for the delivery players as the hourly wage of a Deliveroo driver is far less than the internal equivalent. This creates a win-win situation for deliverers and transporters.
Thus, Deliveroo would be able to increase its revenue without having to spend money on marketing and overhead. While they would still need to pay their deliverers, the arbitrage opportunity created by this model will enable the company to cover the costs of delivery.
As the world increasingly relies on quick last-mile delivery, Deliveroo may be able to leverage its biggest asset to coordinate last-mile logistics inside cities, where delivery trucks struggle.
I hope you enjoyed this newsletter and learned something new.
If you want the full version of this report, including all the formulas and data sources, please send me a message on LinkedIn.
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