Deliveroo: The making of an on-demand giant

In just three years, former banker William Shu (pictured below) has come from nowhere to make Deliveroo London’s most talked-about startup. His bikes have become ubiquitous in the city, he’s landed £137m from major investors and now sees Uber — among others — in his wing mirrors as he furthers his plan to dominate how food is delivered in cities around the world.

There was standing room only when William Shu (pictured above) took to the stage at the recent Techcrunch event at London’s cavernous Copper Box venue. With delegates piling in for the 11:45am session, the Deliveroo founder clipped his microphone onto his hoodie and people with clipboards officiously told anyone without a seat to leave. Few in the room had heard of Shu a year ago but five months prior he had his pick of the world’s most prestigious venture capital firms at what was a beauty parade of an investment round that raised £70m.

As far as the startup world is concerned, Deliveroo is box office. Shu and a couple of helpers were picking up food from restaurants in Chelsea and delivering it to local residents just three years ago. At the last count, it was dispatching a vast fleet of pedal and motorcyclists to 5,000 restaurants in 52 cities across 12 countries and is being earmarked as a global tech-meets-logistics giant for the modern age. The rise has been meteoric.

That playbook

However, Deliveroo no longer operates below the radar and faces stern questions about how resilient its business model is. As it launches around the world, how well can it stand up to a host of competitors?

Any appraisal will invariably lead to a discussion about its ‘playbook’, a term popularised by Uber — the company that has defined the on-demand economy — referring to its finely tuned blueprint. The blistering speed of Uber’s international roll-out is considered to be a function of this playbook of streetwise tactics and wily manoeuvres to establish the service in a variety of cities with a level of speed and impact that no one had previously seen.

Deliveroo’s own playbook is built on hyper-locality and the intense propagation of a triumvirate of constituents: restaurants, drivers and customers within a 2.5 mile radius. The process of lighting the spark in an area to see if it reaches a point of sustainability is an anxiety-inducing and cash-draining affair. Deliveroo is believed to have honed its loss-making period down to just three months for a typical neighbourhood that it has launched in.

Golden criteria

Few companies have embraced the ‘think global, act local’ maxim as emphatically as Deliveroo, which hasn’t deviated from drilling down to micro areas even as it has become bigger. Each patch of streets is identified based on how well it ticks its three golden criteria: lots of nice restaurants, affluent locals and people densely packed in together.

Only when all three exist, the company says, can it offer sufficient choice and deliver within its 30- minute threshold. Because of this criteria, even its early fans thought the concept little more than a ‘Kensington startup’; surely the Deliveroo concept (and prices) couldn’t stretch beyond the most salubrious of postcodes. As it has turned out so far, very few areas the company has launched in have flopped, prompting it to take more gambles and loosen its criteria. The model appears to have worked in student-heavy towns such as Exeter, lower-income cities like Coventry and even sprawling cities including Cheltenham and Berlin. All a long way from King’s Road.

It’s now preparing for a major international push. It launched in Dubai, Singapore, Hong Kong and Melbourne in autumn last year and the background of its latest investors offer a revealing insight into the company’s next steps.

Big backers

The lead investor in the last round was DST Global, a major investor in Facebook, Spotify, Airbnb, Twitter and the key backer of India’s biggest e-commerce firm, Flipkart. Deliveroo also took investment from Greenoaks Capital, which has interests in one of the world’s most lauded e-commerce businesses, South Korean firm Coupang and Hummingbird Ventures, best known for guiding investments in Turkey and the Middle East.

These backers and the money in the bank suggest that Deliveroo could be set for a spending spree, buying food-delivery businesses that are already the leaders in their local markets, although at the Copper Box, Shu said: ‘We haven’t seen anything that interesting. I think we need to see a bit more of what’s going to happen in some of the markets.’

Read more: What it’s like driving for Deliveroo

Cultural peculiarities

International expansion nevertheless represents a serious examination of Deliveroo’s capabilities. It is starting to negotiate how its drivers tackle the mall culture of the Middle East and Asia. It will be confronted with the sprawl in many American cities, the higher cost of riders and drivers in Europe, the traffic and distance between restaurants and where affluent people live in Asia, and a host of legal obstacles and cultural peculiarities.

Even with its new resources, Deliveroo will be acutely aware of the risks of being out-hustled by nimble and savvy domestic operators as it embarks upon its global expansion.

Competition is set to come from a few angles other than local players. Rocket Internet is stealthily bringing its latest on-demand food bet, Take Eat Easy, to London on the back of success mainly in Paris, competing directly with Deliveroo. Although Deliveroo is seen to have ‘won’ London, Rocket’s backing and Take Eat Easy’s lower cost base is expected to present a credible threat in other cities.

Turf war

And then there’s Just Eat. Founded in London back in 2001, it has a different operating model to Deliveroo, focused on the lower end of the market and, crucially, working as a platform for takeaways with their own drivers. The two have stayed off each others’ turf to date but are poised to clash.

‘Will they come into our space? They certainly will,’ says Deliveroo’s UK general manager Dan Warne. ‘But they are a sales and marketing-led business; it’s a platform. To operate in our space, they have to become a logistics business. That’s a major pivot — even if we look similar, the inner workings couldn’t be further apart. The brand is the other challenge. The big Just Eat stickers aren’t going to work with a restaurant like Gaucho. It’s a real challenge. Maybe they’ll launch a sub-brand. But I feel they will try to maintain their order of growth.’

Just Eat initially tried building its own fleet when it started out in Denmark in 2000 but the lack of mass smartphone adoption at the time made it seem impossible and Just Eat was sufficiently bruised to believe the Deliveroo model of running a fleet of drivers couldn’t stack up.

What about Uber?

Most commentators on food delivery say that Just Eat and Deliveroo are setting the global standard and remain perplexed as to why others around the world, including successful US firms such as Doordash and Grubhub, have either been unambitious in their expansion plans or found it so difficult to grow.

Deliveroo nevertheless expects an upgraded assault from them as well as ‘the gophers’; services such as Jinn that simply fetch any food from any restaurant for a customer.

Finally, there’s the rumbling threat of Uber. It has been running Ubereats in New York, Toronto, Chicago and LA since April last year. It’s a similar format to Deliveroo, using its existing know-how of managing a fleet of drivers and runs on the standard Uber app currently used by its customers. It’s set for a big push this year.

Top tables

Given the amount of competition, restaurants can expect charm offensives from Deliveroo and its rivals. Warne admits that Deliveroo is trying to secure exclusives. ‘We invest to grow their business,’ he says. ‘If they’re also using a competitor it may not work for us but it’s not because we want a monopolistic situation.’

He attempts to assuage restaurants’ concerns that they could be hamstrung if Deliveroo becomes too powerful. ‘There is perhaps a bit of nervousness in putting all their eggs in one basket,’ he says. ‘Restaurants may want to have a second player but they can see the growth that we can give.’

There’s also the risk that others will follow Pizza Express, which worked with Deliveroo and quickly switched to doing its own deliveries for its central London branches once it raised awareness of the service and got to grips with how delivery worked.

Shu, meanwhile, was at pains to say that Deliveroo wasn’t competing with restaurants, citing alternatives to Deliveroo as ‘the local pizza place, online marketplace delivery, a Tesco ready-made meal or cooking for yourself’, adding, ‘we are trying to displace a lot of those things. But in-house restaurant dining is a bit different.’

Barriers to entry

The pitch to restaurants is clear — incremental income and minimising wastage without them having to manage their own drivers. And unlike Uber’s clash with taxi drivers, Deliveroo’s success doesn’t involve an obvious ‘victim’, so should, in theory, avoid the collision with regulators that Uber has faced.

So far, restaurants have bought it. Several have gone as far as investing more in their packaging and some restaurants such as Benito’s Hat and GBK in Kensington have altered their entrances to allow drivers to make pickups easier. The prospect of a new kind of ‘restaurant’ built specifically for the Deliveroo platform has even been mooted.

Despite the positive sentiment, Deliveroo’s 30 per cent commission could become an increasing point of conflict for restaurants if deliveries continue to grow. The prospect of Deliveroo’s rivals Just Eat, Take Eat Easy and Ubereats nipping at its margins to get a toehold will also be a factor.

The margin problem

Some observers feel that rather than being too high a commission, the 30 per cent cut reveals just how difficult it is for Deliveroo to be profitable, potentially undermining the entire business model. A price war with rivals and the rising cost of drivers would be enough to squeeze the viability of Deliveroo making money.

Warne says: ‘The reason we charge that amount is that it’s not cheap to run a logistics fleet. There’s also the tablet and the other paraphernalia that we supply restaurants with.’

But even in its short three-year life, Deliveroo has repeatedly defied expectations and has yet to make a wrong step. The experience, new investment money and the profile of the latest backers suggests that it is well placed for what lies ahead.

It’s now a matter of observing how durable that business model really is and how fast and well Deliveroo can crank out its formula of stitching together the restaurants-plus-drivers -plus-customers formula in other neighbourhoods around the world.

This story originally appeared in Courier Feb/Mar.