Deliveroo’s Business Model Set to Disrupt the Restaurant Industry

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on Sep 30, 2019 9:00:00 AM
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Deliveroo—the six-year-old London-based online food delivery service—was in line to raise a whopping $575 million in their Series G funding round, bringing the total to $1.53 billion. The retail giant, Amazon, was leading the pack alongside other investors which included Fidelity Management and Research Company, and T.Rowe Price. Then, on June 24, Britain’s Competition and Markets Authority ordered a postponement of the investment until they could determine whether such an investment posed competition concerns. It’s interesting to note that June 24 is the same day that Amazon closed down its food delivery services in the U.S.

In the order, the regulatory agency stated that they had reasonable grounds for suspecting that, should the investment proceed, Amazon and Deliveroo would cease to be distinct businesses. Deliveroo is, after all, the number one company in this segment worldwide with an estimated 60,000 riders delivering meals from more than 80,000 restaurants in 14 countries. In addition to Amazon closing down its U.S. services, their restaurant-delivery services in Britain ended in December of 2018. 

Whether or not Amazon will play a part in Deliveroo’s rapid expansion is still on the table. Despite the setback, Deliveroo is moving forward with its delivery-only kitchens known as “Editions.”

The Rise of Deliveroo Editions

Editions, also known as dark kitchens, are basically pick-up only restaurants that are entirely serviced by Deliveroo riders. Restaurants are using these sites to grow their existing brand or enter the market with limited funds. Currently, they have about 100 remote kitchens in the U.K. alone. Deliveroo Editions, however, are experiencing some growing pains.

In May, U.K. Councils began cracking down on the delivery giant’s dark kitchens, claiming that some of the units were operating without the appropriate planning permissions. Local planning authorities from various cities have also claimed foul because of the impact that dark kitchens can have on neighborhoods and cities. These minor setbacks, however, do not appear to be slowing down Deliveroo’s upward trajectory.

In August, Deliveroo announced their new “Restaurant Rescue Team” which sounds a little like a version of America’s Restaurant Impossible. Instead of rebuilding a brand, however, this rescue team will revive struggling restaurants as delivery-only models. In essence, restaurants at the verge of collapse, or those that have recently closed, will be offered a spot in Deliveroo Editions. The delivery company will be covering the “costs of rent, equipment, maintenance, utilities, food safety setup, and audit costs.”

While Deliveroo doesn’t have a presence yet in the U.S., other delivery businesses such as Uber Eats have established pilot programs similar to Deliveroo Editions.

The question then arises, is this business model going to change the very nature of the restaurant industry? For some, the answer is yes, and it all comes down to the bottom line.

The Numbers

Zach Goldstein, CEO of Thanx, illustrated the bottom line theory perfectly in his recent article:

Income: A ticket comes to $40.00

Costs: Food and Packaging (at 35%) come to -$14; Labor at 30% comes to -$12; Facilities such as rent and insurance come to about 15% or -$6, with variable costs such as marketing and repairs eating up another 10% or -$4.

This leaves the restaurant with a $4 profit.

But wait, that particular meal was delivered by a 3rd-party vendor who charged a 25% commission which amounted to -$10. Now the restaurant has just lost $6 in the exchange.

Now take a look at Deliveroo’s business model. As they continue to dominate the delivery scene, they plan on increasing their dark kitchens around the globe by using “Roo Boxes,” low-cost prefabricated kitchens that can be started for as little as $12,000. According to an article in Forbes, these prefabricated kitchens have the potential of delivering over 2,000 meals a day. In addition, due to the low overhead, they can lower the price of food by up to 50 percent.

It’s clear that, should and when this business model expand across the globe, the restaurant industry will be changed for good.

I, for one, am praying that my favorite Saturday night hangout, the restaurant I compare all others to, will be able to brave the storms that are looming.

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Topics: Capital, Food Delivery, Private Equity

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