Deliveroo has become a household name during the last year, bringing us doorstep food relief in the absence of being able to visit our favourite restaurants.
As other industries have struggled, the success of the delivery app resulted in a $575 million investment from Amazon, plaudits from Chancellor of the Exchequer Rishi Sunak and a decision to list itself on the London stock market.
Initial hopes of an £7.6 billion valuation were dashed when Deliveroo’s stock price crashed by 30 per cent within the first 20 minutes of its listing on the stock exchange. This was, in part, due to concerns around its business model and its over-reliance on “gig economy workers” — those employed on precarious contracts earning low hourly pay.
Deliveroo’s failure on its first day of trading in London's biggest stock market launch for 10 years has been labelled as potentially damaging to the likelihood of big tech companies listing in the UK, post Brexit.
An expert on digital business models, Professor Charles Baden-Fuller, Centenary Chair in Strategy at the Business School (formerly Cass), believes that Deliveroo’s business model was not one that was going to be a pioneer in profit streams because of its lack of digital progress.
A business model unlikely to yield wonderful profit streams
“Deliveroo is not a proper tech company and its business model, although sound, is not one that is likely to yield wonderful profit streams.
“Deliveroo, as its name implies, is essentially a delivery business. Delivery businesses have an important role in making any economy work. Like Amazon, when it first started on its market-place business, Deliveroo is struggling to make a profit. Once it has secured its core business, it might be able to ‘pivot’ into success, as Amazon has done through its highly-profitable Amazon Web Services — a subsidiary of Amazon providing on-demand cloud services to individuals, companies, and governments, on a pay-as-you-go basis."
It was recently reported that Deliveroo riders were planning strike action after it was revealed that some workers were paid the equivalent of as little as £2 per hour — claims Deliveroo branded ‘unverified’.
Digital technology can transform ‘rather boring business’
Professor Baden-Fuller says if Deliveroo is to turn the tables it must transform its digital offering — with complex algorithmic processing key to take the next step.
“A physical business (delivering food) does not become a tech company because it has an app, website, digital newsletter, and a few digital add-ons. Currently, they offer little that is special in any meaning of the word, tech. Deliveroo’s technology is not able to tell its restaurant customers how to run their restaurants better or offer its customers new insights on how to enjoy food.
“Deliveroo is a delivery business, that benefits from scale and from ensuring its costs are low through keeping its pay bill as small as possible. In sharp contrast, Rolls-Royce added digital to its airplane engines — making engines more reliable as well as reducing their costs and emissions, with Rolls Royce able to lease its engines on a performance basis — to transform its offer. This de-risked many parts of the business from the customer viewpoint, with faster plane turn-around times at airports, and a better overall experience. All this required complex algorithmic processing through machine learning and AI. A case in point that digital technology can transform the offer.
“Enjoy your next Deliveroo take-away, but do not think that its financial success or failure has any message for the UK post-Brexit or tech future, only for the ability of a few city promoters to be fooled into thinking they can over-price a rather boring business.”
A unicorn that has lost its magic
Professor Andre Spicer, an expert in organisational behaviour at the Business School, believes Deliveroo has succumbed to ‘the curse of the unicorn’ — a moniker attached to the mythical animal on the rare occasion a start-up hits $1 billion.
However, according to Professor Spicer, Deliveroo is in a worse position as, despite its slump, it is not coinciding with an often-associated upside of being branded this way.
“Deliveroo has succumbed to the curse of the unicorn, but with a twist. Less sophisticated retail investors are often willing to overlook important detail to be part of the hype and in the past this hype has paid off in the short-term: unicorns often see their share price rising significantly when they are listed. However, the hype around unicorns has a downside in the medium-term, meaning investors initially overlook the underlying value of the company. This becomes apparent after the firm is listed and inevitably share prices fall.
“The interesting thing with Deliveroo is that it seems to be suffering from the curse of the unicorn, whereby share prices fall when the underlying value becomes apparent, without benefiting from any of the hype associated with ‘unicorn’ firms, such as a short-term bump in share price.
“Perhaps this could suggest that unicorns are losing some of their magic and no longer charm retail investors in way which leads them to overlook the underlying value of a company.”
Charles Baden-Fuller is Centenary Professor of Strategy, and Andre Spicer is Professor of Organisational Behaviour at the Business School.