Since around 23 June, the Deliveroo (LSE: ROO) share price has been moving higher. And it looks like the investor optimism arose because of a recent Court of Appeal ruling. The UK court said it’s okay to classify the firm’s delivery riders as self-employed.
Had the ruling gone the other way, the added employee costs would have likely set back the company’s journey to profitability. However, rival and owner of the Uber Eats brand, Uber Technologies, lost a similar case earlier this year.
A focus on quality
Naturally, Deliveroo’s directors feel chipper about the court decision. And the company said: “UK courts have now tested and upheld the self-employed status of Deliveroo riders four times.”
So, what’s different about Deliveroo compared with Uber? The UK’s Supreme Court ruled that Uber’s drivers must be given the legal status of “workers”, guaranteeing them a minimum wage, paid holidays and other benefits. But, according to reports, the ruling was mostly based on the amount of control Uber imposes on its drivers. For example, Uber has the ability to log out drivers from the app.
But Uber’s case was focused on the workers’ rights drivers were entitled to under UK employment law. And although the Court of Appeal considered the Uber ruling, it decided it wasn’t relevant. And that’s because Deliveroo’s case was focused on riders’ ability to organise as a trade union.
Deliveroo scored a win over its rivals with this issue. But it’s not the only area the company is shaping up as being a bit different and, arguably, better than its competitors. For example, the firm appears to excel is in the strength of relationships it builds up with its restaurant and grocery partners.
To begin with, Deliveroo focuses on working with high-quality operators. And an announcement on 27 April gives us a ‘feel’ for the direction Deliveroo’s business is travelling regarding quality. The John Lewis-owned supermarket chain Waitrose declared its intention to expand Deliveroo’s service from 110 new stores.
Profitability could drive the Deliveroo share price
Waitrose began a trial with five stores in September 2020 and expanded it to 40 outlets. It was a cracking success. And sales of Waitrose products through Deliveroo have been “strong and it’s helping to attract new and younger customers.” So the expansion to 150 outlets should be beneficial for both Waitrose and Deliveroo.
However, Deliveroo has yet to achieve a net profit. But the first-quarter trading update released on 15 April featured some encouraging revenue growth figures. Compared to the equivalent period a year earlier, gross transaction values rose by 130%. And the number of food orders taken increased by 114%.
The service is growing fast. And if the company can prove it’s capable of converting some of its turnover into profits and earnings ‘click’, we could see the share price explode higher from the current level around 313p.
However, such an outcome isn’t certain. And as well as the potential for gains, I reckon the stock carries a high risk of losing money for its shareholders if profitability remains elusive. Nevertheless, I’m watching this one closely.
