Delivery Hero

EXTRACT FROM PORTFOLIO MANAGER COMMENTARIES – MARCH 2023

Delivery Hero is the global leader in food delivery and quick commerce, with a presence in 74 countries and an enormous addressable population of 2.2 billion people. It holds the no.1 position in markets accounting for >90% of its gross merchandise value (GMV) in a winner-takes-most industry with three-sided network effects. Scale advantages compound through densities and operating leverage, providing durable barriers to entry. On demand delivery is still nascent and remains very underpenetrated with strong secular drivers, a massive addressable market, and predictable cohort behaviour.

The company culture is highly decentralised, enabling agile operations and a local customer focus. Delivery Hero competes on quality of service as opposed to price. Investors have been skeptical as Delivery Hero prioritised growth over profitability in the past. They are now operating in a far more rational competitive environment with rapidly improving profitability, which has also been well demonstrated in their more mature markets. Their high margin advertising products are of immense value to restaurants and consumer packaged goods (CPG) companies looking to reach affluent tech-savvy consumers. We expect significant growth here in the future.

While many other tech names have rebounded sharply from the 2022 sell-off, Delivery Hero has failed to hold onto initial gains and remains unloved by investors. It didn’t help that the company issued €1bn of convertible debt in the period to assist with liquidity. The share price weakness is not unique to Delivery Hero with other food delivery platforms also coming under pressure. This reflects the perceived weaker investment case for food delivery as the world has reopened post Covid since order frequencies have declined from the levels reached during the pandemic (although they remain well above pre-pandemic levels). We believe there are real network effects for food delivery and most major food delivery markets will end up being dominated by two to three players. Evidence shows that once customers come on board, their order frequency increases significantly over time.