Food delivery M&A: costs, customers & competition
M&A creates value in helping scale food delivery business models and generates marketing synergies to reach profitability. To achieve market leader position and operate profitably a position of 3x or 4x the size of the closest competitor is necessary.
Scaling the business is key for maximising the economies of scale. Scale is measured by number of users and orders. As more consumers engage on the platform this drives order volume and therefore sales for local businesses and more opportunity for riders to increase their earnings. The greater volume of orders in high density areas increases frequency and number of orders for riders, incentivising earning potential and driving efficient fulfilment and performance.
Local network effects increases in value with more users and restaurants using them. In leading market positions, marketing spend can range from 15-25% of revenues with those in second position in competitive markets spending >100% of revenues to increase customer loyalty and retention. With more restaurants the utility of the platform for users increases by providing more options driving consumer engagement, while more customers enhance the utility for restaurants, increasing their sales and earning potential for riders, creating a three-sided network effect.
Increasing brand affinity is achieve through the combination of local network effects and economies of scale, resulting in more restaurants, more consumers, and more riders utilising the platform. Scaling of the logistics platform is a major competitive advantage. In parallel, investment in technology to enhance the service and create innovative features increases brand affinity and awareness, which drives down the high acquisitions costs of capturing consumers attention. Brand is a barrier to entry and is important to create moats to head off new entrants which are often well funded companies.
M&A helps scale and generates marketing synergies
The main use of free cash flow in the past few years has been M&A to accelerate growth. There have been two distinct characteristics for inorganic growth, depending on the business strategy, with an ‘in-market’ and/or ‘out-of-market’ strategic approach to consolidate markets and expand into new regions.
In-market M&A strategy consolidates market share by acquiring complementary business to scale in areas where they already operate. Once a national merchant footprint has been established critical mass of restaurants and riders can be achieved by replicating through new market launches, driving consumer adoption.
This strategy can result in the business generating more EBITDA for potentially a lower percentage of cost compares to investing organically to achieve the same outcome.
There are immediate benefits for in-market acquisitions in terms of marketing synergies. By achieving a market leader position through acquiring another player this enables the business to spend less on marketing in terms of percentage of revenues. Critical mass has other benefits including improving unit economics, less competition in bidding on key search terms and propelling the flywheel.
This strategy can result in the business generating more EBITDA for potentially a lower percentage of cost compared to investing organically to achieve the same outcome.
Out-of-market M&A strategy aims to acquire market leaders of scale in new geographies where they do not already operate to attain an addressable market that is sizeable. Additional benefits include cost synergies which are achieved through geographical expansion where the playbook of scaling and the technology can be leveraged. Furthermore, arbitrage effects can be utilised through acquisition of a smaller start-up which is valued at a lower multiple.
Strategic expansion into new markets has a multitude of benefits to create value more broadly across the business:
Leveraging technology: with geographical expansion capabilities can be leveraged with technology shared and cost synergies achieved
Winning large chain contracts: with a large footprint and scale large chain restaurants are more attracted to establish exclusive contracts
Scaling social marketing strategy: economies of scale through marketing synergies is beneficial given marketing spend is one of the largest costs
M&A strategy focused on consolidation
The evolution of business model matured from a pure marketplace model to an integrated model with high take rates of 22-30% of GMV (Gross Merchandise Value) from 10-15% of GMV. The high profit margin attracted new players, Deliveroo (founded in 2012 in the UK), Postmates (2011 in the US), Caviar (2012 in the US), DoorDash (2013 in the US), UberEATS (2014 in the US), Glovo (2014 in Spain), Foodora (2014 in Germany) and Amazon Restaurants (2015 in the US).
These new players differentiated themselves by expanding the offering integrating delivery for restaurants that previously didn’t deliver, creating a logistics-enabled marketplace model, evolving with a higher focus on last-mile delivery. At the same time, it created a period of ‘land-grab’ opportunity with rapid geographical expansion up until 2015 with new country launches in markets with little or no competition.
More recently in Europe, with key geographies having already been taken by food delivery players the acquisition strategies implemented have focused on the goal of prioritising consolidating market leadership positions in existing markets. Rationalisation of the portfolio has come in the form of divesting non-core markets or in markets with a number two position that are unable to break-even or achieve meaningful profitability.
Implementation of the business model and technology is essential for executing a successful acquisition
Management credibility are vital in executing successful M&A
Implementation of the business model and technology is essential for executing a successful acquisition. A higher level of confidence from investors on the implementation of an acquisition comes from a management team with a good track record and proven success on their ability of integration. Given the high volume of M&A activity in food delivery management teams build a reputation on executing on their strategy and ability to effectively consolidate and drive growth.
M&A is not without risk with value destruction and loss of credibility high on managements concerns. When executing on an M&A strategy in the pursuit of growth organisational capacity and resources to integrate effectively should be considered. Failure to successfully execute can be a costly venture for a start-up and can derail progression on organic growth.
M&A - a softened macro backdrop
Dealroom’s latest report on foodtech companies shows a combined enterprise value of $1.1 trillion, which is up 45% since 2020, with several key structural drivers accelerating this growth. In total there are 119 foodtech unicorns of which 25 are from Europe. This growth has come from consolidation in part from M&A to drive growth, where companies have amassed a significant addressable market providing big opportunities.
Foodtech enterprise value by year founded
Source: Dealroom.co
The first quarter of 2022 has seen volatility in the public markets with foodtech companies declining in value b 8%. There are a combination of factors that have resulted in market volatility and uncertainty deteriorating investor sentiment and dampened the M&A market:
Ukraine/Russia war
Higher interest rates
Weaker macro data
Geopolitical tensions including China/US
Concerns on real growth
More expensive labour and commodities
The unfriendly macro backdrop follows from a post-pandemic cycle whereby companies have high valuations, high margins and in a period of record low interest rates. Going forwards, expect to continue to see consolidation with proceeds reinvested in core geographies to fight off competitive threats. Investors will continue to back quality companies though execution of strategic acquisitions with successful integration a critical part of value creation.
Expanding into adjacent verticals
A developing theme is the last-mile delivery which has become an increasingly important foundation of business models leveraging the delivery infrastructure by expanding the offering with deliveries from over verticals such as supermarkets and the pharmacy. Broadening the offering the last-mile delivery increases the utility of the delivery for a bigger TAM for additional revenue streams.
New well-funded private companies are competing in the market with differentiated strategies and business models adding to the competition. New entrants include Gorillas, Getir, JOKR, Gopuff and Jiffy which have raised substantial capital as they race for scale in the winner takes all market. At the same time incumbents will be looking at the space for partnerships or to consolidate to acquire agile logistic networks making them powerful data-driven retail competitors.