Ordering in with a ‘unicorn’
Delivery Hero CEO Niklas Östberg describes
how his company creates value.
Niklas Östberg, an energetic 35-year-old Swede, is the CEO and
cofounder of Delivery Hero. Based in Berlin and financed with venture-capital
money, the company is built around an online platform that matches restaurants
with hungry customers. Delivery Hero has grown to operate today in 33 markets
across five continents, processing 14 million takeout orders each month and
offering customers recommendations, as well as peer reviews of restaurants.
With a valuation of $3 billion, Delivery
Hero is also one of about 170 “unicorns”: start-ups with valuations above $1
billion. Given the number of new companies that crashed when the turn-of-the-century
tech bubble burst, many executives and investors have cast a skeptical eye on
the unicorn phenomenon. Östberg recently discussed with McKinsey’s Thomas
Schumacher and Dennis Swinford the start-up landscape, the importance of
innovation grounded in data, and his company’s role as a “disruptor of an
inefficient restaurant industry.”
The Quarterly: Valuations of pre-IPO tech companies have come
under scrutiny lately, particularly the emergence of so-called unicorns. What’s
going on, in your perception?
Niklas Östberg: I’m sure a number of those unicorns shouldn’t be
unicorns. As always, earlier-stage businesses come at a higher risk. But I am
also sure that the next Google or Apple is among them—and if only one or two of
the current pool of unicorns get to that level, it justifies their valuations,
collectively, from an investor point of view.
But a lot has changed in the 15 years
since the tech bubble of 2000. At that time, many valuations were based on what
the future might look like, particularly in the Internet space, rather than on
the returns a business could demonstrate. The supposition was that the world
was changing and would probably change for the better as people went online.
And although people did eventually go online, that happened much more slowly
than predicted.
Today, there’s no doubt that online and
Internet businesses are taking over. Some of the biggest businesses in the
world, including Facebook, Amazon, Google, and Apple, are solidly grounded in
the new world of technology. A lot of other companies also have large, tangible
revenue growth and earnings. They don’t buy users or customers with the hope of
making money when, maybe, those users eventually change their behavior.
Delivery Hero, too, generates a lot of revenue—and earns a lot of profit in
many markets. So valuations don’t depend on imaginary future earnings but on
actual returns and EBITDA.1
The Quarterly: How does your business model work?
Niklas Östberg: We’re a place where users and restaurants meet.
The core of our business is an online platform that allows us to map users to
the restaurants around them. Users are attracted to the platform and become
very loyal to it because it helps them identify which restaurants are available
and which ones are good. It’s also convenient because they can pay online,
review past orders, and chart their savings.
It’s a good model for restaurants, too. We
channel more business to them, and they increase their orders. And because the
variable cost of food is pretty low, adding incremental customers is pretty
lucrative. A restaurant that serves 100 orders a day might not make a lot of
profit, for example, but if it boosts that to 110 orders a day, it would make
good profits. Boost that to 200 orders a day, and it will make loads of money.
So restaurants want to be on our platform, and we charge them a fee for
transmitting orders. If they decide they no longer want to be on the platform,
customers can order from other restaurants.
Everything is automated and online, so our
gross profitability per order is around 90 percent. That also comes back to why
we want to grow—because if you have 90 percent gross profitability and low
variable costs, the closer you get, in theory, to 90 percent net profit. This
compels us to build scale to add those incremental users and get closer to that
90 percent EBITDA margin. In some markets, we have already reached over 60
percent.
The Quarterly: Who are your competitors?
Niklas Östberg: The usual way of ordering food is to pick up the
phone and call, so our biggest competitor is still the phone. And most people
also still cook, though only some of them actually like doing it. So why
shouldn’t we get the many who don’t like cooking? At a societal level, is it
efficient for every little household to do its own cooking? For everyone to go
to the supermarket and shop for groceries individually, versus buying groceries
and preparing meals for 100 people at once? More and more, people don’t cook as
long as they can get the healthy food they want when they want it. That’s our
challenge, then—to improve the inefficiency of that industry, to make it more
accessible and available.
The Quarterly: You’re talking about disrupting the entire social
network of how people eat?
Niklas Östberg: I think we should, over the long term. Of course,
you can’t do that all at once, but if you look over ten years, why not? Our
focus is first to attract those customers who order by phone and then to keep
attracting new customers by making the service better. Every small, incremental
improvement takes us one step closer. And at some point, maybe we’ll have a
service that’s so good, why would anyone cook?
The Quarterly: So if home cooks and the telephone are your major
competitors, who really worries you?
Niklas Östberg: We do also have competitors in our own space.
Uber, for example, and Amazon and Yelp have similar efforts under way. It’s a
big space, so why wouldn’t they try? Even Facebook could enable online food
ordering via chat bots, which could completely change the industry yet again.
And, indirectly, guys like Facebook could become our competitors because they
could connect to someone else who provides restaurant info to their chat bots.
And Google, continuously offering better access to information, is already
offering restaurant data, including restaurant menus. So if we don’t stay
innovative and don’t stay the best and don’t offer access to the best and
fastest food, then in the long term we are in trouble. That’s why we can never
relax.
The Quarterly: Do the restaurants get more value out of this than
just reaching more customers?
Niklas Östberg: We try to give them as much value as we can, and
it’s part of our vision to do so. Besides attracting more customers, we reduce
their operational costs, since they don’t need to have someone answering the
phone, for example. We also provide them with a point-of-sale system replacing
the cash register and we compile useful statistics. That will not only save
some thousands of euros per year but also help them provide better food and
service to their customers.
And while we expect to do more in the next
year or so, we’re already able to tell restaurants which menu items are likely
to work. We can say, for example, “it looks like there’s no one in your area
providing a bacon burger. Why don’t you add a bacon burger to your menu?” We
can say which dishes always bring customers back. Conversely, we can also tell
which menu items draw customer complaints or have very low reorder rates.
Customers order, but never return. Every time someone buys that dish, the
restaurant loses a customer.
The Quarterly: Innovation is most successful when it disrupts
what already exists. Who are you disrupting?
Niklas Östberg: I would say that we are a disruptor of an
inefficient restaurant industry. We’re disrupting bad service, inefficient
manual processes. We’re disrupting inefficiencies in how restaurants connect
with customers—not every restaurant can build its own online food-ordering
platform. We’re disrupting inefficiencies in delivery. It makes no sense for
every small restaurant to try to have its own delivery fleet with its own
drivers, given the cost of maintaining a fleet and coordinating deliveries.
After all, if a restaurant five kilometers away delivers to someone in one
place and then goes five kilometers in another direction to deliver to someone
else, it’s expensive. It’s bad for the environment. And it’s bad for customers
because it takes so long.
We’re also disrupting the inefficiency of
a system that doesn’t serve the food customers want. If you were to ask people
on the street, a lot of them would say, “I don’t like delivery because I don’t
eat pizza” or “it’s just bad quality and bad food.” Combined, those
inefficiencies raise costs and reduce quality.
The Quarterly: How are you using all the data you generate to
improve your business?
Niklas Östberg: Big data should actually be big, meaning it should
be available to the entire organization—especially at the front line of the
business. That’s where companies make tens of thousands of decisions every day,
some of which can be handled automatically. These can be very small things, like
“shall we do this kind of promotion for our users?” “Is that a good channel for
our advertising?” “How do we improve our relationship with a specific
customer?” If a restaurant has very bad delivery on Sunday evenings, we can
downgrade it on Sunday evenings. If the system detects fraud, we can trigger
people to stop ordering.
We also monitor our restaurants to
maintain relationships. We know, for example, that a restaurant is likely to
cancel its contract if it starts contacting us more frequently or gets negative
feedback from customers. The data automatically trigger a pop-up to one of our
sales agents—“call this restaurant, see what’s wrong, and do what you can to
help.” This involves decisions that are made both automatically and
independently by sales agents, as long as they have the right information, and
saves a lot of money.
The Quarterly: Do data also help inform investment decisions?
Niklas Östberg: Data help us to be a little faster at managing our
investments. Say you make an investment with a one-to-ten probability that
you’ll be right—but if you’re right, you’ll make a 100-to-1 return. That’s a
very good investment to try. The problem is that if you’re wrong in nine out of
ten cases, you need to have a very fast way of figuring that out. Then, when
you do find the one investment with high returns, you can put a lot of money on
it.
For example, while the main part of our
offering is the online platform, we’ve also invested in separate businesses to
handle delivery for independent restaurants. That is part of building up our
logistics to enable a better service. Restaurants still do the cooking,
naturally, but we track their orders. We offer quality assurance through
metrics like user ratings and reorder rates. And we tell restaurants which dishes
on their menus are good for delivery. We also make much more money on
that—around €10 per order, less the cost of delivery.
For investments like that, we track the
data and optimize performance, shutting them down quickly if it becomes clear
they can’t meet our expectations. We spent nine months on an earlier
delivery-space investment, based on a different concept and setup, for example.
We did as much as we could to improve its performance and invested close to €10
million in the project. But it wasn’t meeting our expectations, so we shut it
down and took the loss. Now, maybe we could have realized that sooner and lost
just €6 million, but other companies might have dragged out the investment and
spent €100 million on it. The point is, if you’re going to fail, you want to
fail fast. You invest to validate or invalidate the concept and then shut it
down if necessary.
The Quarterly: You appear to have a highly federated business
model with a number of CEOs of individual delivery businesses. How does that work?
Niklas Östberg: Centralization is always more efficient, in a way,
because you can do one thing and multiply it across units. On the other hand,
giving people autonomy and authority and responsibility also has an amazing
value. What rarely works is to be 100 percent one approach or the other. The
trick is finding the right balance.
We give local CEOs autonomy and authority
to encourage entrepreneurship—and they fight with blood and sweat to win in the
market. But you have to set the rules of the game. And you have to set the
culture of your company. That balance can be fragile. For example, if you set
the wrong incentive scheme and you place autonomy at the local level, people
are more likely to optimize for their incentive schemes rather than for their businesses.
And, suddenly, you’re sitting there on a conference call wondering, “is this
the right decision that he’s suggesting or is this the right decision for him?”
And you don’t really know. That’s why, first of all, it’s important to find
people with an owner mentality rather than a manager whose career and financial
interests are the top priority. Then give them an incentive scheme that
reflects ownership as closely as possible.
Finally, we’re a data-driven culture.
Decisions based on data are the glue that holds us together. And if data are
your starting point, then a CEO in Argentina, for example, can’t just argue
that “we should do it this way because every Argentinian’s doing it this way.”
We might not agree, but we can do the A/B testing and see what the data tell
us. CEOs get the final decision, but if they can’t prove that their way is
better and still do things their way, it’s a question of judgment. You can be
wrong many times as long as you address the issue.
The Quarterly: If we look back in our imaginations five years
from now—say, after an IPO or acquisition—what would have to happen for
Delivery Hero to fail? And what must happen for it to justify its considerable
valuation today?
Niklas Östberg: We’re in an economy that moves fast. It would be
terribly dangerous to think that something can’t go wrong or that we can’t be
disrupted. That could happen, especially if someone comes along with an
innovation and we’re not already there. So we are always—and I think you have
to be—on the edge of innovating and on the edge of moving fast. That’s what’s
required of companies at our stage.
In terms of revenue, we’re in a good position. This is
true even if I don’t argue that we can grow over 50 percent five years in a
row, though I think we could; even if I don’t assume that we can improve our
unit economics, though I think we will; and even if I don’t assert that we can
increase our pricing, though I think we can. Today’s valuation is not built on
some utopian assumption that the world will change and people will suddenly
start ordering food in a certain way. People already order food online—and we
have the data. We are the market leader in at least 25 markets. We have a
business model that people like. And every second of every hour, we deliver 16
meals globally, hundreds of millions of orders a year. I think we’ve proved we
can make a profit out of that.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/ordering-in-with-a-unicorn?cid=digistrat-eml-alt-mkq-mck-oth-1606
No comments:
Post a Comment