Food delivery businesses are weathering the global financial turmoil generally well, according to new analysis by global law firm Linklaters. From the start of March to the end of April, share prices of a selection of food delivery businesses were up between 5% and 14%, in contrast to the index of European consumer companies (STOXX Europe 600 Consumer Services), which was down by 12%.
While many restaurants have been forced to close in a bid to combat COVID-19, food delivery businesses are looking to evolve their business models by partnering with supermarkets, convenience stores and other retailers to deliver groceries as demand for home deliveries surges, the analysis observed.
It added it expects some softening in global deal-making to be expect as a result of COVID-19 but anticipates venture capitalists and private equity investors ‘to be curious’.
Consolidation on the rise
These developments come at a time of increased consolidation in the food delivery sector, with the last 12 months seeing the second-highest level of M&A by value, with nearly $10 billion worth of deals completed, according to Linklaters analysis.
“Whilst there has been a general upward trend in the level of M&A activity measured by deal value, the level of M&A activity measured by deal volume has decreased over the last 24-months, supporting the consolidation trend. Key markets seeing the largest levels of deal activity include Europe and the US, where nearly half of all deals have taken place over the last two years,” it said.
Fuelled by the larger players seeking to strengthen their market position, there were 10 deals completed in 2019 in a sign of increased demand globally for the convenience of home delivery. Just three companies were behind 40% of deal-making in the last two years.
However, this has the potential to change as VC funds and private equity firms may see a window of opportunity to invest in these growing businesses as they sit on record levels of dry powder [cash reserves], observed the report. Meanwhile, supermarkets who have yet to invest in e-commerce may be forced to enter tie-ups as consumers demand more online services.
“Further consolidation is to be expected in the months ahead as VC funds and private equity firms sit on record levels of dry powder and supermarkets without an e-commerce arm may consider tie-ups,” it said
Increased scrutiny by regulators
While there might be a softening in global deal-making as a result of the impact of Covid-19, M&A activity in the food delivery sector shows no sign of slowing down as the major players will likely look to continue to leverage their existing infrastructure to consolidate.
“We have seen increased regulatory scrutiny of food delivery sector mergers, along with increased interest in technology sector deals across the globe. Notably, the UK Competition and Markets Authority recently cleared the £6bn merger of Just Eat and Takeaway.com, only days after granting provisional approval to Amazon’s investment in rival food delivery app Deliveroo,” the report noted.
“It is expected that this increased level of interest from the regulators will continue, especially as food delivery players look to expand their offerings and services into broader markets.”
Morrisons supermarket beats expectations after online expansion
The shift in shopping habits among consumers was illustrated by Morrisons’ better-than-expected first-quarter results.
Morrisons, the fourth largest supermarket in the UK behind Tesco, Sainsbury's and Asda, posted a 5.7% increase in group like-for-like sales for the first quarter – boosted by food box deliveries and strong online sales.
It said that during the crisis it had more than doubled its online deliveries with Ocado and expects to have made £1 billion this year from online sales with Ocado, double its usual income.
“Our online offer is expanding significantly and at pace,” it reported. “Ten different home delivery food boxes have been introduced so far, available either online or via a telephone call, aimed initially at providing essentials to vulnerable and self-isolating people, and recently extended to other options such as British meat, gluten free, BBQ, and Ramadan.
“In addition, we have formed a partnership with Deliveroo to deliver groceries in as little as 30 minutes to customers by courier from 130 Morrisons stores. The service is proving popular with customers, and has been extended to more deliveries and items, including a selection of beer and wine."
During the period, it also significantly expanded the Morrisons store on Amazon Prime Now, the ultra-fast, same-day online home delivery service.