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How to value a delivery company

Let’s take a look at Missfresh and ask what does it tell us about the type of business ‘delivery’ is?

Missfresh is a grocery delivery company located in Beijing. It has pitched itself at tech investors and claimed a valuation based on a multiple similar to Amazon’s. And it went public, via an IPO, in June last year at a valuation of $2.5 billion. So why, according to the FT, is Missfresh now struggling to pay suppliers of beef jerky and dried seaweed snacks?

In short is Missfresh a tech company or is it a supplier of beef jerky?

It’s this question – and what it means for restaurant delivery companies - that I want to attempt to answer.

Let’s start with what Missfresh tells its investors about the nature of the business it runs.

Its website tells investors that it is an ‘integrated online … on-demand … smart omni-channel’ business. That sounds like a tech company to me. But then the website gives the game away by talking about ‘neighbourhood retail … fresh markets … fresh produce’. That sounds like an old world business to me.

Now Missfresh is just one company – and not necessarily typical of food delivery companies in general – and restaurant delivery companies in particular. But it shares some characteristics in the way that it pitches itself to investors.

So, let’s swing towards restaurant delivery companies and see what they say about themselves to investors. But first let’s take a look at the context of investing in delivery companies as tech businesses.

A pitch for a tech business investment

What does a typical tech business have going for it as an investment prospect?

It’s a business that has already made its first significant investments in software; it requires little by way of additional capital expenditure.

On the other hand, labour costs (for software development) are high but can be turned on and off quickly, they can be repurposed and redirected swiftly in new directions as opportunities arise, and as existing income streams slow down. And marketing costs are high at the outset but, over time, they fall as a proportion of revenue.

The business model of a tech company may include several different players – customers, advertisers, facilitators (a name for people providing things like financial services).

Each of these parties has an interest in driving up the business of other parties in the system – often represented as a flywheel – ‘a heavy revolving wheel in a machine which is used to increase the machine's momentum’. This flywheel effect is a way of creating more sales momentum – making an even better case for investment.

And tech companies use their learnings from millions of interactions between the parties that participate in the flywheel system. These learnings are used to guide future interactions towards products that sell best, towards the brands that are most in demand, and towards the products with the highest margins. And learnings will also be directed at improving efficiency throughout the overall system.

The conclusion from all this for the investor? It’s now just a question of rolling out that software – and profits will follow.

But what happens if it’s not only about software? What happens if the flywheel includes making physical products? Moreover, what happens if they are made by businesses that must work with slim margins? And what happens if the business, no matter how hard it tries to plan its daily operations, is at the hourly whim of unpredictable customers whose decisions might be affected by all sorts of things - like the weather?

And then what happens if the product has to be delivered – in half an hour or so - by people on bicycles who have to deliver to places that may be tricky to find within restricted time slots? And what happens when things go wrong – as they undoubtedly will, quite frequently - the wrong product may be prepared, or only part of the order delivered, or the product is damaged too much during the delivery process. I could go on.

Does all this “what happens if” amount to a tech business (even though some of the issues – such as unpredictable demand - can themselves be resolved by technology)? The short answer is: I don’t think so.

Now the real reason why this is such an important issue is that tech companies are highly valued – and much more highly valued than companies that are engaged in what we could describe as old world activities like preparing and supplying food.

And this means that it is important to the investor to be clear whether the company is a tech business or an old world business.

The dichotomy

So: is delivery really a tech business? Or is it an old world business facilitated with technology?

This isn’t a facile question because a tech company, with the benefits (and more) that I’ve described above, is by its nature going to be valued with a high multiple.

But add in some of the old world considerations and ways of going about things, and the importance of the tech elements are reduced, meaning that the high margin, high growth tech element is much less significant in terms of potential growth and potential profitability. And therefore lessening the value for the business.

That’s why I want to ask this question - “Is delivery really a tech business?” - and try to find out whether they are tech businesses, or old world businesses. And, more specifically, I’d like to find out how they themselves answer this question.

My sources are statements published by DeliveryHero, Deliveroo, DoorDash, Just Eat Takeaway (JET), Grab, and Meituan. I could have selected other companies too – such as Uber and Zomato – but they tend to talk about their whole business and not specifically their restaurant delivery activities.

Since this is a question for investors, I have searched for information quoted in delivery company investor-facing notifications – annual and quarterly reports, IPO documents, and investor presentations.

And to make sure that I’m not seeking quotes that may no longer be valid, I have focussed on comments made in the last eighteen months to two years.

What do restaurant delivery companies tell investors about themselves?

What do restaurant delivery companies tell their – actual and potential – investors?

Well, they tell them that they are indeed tech companies. Their quotes are replete with words such as ‘AI’, ‘algorithms’, ‘analytics’, ‘cloud-based’, ‘data’ (including especially ‘big data’), ‘digitize’, ‘end-to-end’, ‘full stack’, ‘internet’, ‘machine learning’. They use these terms to describe their ‘apps’, ‘super apps’ and ‘websites’. And the words they use most are ‘platform’, ‘online’, and tellingly ‘technology’.

These words clearly describe companies that are firmly in the tech space.

What are the benefits of being a tech company?

These tech-based descriptions allow the companies to derive ‘data-driven insights’, to provide ‘ecommerce services’ at ‘high frequency’, based on ‘ecosystems’ that are ‘large’ and ‘global’ using ‘innovative technology’ to provide ‘network effects’, and ‘product interfaces’ that satisfy requirements for ‘on demand’ and ‘seamless services’ that are ‘optimised’ for ‘search’.

All of these characteristics are undoubtedly well provided for by technology, but old world technology is also capable of providing some of the benefits that are claimed by delivery companies that favour themselves as tech companies. I’m talking about benefits as disparate as ‘empowerment’, ‘insights’, ‘integrated payment’, ‘innovation’, ‘upskilling’, and ‘user stickiness’.

These benefits can be attributed to a ‘marketplace’, ‘logistics’ or ‘quick commerce’ business, which is ‘omni-channel’ or ‘multi-category’ with benefits of ‘marketing leverage’ that are ‘tailored to meet customer needs’. Perhaps they do this by tracking orders in ‘real time’ and certainly providing ‘a wealth of choice’.

And an important benefit is the ‘flywheel’ effect. But this is a characteristic of old world markets too – the more customers a company has, the more opportunities it has to market its products, the more customers it has, and so the flywheel turns even if you are selling baked beans from a corner store.

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More descriptions give the game away

And that leads to the final set of descriptions used by delivery companies in their investor-facing statements which, in a sense, give the game away.

This is where we find ‘consumers’ and ‘customers’, ‘restaurants’, ‘shops’, ‘warehouses’, ‘corporate customers’, and ‘couriers’ (or ‘riders’) who ‘deliver’ ‘convenience’, ‘creativity’, or ‘empowerment’, and provide ‘essential’, ‘enjoyment’, ‘experience’ which may be ‘personalised’.

It’s where the focus may be on peoples’ ‘favourite coffee’, ‘pizza’, ‘ice cream’, ‘prepared meals’ or ‘cooked’ or ‘uncooked food’, offering a ‘varied’ or ‘large selection’ whether in a ‘local’ or ‘hyperlocal neighbourhood’.

And all the while, operators may be engaged in ‘driver acquisition’ or ‘looking for tech solutions’.

All of these activities have been going on from time immemorial. In short, delivery companies are addressing this timeless market.

And they are doing it with tech-enabled propositions. But I’m not at all sure that that makes them tech companies.

But words are just words

Of course, you can argue that businesses (and people) should not be judged on their words alone – you should also look at what they do.

Delivery companies undoubtedly invest in technology – it’s probably the main function of their expanding workforces. Creating new software solutions to problems and directing software solutions at encouraging customers to spend more - this is what drives much of the development activities of delivery companies.

And for further evidence of their tech focus, you only have to look at the screens that show this output – whether it’s the customer’s mobile phone, or their laptop (or even desktop), that sport a wide range of apps from delivery companies.

Or look at the apps interrogated by riders who are seeking their next order or following the route to the customer’s doorstep. Or consider the iPad (frequently several) that captures orders and provides instructions to busy, harassed chefs, in tens of thousands of restaurant kitchens and cloud kitchens.

But the other side of the business that delivery companies are involved in requires peeling, chopping, stirring, cooking, packing; it requires muscle power; it asks for people to work for modest wages (at best) because the margin is tight; it involves human error.

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New world? Or old world?

Does this paint a picture of a tech-focused business sector or a people-centric one that, like Missfresh, ‘sells beef jerky and dried seaweed snack’?

So, I return to my original question: Is delivery really a tech business? Or is it what we could describe as an old world business facilitated with technology?

You can argue that the jury is out on that. But you can look at the words that delivery companies put in front of investors, and you can argue that they are, at best, somewhat ambivalent.

It’s not at all clear whether delivery companies represent a bright new world of sparkling tech innovation, or the daily process of cooking food and delivering it.

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We would really like to hear from you with your comments and questions, your suggestions for topics and additional content peter@thedelivery.world

News

Here is a summary of some of the news in the last couple of weeks:

• Uber to trail delivery of equipment from Parts Town to restaurants in Chicago

• Just Eat Takeaway sells 33% stake in iFood to Prosus

• Doordash and Walmart to end grocery delivery partnership

• DoorDash to partner with Grocery Outlet Holding for grocery deliveries

• Deliveroo and Boots partner on delivery

• UberEats partners with Co-op for UK grocery deliveries

• DeliveryHero revenue rose 50.4% in H1 2022

• Grab revenue rose 79% in Q2 2022

• GoTo – parent of Gojek – revenue rose 73% in the first half of 2022

• Just Eat to deliver from Booker symbol group stores

• UberEats pauses deliveries in parts of Soweto

• Peckwater Brands acquires Honest Food Company - virtual food brand operator

Email us at news@thedeliveryworld.com if you have news to share about the delivery world.

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