Description

Deliveroo (ROO) is a European food delivery platform.  I’m long Takeaway (TKWY) and think ROO is an attractive short against that position, so this is a write-up on both.

I’ll be brief on TKWY (aka GRUB) since there was already a recent writeup on it.  TKWY owns:

(1)  Near-monopoly positions in the Netherlands (50% EBITDA margins, growing 48% YoY H1) and Germany (growing 77% YoY H1).

(2)  Clear #1 positioning in Canada through SkipTheDishes (Doordash model).

(3)  Near-monopoly positioning in the U.K. ex-London and ~30% share in London in a 3-player market.

(4)  Clear #1 positioning in many Tier 1 U.S. cities like New York, Chicago, Philadelphia through GrubHub/Seamless.

(5)  Clear #1 or Close #2 positioning in several other markets under the “ROW” bucket like Poland, Italy, Spain, France, Israel, and Australia.

Almost all GTV in Europe comes from markets where TKWY averages 70% share.  Taking the current market cap less the value of TKWY’s 33% stake in iFood (which has received bids of €2.3B and mgmt. plans to sell) the implied value of TKWY’s wholly owned businesses is €12.1B.  Mgmt. is projecting ~€29B of GTV in 2021, implying TKWY EV/21’GTV of 0.42x.  Even if you value GrubHub at $0, the EV/21’GTV would be 0.63x.

ROO, which is #2 or #3 in almost all of its markets (i.e., will have substantially lower margins on their GTV than TKWY) and has potentially large legal liabilities trades at 0.57x 21’ GTV. 

50% of ROO’s GTV comes from the U.K., where Just Eat was asleep at the wheel until the second half of 2020 when it was acquired by TKWY.  Just Eat dominated the marketplace business in the U.K., where independent restaurants would use it for demand generation and would then do their own delivery.  Like GrubHub in the U.S., Just Eat was very slow to react to what it saw as money-losing logistics businesses (ROO & Uber Eats) growing in London.  ROO & Uber attacked the London market by offering delivery services on behalf of restaurants that previously had no delivery capability.  By­­ increasing the selection (mostly QSRs), they were able to draw customers away from Just Eat. But importantly, they have had very little success in attacking Just Eats’ marketplace business. Since it was acquired by TKWY, Just Eat has implemented “#projectbulldozer” (actual # used by TKWY’s founder/CEO Jitse Groen).  Just Eat is using its substantial U.K. marketplace profits (my guess ~€250 million/year) to offer free delivery from salaried employees and aggressively expand selection to match ROO & Uber in London.  Just Eat will have free delivery and by far the largest selection (because it has ~30,000 independent marketplace restaurants in addition to what is quickly becoming a comparable logistics offering).  I believe ROO has two choices, (1) match free delivery, have negative gross profit per order, and burn through their IPO cash in a few years, or (2) lose share in the UK. 

ROO does have high market share (Jefferies estimates 70%) in Central London, but this is a minority of the UK, and even a minority of London.  Most restaurants on ROO’s service (or Uber Eats) never had delivery prior to joining and most are QSRs.  For these restaurants, ROO/Uber are a very small % of sales in normal times, and an even smaller % of profit because of the high commissions charged.  Therefore, they aren’t loyal or afraid to try multiple apps, unless they get a very low commission to remain exclusive (which guarantees they will be unprofitable supply).  And because many of these restaurants are large QSRs, they have leverage to negotiate low (unprofitable) commissions.  Hence, I think it’s going to be very easy for Just Eat to close the supply gap.  On the other hand, the average restaurant in Just Eats marketplace does ~35% of its business through Just Eat; they are very reluctant to multi-platform and split demand which could potentially have the effect of pushing the restaurant down the page and impacting the Just Eat business.  They’re also reluctant to add complexity to the kitchen for minimal extra sales.  ROO & Uber are known for offering delivery for branded restaurants, not mom and pop takeaways, so even if a marketplace restaurant multi-platformed it wouldn’t generate much if any sales from ROO and would have the added complexity of multiple tablets in the kitchen processing orders at different times to keep track of.

So, half of ROO’s GTV is in a market where they are a distant #2 player when measured by share of gross profit dollars (i.e., share of non-QSRs), where the #1 player can afford to offer free delivery forever.  Just Eat just rolled out the new strategy in the back half of last year and is still ramping up delivery efficiency and selection, so I expect the future for ROO in the UK to look a lot worse than the past.  And they’re up against very tough comps to begin with from COVID.  Alternatively, maybe they’ll ramp up discounts and won’t lose share but will burn cash.  Either way, I don’t see a likely endgame where ROO is profitable enough in the UK to justify the market cap.

And to make matters worse, ROO has serious legal risks.  Milan prosecutors and the Italian Labour Inspectorate have already jointly ordered the four major food delivery platforms to hire their couriers as employees and pay €733 million in fines.  The “four” includes Just Eat which has a very tiny delivery presence, so it’s really split between Uber, Deliveroo, and Glovo.  But if they hire these workers as employees, they also may have to catch up on prior missed social security payments which can be up to 33% of an employee’s salary.  They can fight the charges in court, but my understanding is that risks criminal sanctions against the managers.  And in Spain, the Supreme Court ruled that food delivery riders are employees, not contractors, and the Spanish government introduced legislation to that effect which will take effect soon.  TKWY’s founder summarizes the risk well: “About logistics, it is our assessment that what our competitors do in Europe is, in most countries, illegal… And therefore, our competitors are going to be stuck with quite a hefty bill for the past couple of years.”  TKWY employs their delivery drivers, offering full benefits and minimum wage.  I believe this is going to shine an even brighter light on the employment practices of its competitors (i.e., ROO).  How do you make the standard “our business model doesn’t work if we have to classify them as employees so you’re going to get less employment” argument to regulators when your much larger competitor is employing tens of thousands of riders and doing fine?

Summing it up, with ROO you get 50% of the business in the UK (where they are up against a dominant Just Eat who plans to offer free delivery indefinitely) and a bunch of #2/3 positions in a grab bag of other competitive markets where ROO is operating with a potentially illegal labor arrangement (and the associated potential legal liabilities) for 0.57x 21’ GTV.  Alternatively, for 0.42x GTV you could buy TKWY, which gets nearly all of its GTV from markets where it is a clear #1 including Germany/Netherlands where it is effectively a monopoly.  

I think Germany & the Netherlands are probably worth near TKWY's entire market cap (ex-iFood stake).  Just those two markets are run rating €5.6B GTV in the first half of the year (+75% YoY).  I believe it’s highly likely that Germany will eventually match the Netherlands margins given the lack of competition; it’s just less penetrated and investing in rapid growth.  The Netherlands margins were 54% in 2019 before investments in delivery lowered them to ~50%, but let’s haircut it and say 40% due to growing delivery share.  Assuming those two markets grow GTV at a 25% CAGR over the next five years at 15% take-rates (low given assumption that delivery share is growing and reducing margins) and 40% margins, just the Netherlands and Germany could be earning around €1B EBIT in five years and would still have low penetration of their TAM.  So, with relatively reasonable assumptions, TKWY ex-iFood stake is priced at 12x 5-year forward Netherlands/Germany EBIT which is only ~20% of total company GTV.  I think those markets are very good downside protection, and there’s significant upside if the UK strategy works and/or GrubHub defends its core markets, both of which I think are highly likely.

ROO's price relative to TKWY, given the differences in the quality of their businesses, doesn't make sense to me.

Risks to the short (besides the general risk of shorting anything in 2021):

It’s possible this could be acquired, but Amazon which owns a stake seems unlikely given that they chose to sell down part of their stake in the ROO IPO.  Uber Eats could try, and if it was approved that would obviously be bad for the short, but good for TKWY since it would rationalize the UK into a duopoly.  DoorDash could try, but I don’t see why they would want to pay substantially more than this price given the potential liabilities and competitive situations they would be buying into. 

Catalyst

- Lose share to Just Eat and/or losses increase to defend share

- Large fines materialize

- Other markets make the independent contractor rider model illegal