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Part 2: Will Deliveroo's IPO Deliver?

Following on from part 1, in this article I’m going to explain how and why Deliveroo’s IPO didn’t live up to expectations. The company opened trading on March 31st at 8am below 270p

per share, over 30% less than the lower end of the pricing range of 390p - 410p.


What is Deliveroo?


For those of you that have been living under a rock, Deliveroo is an online food delivery service. Food is delivered by self-employed drivers/riders who operate on an on-demand basis. This provides riders flexible work hours. However, customer demand can fluctuate causing pay to vary day-to-day. The major differentiators to other food delivery companies such as Uber Eats and Just Eat is a focus on delivering food only from high quality restaurants. From my own experience using alternative delivery services, there are some questionable restaurants listed which pushed me towards only using Deliveroo. Deliveroo makes money via delivery, sign-up, and service fees, as well as by offering premium subscriptions and selling food through its own cloud kitchens. Founded in 2013 by two Americans and headquartered in London, Deliveroo currently operates in 11 countries while adding over 140,000 restaurants to its online food delivery network.





What is an IPO?


An IPO is called an Initial Public Offering. It is the process by which a private company becomes a public company by selling shares – which investors can then buy and sell on a public stock exchange. In Deliveroo’s case, the London Stock Exchange. The incentive to take a company public is to raise money. Deliveroo intends to use this money to continue investing in growth opportunities, which will aim to boost revenues.


Why did Deliveroo Shares Plunge 31% on London Stock Market Debut?


On Wednesday, March 31st at 8am shares were down over 30% in opening trade.

I believe this is due to the overcrowded food delivery market. Competition within the food delivery sector is fierce. Household names such as Uber Eats, Just Eat and even some more niche grocery apps like Gorillas and Weezy have considerable market capitalisation. This means margins are razor thin as these firms aggressively compete with each other for business. Fierce competition forces these firms to keep costs to a minimum affecting worker’s rights. Furthermore, Institutional investors such as Aviva, Rathbones, Legal & General, M&G and others all refused to support the float due to these issues with workers’ rights, as well as the share-holder structure discussed in part 1. Currently, the workers are self-employed and labelled as Gig workers – independent contractors. The fear of the workers gaining employee status, would entitle them to benefits such as sick pay, holiday pay, as well as national insurance. These benefits would eat into profits or in Deliveroo’s case add to their losses. These aren’t irrational fears. A Supreme Court ruling against Uber last month forced Uber to treat their cab drivers as employees, consequently giving them these benefits. Whilst the ruling didn’t apply to food delivery drivers, it was seen as a hit for the gig economy and could set a precedent for Deliveroo’s classifications of its drivers. Stemming from an overcrowded market, the shares ultimately flopped. Even being priced at the low end of the IPO range of 390p-410p investors didn’t buy in.


Whose fault was it?


I believe the joint bookrunners including, Bank of America, Citigroup, Jefferies and others priced Deliveroo shares too aggressively. Under the backdrop of COVID-19 and global lockdowns, online food deliveries were booming. Spending patterns shifted towards a stay-at-home lifestyle, boosting the likes of Netflix, Amazon, and of course online food delivery companies. Deliveroo really couldn’t have been served better market conditions. However, that didn’t stop Deliveroo from making huge losses. They reported a £225 million pre-tax loss in 2020 despite a sales boost from COVID-19 lockdowns. With the global vaccination programme underway and freedom on the horizon, people are eager to go out and spend. I believe, like me, others will want to go out and spend money on experiences rather than home deliveries. Cinemas will bounce back, restaurants will be incredibly popular, theme parks are going to be packed in the warmer summer weather, and staycations will be impossible to book. All these things don’t include staying at home, secluded, and eating food in front of the TV whilst streaming another season of your favourite Netflix show. The bankers advising Deliveroo got it wrong but it’s not them who will suffer. It’s the 70,000 odd retail investors who bought in and would have already seen the value of their investment cut by about a quarter. Once again it seems like there are no repercussions for the bankers for pricing Deliveroo too aggressively.


Disclaimer:

Please note that the opinions expressed by the author in this article do not constitute financial advice and are solely for educational purposes only. When buying shares, the value of your investment may go down as well as up and you may get back less than you invest.


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