(Bloomberg) -- Germany’s Delivery Hero spent years inching toward profitability, a rare feat in an industry with razor-thin margins. Now it has to keep those profits in the face of grueling price wars with bigger rivals.
To do so, chief executive Niklas Östberg is focusing on key markets in the Middle East and Asia, while trying to shed costs and units at a company spanning more than 70 countries.
“I think the first step is to make sure that we have a strong balance sheet,” Östberg said in an interview in Berlin on January 28th. “Scale is important, but now we’re probably more focused on cost efficiency.”
His efficiency drive has had mixed results.
Delivery Hero, which formed in 2011, achieved a positive free cash flow for the first time in late 2023. It reached a detente last year with an activist investor, who had called for Östberg to step down. The company bounced back, improving its share price. Last December, the firm listed its Middle Eastern unit, Talabat, in Dubai, bringing in $2 billion in proceeds.
But a consolidation effort has hit snags. Taiwanese authorities blocked Östberg’s attempt to sell a local subsidiary. In the Middle East, Delivery Hero is seeing increased competition from Chinese delivery giant Meituan, which recently expanded in the region. In Asia, Delivery Hero’s largest region by sales, Meituan and other services are cutting prices relentlessly.
Delivery Hero is facing a dilemma endemic to the cutthroat industry. Raising prices risks sending customers elsewhere, but out pacing rivals requires costly subsidies that make profits virtually impossible. Östberg, who has expanded his company globally, buying more than 30 businesses from Latin America to Africa, must now pick a priority.
And he’s standing off against larger, aggressive competitors in three markets — the United Arab Emirates, Saudi Arabia and South Korea — that make up about 41% of Delivery Hero sales, according to Bloomberg Intelligence.
While his company remains the largest delivery operator in Europe, it is dwarfed by competitors in Asia and the US.
It hasn’t helped that shares are down more than 80% from highs in early 2021, when the pandemic made delivery apps a booming business.
“Delivery Hero has delivered on many of its promises, but it is the unexpected challenges that set them back,” said Annick Maas, an analyst with Bernstein. “Today, the focus should be on building trust with investors.”
Fighting Back
Talabat is Delivery Hero’s crown jewel — the unit had $5.3 billion in overall sales for the first three quarters of 2024. Östberg said he plans to use proceeds from its initial public offering to pay off some of the $3.8 billion in convertible bonds Delivery Hero holds, and believes Talabat has massive growth potential.
But the Gulf region has also attracted the attention of Meituan. Its local app, Keeta, reached one million weekly users last month, matching Delivery Hero’s regional offering, according to data analyst Sensor Tower.
Keeta is also growing in Hong Kong, another major delivery market. Last year, Keeta overtook Foodpanda, Delivery Hero’s local unit, in overall sales, according to Measurable AI, a consumer research firm. Britain’s Deliveroo Plc, which the research firm ranks as the city’s third largest provider, recently ruled out providing “endless promotions” there.
For now, Delivery Hero is focusing investments in Asia on South Korea, one of its largest markets. Its rival there, Coupang Inc., has introduced free deliveries in the country with its Coupang Eats app.
To respond, Östberg reinvested around €100 million ($104 million) into its South Korean operations. He said the unit is profitable. “Of course, Coupang is a very good competitor, and we don’t take them lightly,” he added.
Robots, Eventually
In other parts of Asia, Delivery Hero is in retreat. A plan to sell Foodpanda’s operations in Taiwan to Uber Technologies Inc. for $950 million was opposed by Taiwanese regulators. Östberg declined to comment on the situation. Delivery Hero has tried to sell other assets in Southeast Asia, where regional provider Grab Holdings Ltd. has grown rapidly.
“We are not here to build businesses to sell,” Östberg said. But he acknowledged that he takes offers to shareholders if the price is right.
The company, which reports its fourth quarter results this week, has told investors it will reach the “lower end” of projections for adjusted earnings before interest, taxes, depreciation and amortization in 2024, a range of €725 million to €775 million.
To boost profits, the executive is looking to automation. The company has used robots to delivery items in South Korea and is testing drones in Norway. Eventually, Östberg believes that a quarter of all its deliveries will come via robots of some sort.
While the company mostly handles food today, the CEO imagines delivering many items within a mile radius of customers, like clothes or flowers. He didn’t provide a timeline for more robot deliveries or the new categories.
For now, he will have to focus on beating the competition. “When the teams are doing great, it’s very enjoyable,” he said. “When the results are not there, well, I guess it’s also fun to fight back.”
