ANALYSIS – European food supply emerges with gorillas buy Reuters

By Toby Sterling

AMSTERDAM (Reuters) – Grocery-minutes giant Getter’s $1.2 billion deal to buy rival Gorillas is an important step towards consolidation in Europe’s food delivery market, where companies are struggling amid a post-Covid recession.

After a rapid expansion, these businesses were hit by a lockdown-driven drop in demand for deliveries in March and falling interest rates, while investors pounced on loss-making tech companies.

Food distribution groups quickly consolidated in their quest to turn a profit, cut costs, and began exiting markets that were weak.

Companies and industry watchers say the painful layoffs will continue — but survivors are starting to see the first green shoots.

Citi analyst Catherine O’Neill said mergers and cost-cutting to shed excess capacity were progressing faster than expected and unit economics, including order volume per delivery, were improving.

But Europe’s cost-of-living pressures remain a major downside, he said.

“We have yet to see how these companies will weather the recession.”

Istanbul-based Gettir and Berlin-based Gorilla are among several venture capital-backed fast-casual companies racing to set up “dark stores” — delivery centers used to quickly ship groceries to customers in city centers.

The Dark Store model is fundamentally different from established groups like Just Eat Takeaway and Uber (NYSE: ) Eats, which take orders and deliver food to restaurants, though they are seen as competitors.

Fast trade

The Gorillaz acquisition makes Getir the largest rapid trading company in Europe.

Friday’s deal valued Getter at about $8.8 billion, seven times more than Gorilla, because of its strong position in Turkey, analysts said.

Gorillaz and Getter did not respond to requests for comment.

Other aggregators include Berlin-based Flink and Philadelphia-based GoPuff, which operate in the US and Europe.

“In Germany, we see direct competition from Gorillaz and Getter. Everything else has disappeared,” said Flink spokesman Boris Radke.

Flink operates 190 Dark stores, compared to 180 for Gorillaz.

Radke said Flink is thriving because of its close partnership with supermarkets REWE in Germany. Carrefour (EPA:) In France, both are partners in the company.

Analysts estimate that a dark store hub can turn profitable with 500-1,000 orders per day.

“We’ve closed some centers that weren’t profitable, and we’ve definitely shelved any major expansion plans,” Radke said.

However, he said the number of Flink centers that are profitable is increasing and sales are “continuing to increase month-on-month”.

Less capital, less coupons

More than a dozen small European fast-food companies have failed or been acquired since mid-2021.

Venture capital firms invested $125 million in two deals in 2022, up from $1.3 billion in thirteen deals in 2021, according to PitchBook data.

With less competition and less new capital entering the market, remaining companies in both grocery and food distribution have cut spending on vouchers and promotions.

While most food companies have experimented with fast-paced commerce, the two types of companies now collaborate frequently, a sign of things to come.

Last month, Getir signed a deal with Just Eat Takeaway to list Getar’s grocery products on the Takeaway app.

This will give Just Eat Takeaway additional high-margin orders, while Getir will get more deliveries and sales from its dark stores.

“I expect we’ll see more activity in the form of M&A or deeper business partnerships,” said Larry Illg, head of food businesses at Process ( OTC: ), a technology investor that owns a stake in DeliveryHero.

Although profitability is still a long way off for privately held fast-casual companies, all of Europe’s listed food delivery companies have set formal targets for earnings before interest, taxes, depreciation and amortization (EBITDA).

Just Eat has already said it is EBITDA-profitable. Delivery Hero says it will arrive in 2023 and Britain’s Deliveroo in the first half of 2024.

Shares of European delivery companies are down about 60% from a year ago, but have traded sideways since June.

Uber and DoorDash, both already EBITDA positive on the strength of their US operations, say their European subsidiaries are growing.

“We continue to see strong demand for groceries, and we continue to see groceries as a growth driver for our overall business next year,” Uber spokesman Casper Nixon said.

Fast grocery options are “absolutely available on the app, but we don’t believe it makes sense to own the entire supply chain,” he said.

Sajal Srivastava, co-founder of TriplePoint Capital, which has provided venture debt funding to Flink, says the negativity about rapid trading is overblown.

“Consumers are still using it. The numbers are still growing and the economy is improving,” he said.

So, “All the naysayers who say rapid trade is over — no. It’s going to be around and the data shows it.”