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Deliveroo announced today that it plans to exit the Spanish market, citing limited market share and a long investment path with “very uncertain long-term potential returns” on the horizon.
The company, a UK-based on-demand company, went public earlier in 2021. Its shares initially fell, raising concerns about the value of on-demand companies and technology concerns listed in London more broadly. However, Deliveroo’s shares have since recovered and the company’s second quarter earnings report saw it increase its expectations of expected gross order volume growth “from 30 to 40 percent to 50 to 60.”
Given its rising growth expectations and improving public market valuation, you might be surprised that Deliveroo is willing to exit any of the 12 markets it currently operates in. In the case of Spain, it appears that Deliveroo is concerned that changes to local labor laws will make it more expensive to operate in the country, which given its modest market share is not acceptable. .
Recall that Spain passed a law in May – a law generally accepted in March – requiring on-demand companies to hire their couriers. It’s the kind of arrangement that on-demand food delivery and ride-sharing companies have long been fighting against; many on-demand businesses are not profitable without hire couriers, which could increase their costs. The possibility of a worsening economy makes such changes in labor laws in any market a concern for startups and public companies that rely on independent delivery people.
Let’s analyze the Deliveroo statement to better understand the company’s point of view. Here is the introductory paragraph:
Deliveroo announces today that it is offering a consultation on the end of its operations in Spain. Deliveroo currently operates in 12 markets around the world, with the vast majority of the Company’s gross transaction value (GTV) coming from markets where Deliveroo holds a No.1 or No.2 position.
Translation: We are probably leaving Spain. Most of our order volumes come from markets in which we have a leading position (the company competes with Uber Eats, Glovo and Just Eat in different markets). We are not in a leading position in Spain.
Spain accounts for less than 2% of Deliveroo’s GTV in the first half of 2021. The company determined that obtaining and maintaining a leading position in the Spanish market would require a disproportionate level of investment with returns very uncertain long-term potentials which could have an impact on the economic viability of the market for the Company.
Translation: Spain is a very small market for Deliveroo. Gaining a lot of market share in Spain would be very costly and the company is not sure of the long-term profitability of the country’s activities. This is where workforce issues like this come in – investing to gain market share in a country where your business is less profitable is hard to pin down.
And according to El Pais, Deliveroo’s decision comes as it hit a deadline for the reclassification of workers. This may have contributed to the timing of the announcement.
From this point on, Deliveroo spends three paragraphs discussing how it will support workers in the event that it leaves the Spanish market. It ends with the following:
This proposal has no impact on the annual forecasts previously communicated on GTV’s annual growth and the Group’s gross profit margin.
Fair enough.
On-demand companies have argued over the years that changes to labor laws that result in additional costs in the form of hiring couriers – or simply their higher pay – would make some markets unprofitable and drive them out. . Here, Deliveroo can complete an exit at virtually no cost, given its low order volume compared to its 11 other markets.
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