Orders are tumbling at Deliveroo but profitability beckons. How come?

Takeaway order numbers through the major courier platforms are tumbling. But for the first time, those platforms are nearing EBITDA break even or better yet, making a solid profit. How come? And what happens next?

In its latest results, Deliveroo reported a 2% drop in orders globally in the fourth quarter of last year versus the same period in 2021. In the UK alone they were flat. For Just Eat Takeaway (JET), total orders dropped 12% globally and 10% in the UK.

Despite this potentially worrying turn, the CEOs of both companies are more buoyant than ever. “We remain confident in our ability to adapt financially and to make continued progress on our path to profitability,” Deliveroo CEO Will Shu said last week. JET CEO Jitse Groen was similarly positive, with his company swinging to a small profit.

The solid financials in the face of falling orders is thanks in both cases to some disciplined cost-cutting.

“For years, food delivery companies have focused on gaining scale in what has become a highly competitive market,” says Russ Mould, investment director at AJ Bell. “That’s fine if they are prepared to stomach losses during their land grab exercise, but at some point the focus must shift to making a profit.

“[JET] has been streamlining its business, with the results now shining through,” he adds.

Publicis Sapient managing partner Julian Skelly agrees. “Deliveroo and Just Eat are maturing fast,” he says. “After rapid pandemic-fuelled growth, both saw increased costs impacting EBITDA in 2021. In the space of a year, both companies have managed to get control of their costs and are now reporting positive margins.”

“This quick turn-around shows the benefits of their model, with low capital investment allowing them to move quickly. It also shows a strong focus on margin-management and gives confidence in the overall health of the businesses,” Skelly adds.

To cut costs, Deliveroo ditched regions with the smallest opportunity, pulling out of Australia and the Netherlands, where, says Rebecca Crook, chief growth officer EMEA at CI&T: “They had no viable plan to turn the finances around because it would require a disproportionate level of investment”.

Meanwhile Just Eat mounted a recruitment freeze and sold its stake in Brazilian food ordering platform iFood.

Prices and delivery fees have snuck up too. As a result, Deliveroo’s gross transactional value (GTV) is up 9% year on year, globally and in the UK. For Just Eat, GTV is down 2% globally and 3% in the UK, but in both cases, GTV is weathering the drop in orders (see box, below-left).

“These decisions have helped improve profitability,” Crook adds, offsetting the fall in orders.

“Food delivery continues to shift from a state of war to the spoils of war,” says Bernstein European food delivery analyst William Woods. “The market has rationalised quicker than expected, profitability has been easier than expected and we now expect a material inflection point in profitability.”

The change of strategy from scaling to consolidation will have knock-on advantages for the market leaders in each country, Groen argues. “Generally, everybody in this environment needs to become profitable. And that should mean the level of competition goes down,” he said last week. “What you would expect is the positions competitors have in places where they are weak go first… adding up all these things could be a benefit,” such as reduced marketing costs and promotional spending.

However, it could take time. “It’s a misconception that everybody needs to change their ways,” he says. “If you have enough money, you can burn that money.”

Regardless, the promise of sustained profitability remains precarious.

The hospitality sector is suffering, with venues closing at an alarming rate. Between December 2021 and December 2022, the number of food-led outlets in the UK plummeted by 4.9%, the Hospitality Market Monitor from AlixPartners and CGA found. At the present rate, there is a net loss of 18 hospitality venues every day.

Many are food platform user favourites, such as Byron Burger, which this month closed a further nine branches. The appointed administrators cited rising costs as well as “a reduction in customer spending”.

“[The food platforms’] biggest risk will be in how they manage their partnerships and relationships with restaurants, which are under immense pressure due to the cost of living crisis,” says Crook. “As restaurants look to tighten their belt financially, the typical 25%-plus fees may not offer a large enough return on investment for them. So the food delivery giants need to really look at their operating model, because consumers demand choice and if they start losing restaurants, consumers may look elsewhere,” she adds.

In short: “The platforms need to look at their operating model to see how they can reduce fees for the hospitality sector, which is being squeezed at every corner,” she says.

But reducing those fees will hit margin per order.

Squeezing budgets

Of course, it’s not just restaurants being squeezed. Consumers are too.

Deliveroo reported 7.4 million active users in the fourth quarter, around the same as a year earlier but with a “slightly lower retention of existing customers”.

“It’s definitely the less affluent customers that are, for obvious reasons, less engaged with the platform than they were previously,” explained Shu.

As the cost of living crisis rumbles on, more customers may find themselves in that less affluent demographic.

“A recession could cause people to scale back spending further, meaning the weekend takeaway treat for many could be downgraded to only once or twice a month,” Mould says. “That would be bad news for the network of drivers waiting to deliver food to people’s homes.”

But by the same token, more customers that might have headed to a posh restaurant might now order in instead.

“No one really knows how the cost of living crisis will fare for the food, leisure and entertainment sectors, but typically in-home entertaining becomes more popular as consumers want a ‘treat’ and decide to stay in rather than go out,” Crook says.

“The delivery platforms have an opportunity to serve this market well, but also perhaps make recommendations of other add-ons such as drinks or desserts from other providers to help increase revenue,” she adds.

Grocery will play an even more important role in securing loyal customers and driving up orders. Deliveroo has added around 2,000 grocery sites over the last year globally, taking the total to 18,000, including several major supermarkets. Its deal with Waitrose last week includes deliveries from Sushi Daily concessions at several stores. Just Eat has likewise been growing its grocery offering, securing partnerships with Asda, Co-op and this month Sainsbury’s.

“Economic uncertainty is starting to have an impact on what for many customers is still a luxury,” says Skelly. “Deliveroo has been able to offset the impact of this with an increase in restaurant prices, but this isn’t sustainable. If order volumes continue to fall, or even start to stabilise, both companies will need to maintain their focus on cost-control.”

The result will be “less investment, less expansion and less promotion-led marketing”, Skelly adds. And with economists predicting a long, shallow recession, “this approach might be needed for some time”.