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Delivery wars: as another start-up raises money from investors is this the next tech bubble?

Deliveroo popularised the gig economy delivery model - Bloomberg
Deliveroo popularised the gig economy delivery model - Bloomberg

In the summer of 2016 it appeared that the battle to lead in the on-demand economy had been a foregone conclusion. Uber, Amazon and Deliveroo had all launched successful food and grocery delivery services operating under the gig economy. And funding for smaller rivals had started to dry up. 

Uber and Amazon both launched delivery services in London in June last year. The ride-hailing firm started its UberEats service, dedicated to transporting food from restaurants across the city. And the online retailer began its same-day grocery delivery service Amazon Fresh. Two months later, Deliveroo raised $275m (£214m), helping it stay in the competition and elevating it to the fabled status of “unicorn”, businesses valued at $1bn.

The news spelt trouble for the plucky upstarts that had been hoping to compete for a slice of the on-demand delivery pie. By September, with investors losing interest in smaller firms, the health-focused Pronto announced it had run out of money and was shutting down.

Less than a year later, the tables have started to turn. Last week, Quiqup, a smaller company that delivers high street goods as well as food, announced it had raised £20m. A couple of miles up the road, Deliveroo was at the Central Arbitration Committee for the start of a tribunal that poses the toughest challenge to its business yet.

Quiqup’s news came as a boost to the industry, which hasn’t attracted as much funding this year as it did in 2015 and 2016. It shows the market isn’t yet saturated and that there is competition beyond the three-horse race between Uber, Amazon and Deliveroo. Services such as Jinn's full high street shopping service, Bevy’s 24-hour alcohol delivery and Farmdrop’s locally sourced groceries, could still gain a foothold.

The Farmdrop app connects customers with local producers - Credit: Farmdrop
The Farmdrop app connects customers with local producers Credit: Farmdrop

But the interest has been overshadowed by the lingering question of whether the gig economy is sustainable. Legal proceedings and legislative scrutiny threaten to make the services less cost effective by compelling companies to guarantee their riders employment rights. Even the largest firms don’t appear to have found a way to turn a profit, without the added burden of their self-employed riders being workers.

The volume and size of on-demand delivery companies has grown rapidly out of a high demand for quick access to food and goods. But consumers are still reluctant to pay for the service.

“There’s a tremendous market in terms of demand. The immediacy of delivery services is what consumers want,” says Mark Tluszcz, chief executive of Mangrove Capital Partners. “But there’s an unwillingness to pay for it. That’s where the problem starts.”

From technology giants to small start-ups, delivery businesses are subsidising their services in order to keep customers on side. Most consumers aren’t willing to pay more than a couple of pounds for delivery, meaning these companies require sufficient venture capital funding or alternative revenue to subsidise their service.

“There’s a lot of people riding around on bikes and there’s an inherent cost to that,” says Tluszcz. “It’s not clear that any of the major players are able to make a profit - even Uber. The market is there but you have to figure out a way to make money from it.”

This has created a scenario where firms penny pinch when it comes to their riders, spawning a host of problems. Deliveroo riders went on strike last summer over their pay, with some saying they receive as little as £4 an hour, less than the current minimum wage.

Following the strike, a number of riders went to the Independent Workers Union of Great Britain (IWGB) for representation. Megan Brown, a 25-year-old rider who joined the union last summer, says she enjoys working for Deliveroo but worries about the security of the position.

“Any illness, any injury on the road - which isn’t that unlikely - is a worry,” she says. “I know riders who have broken their hips or have a bad ankle and continue working because they’re not well paid enough and they need the money.”

Gig economy: Does it pay to be self-employed?
Gig economy: Does it pay to be self-employed?

The riders’ attempts to unionise led Deliveroo to the Central Arbitration Committee last week. The tribunal will decide whether or not Deliveroo’s independent contractors are workers and can thus be represented by a union.

“We’re at one of the bigger companies, we’re at the forefront of the gig economy, and if we don’t fight for our rights now lots of other people will lose out,” says Brown.  

If it loses and riders start demanding more employment rights, Deliveroo and other delivery companies could be at risk of collapse, Tluszcz says.

“Our labour laws put the nail into the coffin,” he says. “It’s too easy to think you can hire a bunch of people on bikes and you’re going to make a lot of money. But you still have to pay a person to peddle a bike down the street. Are you really building a tech company or a last century fleet of people on bikes?”

Recent rulings haven’t been kind to companies that operate under the gig economy. Uber, CitySprint and Excel have all lost in tribunals that ruled their deliverers are workers and therefore entitled to employment benefits including sick and holiday pay, as well as National Minimum Wage. The Court of Appeal also ruled against Pimlico Plumbers. Uber, which is appealing the decision, recently granted its drivers sick pay and injury cover for £2 a week.

Legislators are also looking to crack down on companies taking advantage of gig economy contractors. The Labour, Conservative and Liberal Democrat parties have all promised to introduce new protections for self-employed people and make it more difficult for companies taking advantage of the rules. The pledges follow criticism of the industry from the House of Commons Work and Pensions Committee, which said the self-employment contracts of Uber, Deliveroo and Amazon are “unintelligible”.

Alex Mytton and Jamie Laing of Made in Chelsea fame as celebrity ambassadors for Bevy 
Alex Mytton and Jamie Laing of Made in Chelsea fame as celebrity ambassadors for Bevy

The existential threat to the gig economy is real, then, but it needn’t be the death knell for delivery start-ups. Martin Mignot, partner at Index Ventures who has worked with Deliveroo, says the riders, start-ups and UK economy both rely on one another and have produced new streams of wealth that won’t disappear.

“Who has an interest in shutting down these businesses and making them unviable? There are high street restaurants surviving only because they have this. There are riders who are taking these jobs and want to be paid,” says Mignot.

But he admits that the companies will need to start offering riders more security if they are going to be able to compete. “Deliveroo, Uber, Jinn, Quiqup and Amazon are all fighting for the same riders, which are in short supply,” he says. “Acquiring them is costly so you want to retain them and make sure they’re happy. Failing at this would kill their business model.”

Most industry experts agree that the nascent market has a lot of potential but that it will need to reshape if it is to become profitable. Deliveroo plans to bring down the cost of its service by drawing revenue from being a full Netflix-style service for eating at home, Mignot says.

“Getting food delivered in half an hour was initially revolutionary enough to win,” says Mignot. “Going forward that’s not going to be enough, it will be the baseline expectation. What will make you win is the content on the platform.”

He says Deliveroo will scale back the cost of food production through its Edition kitchens, while adding exclusive content to its app to make it stand out. For example, it could notify customers when their is a new concept restaurant or pop-up launching near them.

“Food in many ways is becoming entertainment and it partners with that in households. We see Deliveroo becoming the Netflix of food eventually,” says Mignot.  

Quiqup, meanwhile, plans to work with existing businesses to help them offer local delivery. As well as drawing customers to its own site it says it will work with partners such as Burger King and Whole Foods to embed its technology into their platforms.

For many analysts, the companies that will thrive are those that can scale and reward their riders by finding alternative sources of revenue. "In the long run it should be as profitable as Just Eat," says Mignot.