Deliveroo announced today which is considering exiting the Spanish market, citing limited market share and a long investment road with “highly uncertain potential long-term returns” on the horizon.
The company, a UK-based on-demand team, was made public in early 2021. its shares initially fell, raising concerns both about the value of on-demand companies and London-listed technology concerns more broadly. However, Deliveroo shares have since recovered, and the company second quarter earnings report saw its expected gross order volume growth expectations rise “from 30% to 40% to 50% to 60%.”
Given your growing expectations for growth and improving public market valuation, you may be surprised Deliveroo is willing to abandon any of the 12 markets in which it currently operates. In the case of Spain, Deliveroo appears to be concerned that changes in local labor laws will make its operations in the country more expensive, which, given its modest market share, is not acceptable.
Remember that Spain adopted a law In May – a law generally agreed in March – Require on-demand companies to hire their couriers. This is the kind of arrangement that private transportation and food delivery companies have long fought against; many on-demand businesses are not profitable without Hiring couriers and doing so could increase your costs. The potential for a downturn in the economy makes such changes to labor laws in any market a concern for startups and public companies that rely on freelance delivery workers.
Let’s take a look at Deliveroo’s statement to better understand the company’s perspective. Here is the introductory paragraph:
Deliveroo announces today that it proposes to consult on the closure 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 occupies a # 1 or # 2 market position.
Translation: We will probably leave Spain. Most of our order volume comes from markets where we are in a leadership position (the company competes with Uber Eats, Glovo and Just Eat in different markets). We are not in a leadership position in Spain.
Spain represents less than 2% of Deliveroo’s GTV in the first half of 2021. The company has determined that achieving and maintaining a top-tier market position in Spain would require a disproportionate level of investment with highly uncertain potential long-term returns that could affect 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 expensive and the company is not sure of the long-term profitability of the country’s business. This is where labor issues like this come into play: Investing to gain market share in a country where your business is less profitable is hard to define.
Y according to The Country, Deliveroo’s decision comes as it faced a deadline for the reclassification of workers. That may have contributed to the time of the announcement.
From this juncture, Deliveroo dedicates three paragraphs to discussing how it will support workers if it leaves the Spanish market. Close with the following:
This proposal does not affect the full annual guidance previously communicated on the annual growth of GTV and the Group’s gross profit margin.
On-demand companies have argued over the years that changes in labor laws that would impose more costs on their plates in the form of hiring couriers, or simply pay them more, would make certain markets uneconomical and drive them away. In this case, Deliveroo can go ahead with an exit at virtually no cost, given how small the order volume is compared to its 11 other markets.