International

In China, Food (Delivery) For Thought

In China, at least, a hero ain’t nothing but a sandwich.

As the recent exit of German online food delivery behemoth Delivery Hero’s exit from China last week proves, you can have a strong business model, deep pockets and a well-defined mission, and still go home empty handed.

The news, first reported by TechCrunch, comes as not long ago, Delivery Hero was valued at more than $3 billion in a fundraising round, which speaks at least in part to the vagaries of valuation and investor expectations, which do not always dovetail with reality.

Why leave China? It’s a huge market, presumably one marked by hundreds of millions of consumers who like to eat and would like the convenience of meal delivery. As is so often seen, the choice to stay or leave boils down to one overwhelming factor – and in this case that overwhelming factor is competition, so much so that the firm is planning to divest its Waimai Chaoren (which translates to “Takeout Superman”) in the next few months. TechCrunch stated that the German firm found it tough going against a plethora of Chinese startups in the same space ranging from Baidu Waimai to any number of smaller players.

Key to the competitive impact, TechCrunch said, include price undercutting and in some cases, startups are even offering free services.  It’s hard to compete against free. The company’s CEO told TechCrunch that his firm does not have the appetite to compete in an environment where that type of dynamic exists. Reports have pegged the impact of the divestiture (or even an outright closure) at around 400 jobs.

The departure marks a relatively quick exit from China, where Delivery Hero opened up shop in 2012, with initial presence in Shanghai and an expansion effort that ultimately spread to 19 cities across the country. Yet the continued capital investments (regardless of the firm in the delivery space) shows that even with commitment of time and money, brand loyalty is no given.

What about capital flowing into the region, from investors? TechCrunch stated that there have been significant capital raises in online delivery firms, with lots of financial firepower coming into this arena.  Consider the fact that the Baidu Waimai is gathering up as much as $500 million to earmark for logistics. Separately, Ele.me has Alibaba at its back, with a $1.2 billion raise being corralled by that eCommerce giant. And Ele.me also has Did Kuaidi on its side, using the Chinese Uber challenger to help deliver food using its vehicles.

All of this speaks to crowding in a space by very big players, with very deep pockets, and a deep bench of logistics operations (and perhaps, as a result, cross selling opportunities). TechCrunch posited that the exit from China may presage a move toward an initial public offering for Delivery Hero.

But Delivery Hero’s decision to leave China hints that the days of hyped up tech valuations may not in fact be behind us, with implied valuations yet again topping more than $1 billion – and the mythic unicorn rears its head again. The fact that there is so much capital chasing the same consumers, and the same value proposition (i.e. food delivery), hints just a bit at tech bubbles from years past. One wonders when investors may be reaching for antacids.

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