Deliveroo steps out of German market

The news arrived with something of a bang in email inboxes on Monday afternoon. After Friday, August 16, the food delivery service Deliveroo would no longer be bringing meals to its customers in Germany.

"At Deliveroo we're on a mission to create the very best food delivery service in the world," the somewhat cryptic valedictory mail began. "And at the heart of this is offering a service that works brilliantly for our customers, riders and restaurants.

"Where we cannot do this to the level that we expect and you deserve, we won't operate. Therefore, Deliveroo's focus will now be on growing our operations in other markets around the world."

For residents of the German cities of Berlin, Hamburg, Munich, Cologne and Frankfurt, the news might come as a surprise given what a common sight Deliveroo's little green food boxes are on the back of bicycles as they whizz around those cities.

The writing has been on the wall for Deliveroo's German operation for a while though. A year ago, Deliveroo ended its operations in several mid-sized German cities such as Dresden, Leipzig and Stuttgart as the pressure began to tell.

But the real dagger came last December when the Dutch food delivery giant Takeaway.com — known in Germany as Lieferando — effectively tied up the German food delivery business for itself with its purchase of Delivery Hero's extensive operations in the country for $1.1 billion (€990 million).

A market stuffed to the gills

British company Deliveroo entered the German market in 2015, with a view to taking a big bite out of a fast-growing sector.

But it quickly found itself in a particularly cutthroat corner of the foodtech world. Delivery Hero, which owned the long established order-platforms Lieferheld, Pizza.de and Foodora, was locked in a battle for supremacy with Lieferando. Both more or less shared the market, with the likes of Deliveroo living off crumbs from the outset.

Any hopes Deliveroo had of muscling in on the duopoly were effectively dashed by the December deal which saw Lieferando take over Delivery Hero's operations.

While the sudden nature of Deliveroo's withdrawal did surprise many, not least its 1,100 self-employed delivery riders in Germany, it's easy to understand the maths behind the move.

As of August 2017 (see graphic), Deliveroo had just 2% of a market share in food delivery in Germany. The other 98% is comprised of companies now all owned by Takeaway.com. That company itself estimates the entire German market for food delivery to be worth around €6.8 billion ($7.58 billion). Any future growth is now theirs for the taking.

Deliveroo's German goose is cooked

A spokesman for Deliveroo told DW that while the company would not disclose "internal discussions," the decision to leave is based on "prioritizing investment and resources where we see the greatest potential for growth. Deliveroo wants to invest in markets where we will see the greatest return."

In other words, it wasn't making enough money in Germany to justify hanging around any longer.

The food delivery sector is an especially difficult business to break into in Germany, as Thomas Schumacher from consultancy McKinsey told DW.

"When I started working in Germany five years ago, you could see intense competition," he said. "Now the market has massively consolidated."

A sticky business

The origins of the sector were with aggregator apps and platforms which simply connected customers to restaurants, who then delivered the food themselves. That model still accounts for around 95% of all food deliveries, with much of Lieferando's business operating that way.

Companies like Deliveroo brought in a new model, where they provided their own riders. While that model has been embraced by most companies in the sector, it brings particular logistical challenges, such as the need to have an extensive network of riders available throughout the city at all hours, available to pick up and deliver food quickly.

When restaurants see that such companies can connect them to new customers and increase their revenues by up to 25%, which is usually enough to offset the 40% commission companies like Deliveroo typically take, they are naturally keen to sign up.

But a major issue for new entrants to the market is that it is an extremely "sticky" business for both customers and restaurants, says Schumacher. That means that once they have committed to one platform, they are very unlikely to switch to another or to sign up to more than one.  

Restaurants are no less likely to take on a second delivery platform as a customer already satisfied with one is.

"It is hard to go to restaurants and say, 'hey I will increase your revenues by 25%' because if your competitor is around and they have already done that, it is very unlikely that you can do the exact same," says Schumacher.

Hungry for more — just not in Germany

While Deliveroo won't be delivering in Germany again anytime soon, that's not a reflection on its overall booming growth in Europe. In 2018, the company had 99% year-on-year revenue growth across the continent. The company is also stepping up its Asian expansion, having recently launched in Taiwan.

It recently took in a major investment stream of $575 million from Amazon and other investors and the company told DW that while it has not ruled out a return to Germany in the future, it "is prioritizing its focus and resources because we are intent on further growth and expansion," specifically listing markets such as Italy, Spain, France and the UK, where it is already strong.

That is all scant consolation for Deliveroo's network of delivery riders and support staff in Germany, now out of work in the highly precarious gig economy.

While Deliveroo says it will provide workers with "one-off goodwill payment" equal to 10 days' pay and a second payment equal to two weeks' pay, the abrupt nature of Deliveroo's exit from Germany will still present difficulties even for workers whose business, above all else, is speed.

For Deliveroo, the company will simply look to continue its city by city approach of expansion in markets a little less stuffed than the German one currently is.