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In most sectors, companies lament the impact of rising interest rates. The higher cost of capital sends their wheels spinning. Not so in European food delivery, where operators have paused value-incinerating land-grabs and are starting to gain traction.
For the first time, all three of the European delivery companies are expected to report positive adjusted ebitda in 2023. This metric strips out the impact of share-based compensation, which can be considerable, but it provides a useful indication of how the underlying business is performing.
The UK’s Deliveroo reckons it will do slightly better than its guidance of £60-80mn adjusted ebitda. Earlier in the week, Just Eat pointed to above-guidance adjusted ebitda of some €320mn. Germany’s Delivery Hero, which operates brands such as Glovo, Foodora and Foodpanda, expects adjusted ebitda margins of over 0.5 per cent.
True, this is a mere sliver of profit and is adjusted to boot. Investors burnt by years of negative cash flows are loath to give the sector much credit. With the exception of Deliveroo, whose strong balance sheet enabled it to return cash to investors, share prices have languished.
Yet the companies can point to 2023 as proof that their concept works. Even in the midst of a cost of living squeeze, they have been able to extract more from their customers without causing them to quit the apps. Gross transaction value at Deliveroo rose 3 per cent year on year to £7bn.
There is more to come, especially in markets where food delivery is less widespread. Demographics will help. Today’s delivery-prone youngsters may spend more as they grow up and their disposable income increases. Gross transaction volume growth in the high single digits should be a reasonable mid- to long-term assumption, thinks Giles Thorne at Jefferies.
Margins rise with increased penetration. As the density of participating restaurants and diners in a small “hyperlocal” area increases, riders can make shorter trips and even bunch up deliveries. Central overheads are largely fixed, meaning operating margins after amortisation and depreciation should move from negative to some 6 per cent of transaction values, reckons William Woods at Bernstein.
That is an attractive shift, especially for a sector that trades at 6.8 times 2025 ebitda, on Capital IQ estimates. European food retailers such as Tesco and Carrefour, with a fraction of the growth potential, hover near 6 times. Beleaguered platforms may yet deliver the goods.
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