Food delivery companies versus long?term

Spanish home food delivery company Glovo is to abandon Turkey, Egypt, Uruguay and Puerto Rico, following its recent exits from Brazil and Chile. The news comes on the same day that Uber announces the termination of its food delivery business, Uber Eats, in India, after selling its operations to rival Zomato in exchange for a 9.99% stake — following the same procedure it has used on other occasions to leave markets where it is unable to achieve leadership or positive results. In September 2019, Uber decided not to invest in another well-known player, Deliveroo, after failing to agree on its valuation. Meanwhile, Colombia’s Rappi recently announced it was shedding 6% of its workforce, despite investment of more than a billion dollars from Softbank.

What’s going on in the food delivery market, and why does it seem to be having problems with the long term? This is a sector that has shown strong growth, prompting speculation that by 2040 few of us will bother cooking at home. It is also responsible for our poorer dietary habits, relies on the systematic exploitation and denial of the rights of its workers, and which generates huge environmental problems, with China pondering a ban on single-use plastics this year. Food delivery also puts strong pressure on many restaurants, which have reacted angrily in markets like India.

The approach of businesses that are prepared to absorb high levels of losses in the short term in exchange for long-term profits could change the ideas that many traditional investors have on the subject — but it requires some clear ground rules. The first of these, logically, is evidence that money can be made in the long term. If the activity of delivering food people’s homes is not subject to excessive entry barriers, if competition is fierce, margins low and the only opportunities seem to be through consolidation based on high valuations, the outlook is anything but clear.

It is possible that in the future, the market for home delivery of meals will grow significantly and consolidate. We are talking about growth rates of 29.1% in the United States, 22.9% in China, 19.4% in Germany or 19.1% in France, which surely represent a change of habits in a significant percentage of the global population, and will be met by the growth of certain types of restaurants.

The question is whether the valuations of the companies operating in this sector are realistic. Sure, a long-term approach is not uncommon. But not all businesses focused on the long term and on patient investors necessarily have the mettle to see the game out to the end.

(En espa?ol, aquí)

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