Uber is targeting the UK's food delivery market with plans to link up with Deliveroo, the London-based food delivery app, in the latest sign of Big Tech investing in a British start-up.
Deliveroo’s main investors, which include Fidelity and T Rowe Price, are seeking an investment or partnership rather than a full sale, according to sources.
No firm valuation has been reached, but people close to Deliveroo said the company – which was valued at $2 billion (€1.7 billion) last year – would hold out for a price above $4 billion. Uber was willing to make a significant investment but would not bid more than $4 billion, according to one source.
“The price is always going to be a sticking point,” said one investor. “Deliveroo is not up for sale,” said another.
Dara Khosrowshahi, Uber's chief executive, has focused expansion plans on UberEats, its food delivery division, which is growing at 200 per cent a year and is on track to report $6 billion of revenues this year.
"Dara is really keen to expand UberEats in Europe but he will be disciplined," said a US banker who has worked with him in the past. "If Deliveroo turns Uber down it risks entering into a pricing war that it won't be able to win."
Uber has not hired any external bankers to advise them on the deal, according to a source.
UberEats generates revenue from three sides of each delivery order: a delivery fee paid by the customer; a commission from the restaurant; and a portion of the driver’s fare.
‘Two-horse race’
The tie-up would create a “two-horse race” in the market, according to Trish Caddy, an analyst at Mintel. A combined company would close the gap with bigger British rival Just Eat and eliminate a competitor in a market where consumers can switch between services easily.
News of the talks sent shares in Just Eat down 4.8 per cent to 684p on Friday.
“Uber wants this just for competitive reasons,” said Ms Caddy. “The purpose [would be] to create this simpler competitive landscape between Just Eat and UberEats.”
In the UK, where Deliveroo has operated since 2013 and UberEats launched in 2016, Deliveroo delivers from a network of 10,000 restaurants, while UberEats has 7,000. By comparison, Just Eat has a network of 30,000.
An analysis of App store and Google Play data by Priori Data, a consultancy, shows that this year UberEats recorded 13 per cent more daily active users in the UK than Deliveroo at 50,647 compared with 44,890. Just Eat, which was first to market, has almost 500,000 daily active users, according to the same data.
Deliveroo disputed the figures and said the company was “significantly larger than any other food delivery company with its own fleet of riders”.
Deliveroo does not operate in the US, but it would offer Uber the chance to expand its European business rapidly. Jason Droege, head of UberEats, told the Financial Times in March that European countries were "super important" to its expansion plans.
"The market [in the UK] is just further along in thinking about [food delivery] and it's very important for that reason. France has also been developing for those reasons," he said.
As UberEats has expanded into 300 cities around the world, it has pursued two strategies. In places where Uber also offers rides, it can leverage its existing network to launch food delivery with a built-in pool of potential customers and delivery drivers.
Uber also operates UberEats in places where it does not or cannot operate its main rides service, including some cities in Canada, France, Mexico, Japan and India. That gives its brand a foothold for a possible future rollout of rides. It has also contributed to the overall growth of Uber users. More than a third of first-time customers of UberEats this year have never used an Uber service before.
Intensifying competition
Competition in the food delivery sector has intensified in Europe, with both Deliveroo and Just Eats stepping up their investment in response to Uber’s arrival in the UK.
In the US, Postmates raised $300 million in venture capital funding earlier this week, while DoorDash, another competitor, raised $250 million in August, less than six months after raising $535 million from SoftBank.
According to the last accounts filed by Deliveroo’s parent company, Roofoods Ltd, at Companies House, revenues rose 611 per cent in 2016 to £128.5 million, while losses tripled to £129 million. The company held nearly £180 million in cash.
Over the course of 2016, Deliveroo spent more than £13 million on equipment for its drivers and building out its network of “dark kitchens”, restaurant sites that are not open to the public and exist only to serve Deliveroo customers. Gross margins were 0.7 per cent.
Any deal may also be complicated by competition concerns. The UK's competition watchdog previously investigated Just Eat's £200 million purchase of Hungryhouse, the UK arm of Delivery Hero.
That deal was cleared in 2017, with the Competition and Markets Authority noting that the strong growth of Deliveroo, which was on course to have 10-20 per cent of the market by the end of 2017, ensured there would not be any substantial lessening of competition. – Copyright The Financial Times Limited 2018
