Deliveroo is a ubiquitous food delivery firm in the UK. As a student at the University of Cambridge, there was not a single day that I did not see a Deliveroo delivery vehicle parked in college delivering food to a college-mate. Additionally, more significant was the fact that Amazon acquired a 16% stake in Deliveroo. I was therefore not surprised when Deliveroo went in for an IPO some time ago that was the City of London’s biggest IPO since 2011.
However, Deliveroo’s IPO was an unmitigated disaster as investors were among other factors wary apropos “concerns over how the company treats workers and increased regulatory risks facing gig economy companies.” (Quotation source: https://edition.cnn.com/2021/04/02/investing/london-deliveroo-ipo/index.html).
In India, Swiggy for instance does not face such risks but already there have been stories in the media about confrontations between customer(s) and food delivery companies. Recently, in Bangalore a customer and Swiggy got into a conflict because Swiggy refused to give free food. Additionally, when I entered the string “Swiggy customer fight” in Google India search box, I got a whopping 332,000 results in 0.41 seconds as on August 20th 10.27 AM. This only illustrates the potential downside risks confronted by food delivery firms in India. Clearly, the Indian stock markets that are purportedly forward-looking have not sufficiently captured such risks while valuing Zomato during its recent IPO. There is thus an urgent need for new valuation methods.
Food delivery firm (hereinafter X) is able to save a huge amount of additional costs and generate considerable incremental revenue for restaurants. Thus, we can create an incremental profit and loss statement (see template displayed below) that captures these additional cost savings and incremental revenue. This can then be used as the base to prepare financial statements (viz. Balance Sheet and Cash Flow), which can then be used to value X.
| FY 2022 | FY 2023 | |
|---|---|---|
| Salary expenditure savings (savings in salaries of servers, stewards, security staff etc. working at the restaurant) as they are not needed since food is being delivered by X directly to the customer’s residence | xxx | xxx |
| Restaurant upkeep savings (costs saved due to lower electricity, rent etc.) as customers need not patronize the restaurant physically as X delivers the food to the customer’s residence | xxx | xxx |
| FY 2022 | FY 2023 | |
|---|---|---|
| Higher sales as X is bringing in new customers who did not patronize the restaurant earlier but have now become its customers due to X | xxx | xxx |
This is merely exploratory and surely many more incremental revenue possibilities and addition cost savings brought by X to the table can be captured by this valuation method. Such methods can be used to value loss-making firms such as X rather than using traditional cash-flow based methods such as Discounted Cash Flow.
There is an urgent necessity to invent new valuation methods as many loss-making firm IPOs are likely to hit the Indian stock markets in the ensuing months. Hence, necessity is the mother of invention, as far as coming up with new valuation methods for valuing food delivery firms is concerned.