The Business Of
Deliveroo | How Do They Make Money?
Morning All!
Let’s crack on with how Deliveroo makes money…
More Than Just Fees…
So most of us who’ve used the app are well aware of Deliveroo’s various fees - delivery fee, service fee, small order fee, etc. However, you may be surprised to know that these fees actually represent a relatively small portion of Deliveroo’s revenues!
The majority of Deliveroo’s £1.82bn revenue actually comes from commissions on orders - this is money that Deliveroo takes from their restaurant partners’ food and drink orders. In fact, this cut they take from restaurants makes up a whopping ~70% of Deliveroo’s revenues!
The company’s average commission rate is 27.5%, which means for example that when we order food + drink worth £50 from the app, Deliveroo will take on average £13.75 (27.5% of £50). Whilst 27.5% is the average, the rate can vary from 15% all the way up to 45%. Larger restaurants/grocers like McDonald’s bring in more orders and keep the Deliveroo fleet of riders busy and so are given lower commission rates.
What would happen if Deliveroo charged McDonald's a normal commission rate? Well, McDonald's could look for lower rates at competitors like Uber Eats and take their business off the Deliveroo app - leaving Deliveroo with a massive hole in revenues!
The other major source of revenue is what we mentioned earlier - consumer fees. Back to our £50 order, let’s assume service fee + delivery fee on average comes to 10% of the food order. This means consumers pay an additional £5 to their order. How much of that £5 goes to the restaurant… nothing! As the charts show, when we make orders on Deliveroo or Uber Eats, these companies take a healthy share of the order value, about one third!
Many restaurants aren’t happy with this split because it means their margins are lower.
Harder Across The Pond?
Deliveroo certainly aren’t complaining… growth in domestic customers and international expansion has seen their revenues grow an incredible 3.8x over the last 3 years. The company’s revenue from outside the UK has also grown healthily from £262m in 2018 to £844m in 2021.
However, not all international moves have been so successful. Deliveroo’s growth in the UK has been aided by the fact that they are the market leader. Whilst Deliveroo wasn’t the first player in the UK (JustEat was the first mover) - Deliveroo really revolutionised food delivery. Before Deliveroo, the quality of restaurants on food delivery apps was poor, you couldn’t see where your rider was, and the whole technology was lacking. Deliveroo changed this.
However, this story isn’t the same abroad. International regions have their own ‘Deliveroos’. And so, to take market share away from the existing food delivery platforms (who started earlier and so already have many customers) requires a ton of marketing spend, and hence, losses for the first few years of entry. The tough regulatory environment with respect to riders’ employment rights in regions like the Netherlands and Spain have also contributed to Deliveroo exiting those markets in the last 2 years. We’ll touch on the rights of gig economy workers more on Friday when we look at the outlook for Deliveroo and the food delivery industry!
28th Feb 2023
That’s a wrap for today. We’re back tomorrow with part 3 of Deliveroo where we’ll be looking at the costs required to operate this business model. More surprises in store!
Have a great day!
The Business Of Team