Today’s interim results were a mixed bag of groceries for Deliveroo.
While turnover got a 12% boost and transaction volumes moved in the right direction, it wasn’t enough to stem deepening underlying (EBITDA) losses of £68mln, a 161% year-on-year increase.
The London-listed food delivery company also announced its departure from The Netherlands after six years for failing to chip away at the dominant position of native rival Just Eat Takeaway.
In spite of that, ROO shares rallied 3.5% on the day, bolstered by a £75mln share buyback announcement.
There is no doubt that food delivery has become a cutthroat sector to operate in following the pandemic-era boom.
“The reopening of the economy combined with stiff competition from the likes of Just Eat and Uber (NYSE:UBER) Eats and q-commerce (quick commerce) players like Gorillas and Go Puff as well as the cost-of-living crisis have created an extremely challenging environment for Deliveroo,” said Victoria Scholar, head of investment at interactive investor.
So what can a food delivery company do in the face of this myriad of challenges?
The answer could be in advertising.
Uber changes tack
Silicon Valley rival UberEats has already signalled that advertising is key to sustaining revenue growth going forward.
As reported by Reuters, Uber boss Dara Khosrowshahi plans to increase advertising revenues sevenfold in the next two years alone.
If successful, that would create a US$1bn revenue stream for Uber’s low-margin delivery segment.
While Deliveroo has yet to make a similar bold projection, it has also indicated that advertising will become a substantial part of its revenue mix.
On June 29, the company announced Deliveroo Media and Ecommerce, a new platform allowing brands to target Deliveroo customers across the app (including on the order tracker page), as well as social media, email, and via push notifications.
Path to profitability
Going by today’s earnings call, advertising is expected to be a key pillar in Deliveroo’s path to profitability one year on from its infamous IPO, or the “worst IPO in London’s history” as the Financial Times put it.
Deliveroo sees income from its nascent advertising platform enabling revenue growth of 12%, outpacing gross transaction value growth of 7%.
That advertising revenues will only comprise a small portion of revenues is besides the point: Substantially better margins compared to food delivery means that “advertising revenue is an important lever to drive Deliveroo's path to profitability and free cash flow generation,” the company stated.
But margins are facing an onslaught from another direction, according to equities analyst Bradley Hughes at Shore Capital.
“Better-than-expected revenue growth comes likely at the expense of materially higher marketing costs which clocked 29% growth in the period year on year,” according Hughes.
Hughes surmised that these skyrocketing marketing costs likely come as a response to Just Eat’s aggressive inroads into the London market.
It seems that Deliveroo just can’t cop a break from those Dutch delivery kings.