Late last week it was announced that U.S. tech giant Amazon has made a huge investment in London-based food deliveries ‘unicorn’ Deliveroo. The company, founded in the UK in 2013 by American entrepreneurs Will Shu and Greg Orlowski, closed a funding round worth £459 million, which was led by Amazon and included additional investment from existing shareholders T Rowe Price, Fidelity, and Greenoaks. It takes the total investment raised by Deliveroo to £1.21 billion and a valuation that is now believed to exceed £3 billion ($4 billion).
It is not known exactly how much of the most recent £459 million was contributed by Amazon, or exactly what size of stake in Deliveroo the U.S. tech giant now holds, but it is believed the investment is in the hundreds of millions of pounds. Like many quickly growing businesses in the digital economy, Deliveroo is still loss making – £185 million pre-tax over 2017. Despite that, Amazon is reported to have been pursuing involvement in Deliveroo for some time now with two preliminary approaches said to have been made last year.
But the big question many observers are asking is what exactly is Amazon’s interest in a loss-making company whose business model is delivering restaurant and take-away orders, mainly by bike? Handing Deliveroo a few hundred million, or thereabouts, is clearly a longer term strategic investment. How does Amazon believe a stake in Deliveroo will benefit its wider business?
The most obvious conclusion to be taken from the deal is that Amazon wants a serious foothold in a company able to take the battle to Uber Eats, the dominant force on the U.S. market in Deliveroo’s sector. Deliveroo is expected to launch operations in the USA later this year or early next year.
The most recent investment raise led by Amazon was in large part motivated by the need to build a sizeable war chest for that assault. The U.S. food delivery app market is already a relatively crowded space but it’s also a huge pie. Deliveroo will be confident of taking significant market share from smaller competitors relatively easily with Uber’s Uber Eats service its main competition.
But why is competing with Uber on delivery so important to Amazon? Uber and Amazon are both examples of the giant U.S. tech companies with ambitions across potentially lucrative opportunities in the quickly growing digital economy. These companies all started out with different core business models – online retail in Amazon’s case, online advertising for Google, tech hardware for Apple and ride-hailing for Uber.
But they have all leveraged their customer bases and brands to build out broader service ‘ecosystems’ and move into new verticals such as content streaming, Cloud computing services etc. as they seek to satisfy the constant hunger of investors for continued growth. Amazon’s Jeff Bezos has an obsession with delivery and believes it is the key to being able to satisfy consumer demand for instant gratification. Building the biggest, quickest and cheapest delivery service in the world is his ambition. The company is working on a drone delivery service and even building its own airport. Deliveroo is likely seen as an important step towards developing a stronger ‘last mile’ component to Amazon’s wider deliveries network.
It’s a tie-up that looks mutually beneficial. For Deliveroo, Amazon’s backing, both financially and through an injection of know-how, will help it step up the pace of the company’s international ambitions. For Amazon, it’s another piece in the deliveries jigsaw and fits into Bezos’s interest in the long term potential of ‘food as a service’ he clearly believes has huge earning possibilities.