Deliveroo's Public Market Debut and Ongoing Challenges

Update: Market volatility is currently impacting Deliveroo’s performance. Following an initial pricing at the lower end of its projected range, Deliveroo, traded as “ROO” on the London Stock Exchange, commenced trading at 331 pence (£3.31), representing a decline of approximately 15% from its private placement price.

Initial Pricing and Market Reaction

The stock continued to decrease in value throughout the day, ultimately closing at 287.45 pence – a 43.55% drop from its opening price of 331 pence. Trading fluctuated between 271 pence and 344.95 pence, falling short of the anticipated debut price. Concerns regarding the company’s labor practices, detailed below, are cited by some as contributing to this initial underperformance.

Tech stocks are consistently making an impact on public markets. Deliveroo, a leading UK-based food-delivery service supported by Amazon, experienced significant growth during the Covid-19 pandemic. The company has announced a share price of £3.90 ($5.36) for its public offering on the London Stock Exchange, establishing a market capitalization of £7.59 billion ($10.4 billion) and raising £1.50 billion ($2.1 billion).

Navigating Volatile Market Conditions

This valuation falls within the lower end of the revised range of £3.90-£4.10 that Deliveroo established earlier in the week. The company attributed the narrowing of this range from its original £3.90-£4.60 to “volatile global market conditions for IPOs.”

“Deliveroo is choosing to price responsibly within the initial range and at an entry point that maximises long-term value for our new institutional and retail investors,” the company stated.

Labor Practice Controversies

Deliveroo continues to face scrutiny regarding its driver compensation model. This issue appears unlikely to be resolved quickly. Despite claims from Deliveroo sources that these labor concerns haven’t affected the IPO process, reports indicate some large institutional investors have declined to participate in the offering.

Today’s market activity may offer insight into the true extent of this impact.

A Milestone for the London Stock Exchange

This listing represents a significant event for both Deliveroo and the London stock market. As numerous privately-held tech companies explore options like acquisitions, U.S. listings, or SPACs, Deliveroo’s decision to list on the LSE is noteworthy.

It marks the largest IPO on the exchange in terms of market capitalization in nine years (since commodity giant Glencore in 2011) and the largest in terms of funds raised since last September (when e-commerce firm The Hut Group listed).

CEO's Vision for the Future

“I am very proud that Deliveroo is going public in London – our home,” said Will Shu, Deliveroo’s CEO and co-founder. “As we reach this milestone I want to thank everyone who has helped to build Deliveroo into the company it is today — in particular our restaurants and grocers, riders and customers. In this next phase of our journey as a public company we will continue to invest in the innovations that help restaurants and grocers to grow their businesses, to bring customers more choice than ever before, and to provide riders with more work. Our aim is to build the definitive online food company and we’re very excited about the future ahead.”

Tech companies are driving much of the activity on the LSE, with four of the last five IPOs valued at over £1.5 billion in the last five years originating from the tech sector.

Concerns Regarding Driver Earnings

The ongoing labor controversy remains a critical issue for the company. A report by the Bureau of Investigative Journalism in the UK revealed that one in three Deliveroo couriers earn less than £8.72, the UK national minimum wage for individuals over 25.

In some instances, earnings disparities were significant: a cyclist in Yorkshire worked 180 hours and received the equivalent of £2 per hour, according to the report. Deliveroo has consistently maintained that its couriers earn an average of more than £10 per hour.

Broader Implications for the Gig Economy

This issue extends beyond Deliveroo. Earlier this month, Uber reclassified 70,000 drivers in the UK as workers, granting them benefits following a court case, although Uber Eats – a competitor to Deliveroo – was not included in the agreement.

However, it may not be legal rulings but public pressure that ultimately influences changes in the food delivery driver landscape. Just Eat, another competitor, introduced an agency worker model last year, offering drivers the option of hourly wages instead of per-ride payments. This represents a potential solution to the ongoing debate.

Investor Concerns and Unit Economics

Regardless of investor opinions, the potential for legal challenges, court losses, and increased costs may be more significant drivers of concern than a sense of justice for low-paid delivery personnel.

Investors are closely examining Deliveroo’s unit economics. While the company is currently unprofitable, its losses have been narrowing due to a surge in sales during the Covid-19 pandemic, as restaurant dine-in services were disrupted and consumers increasingly relied on delivery services.

Expert Commentary on Labor Practices

Tom Powdrill, head of stewardship at Pensions & Investment Research Consultants, has been vocal about the potential impact of labor practices on investors. In a blog post published today, he highlighted the company’s dual-class share structure, which limits the influence of asset managers, as well as the ongoing labor issue.

“Reasons for ducking the Deliveroo IPO are varied,” he writes. “Partly it’s a simple question of how successful the business is likely to be. It’s also being shunned due to its treatment of riders who are generally employed on a gig-basis leaving them unentitled to basic benefits. This has two aspects to it. On the one hand some investors may find the employment model too much on its own terms. But it’s also a risk. If Deliveroo is successfully legally challenged on employment status the economics change too, as we saw recently with Uber.”

Post updated with trading price.