Bloomberg Línea — Amid pandemic and lockdown times, instant delivery businesses grew and cashed in. Now the sector seems to be experiencing a hangover. Deliveries burn a lot of cash, and at a time when money is more expensive, startups in the sector have seen that “lunch is not free”. Under pressure, these startups have cut costs and had their valuations impacted. One example is Instacart, a US supermarket delivery startup that bankers expect to make an IPO in 2023, which has cut its internal valuation to around $10 billion, two people familiar with the matter told The Information.
It would have been the second time in the year that Instacart has reduced its valuation, now almost 75% lower than the $39 billion valuation from early 2021. According to The Information, Instacart’s new valuation may give a direction of what the company can raise when it makes its stock market debut. In the US, DoorDash (DASH), which is also a quick delivery company and is listed on the NYSE, has seen its shares fall 2/3 since the beginning of the year.
Could Instacart’s valuation cut affect Merqueo, a LatAm-based company in the same sector that filed for an IPO request on Nasdaq on Tuesday? Merqueo has so far not informed how much it intends to raise in its IPO, nor the price at which it will subscribe its shares on Nasdaq.
The IPO, a move that has all but dried up this year in both the United States and Brazil, is a means of capitalizing. Merqueo, founded in 2017, is a Series C-stage Colombian startup that has already raised about $80 million. The startup, which also has operations in Brazil, competes with Latin American delivery industry giants like iFood - valued at $5.4 billion after its purchase by Prosus -, Rappi (last publicly valued at $5.25 billion), and new challengers like Mexico’s Justo and Jokr. In Brazil, Jokr is represented by Daki, which, according to people familiar with the matter, recently received a new round of investment raising its valuation. The company was already a unicorn since 2021.
Merqueo, which had announced expansion into Mexico, said in June this year that it was leaving operations in the country. In 2022, the startup received $22 million from the IDB (Inter-American Development Bank). In 2021, the company received $50 million in a Series C round led by IDC Ventures, Digital Bridge, and IDB Invest, with participation from MGM Innova Group, Celtic House Venture Partners, and Palm Drive Capital.
In the document submitted to the SEC, Merqueo explained that it is an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting requirements. “Investing in our securities involves a high degree of risk,” it said.
What to expect from Merqueo’s IPO
Merqueo’s CEO is currently Felipe Ossa, former managing director of Domicilios.com, which was acquired by iFood and Delivery Hero. Ossa was COO of the company and five months ago replaced Miguel McAllister, who cofounded Merqueo with José Calderón (of RobinFood) in 2016, in the role of CEO of the company. For the COO position, Brazilian Saulo Brazil, who was director of Brazil operations at Merqueo, has moved up to the position that was Ossa’s. Brazil was co-founder and CEO of Delivery Center.
In Brazil, Merqueo began operating in July 2021 and had plans to double in size in the country by the end of 2022, increasing the number of dark stores in São Paulo for deliveries within 60 minutes.
In Brazil, Magazine Luiza (MGLU) also launched delivery services within an hour through Magalu Entregas in 2021, and Americanas (AMER) offers Americanas Entrega on the same model. Rappi offers Rappi Turbo and iFood is betting on Entrega Express.
In a January 2022 report on e-commerce models based on ultrafast delivery, Goldman Sachs (GS) analysts said they recognize the convenience this model offers urban consumers, but believe the price associated with it (delivery fees range from R$5 to R$20) limits the current addressable market for this demand, especially in the current macro environment.
In an interview with Bloomberg Línea, Luiz Alberto Marinho, a retail and marketplace specialist and director of the consultancy Gouvêa Malls, said he strongly believes in the importance of this delivery service, although he realizes that in Brazil there is still much to advance in food e-commerce.
“There are many issues with the habit of Brazilians, in the US this has grown faster. For these markets to grow in this segment of digital food sales, it is necessary to have very fine-tuned logistics. And this is a business that you need scale, capillarity, to be able to dilute costs and make this business work”, he said.
According to Marinho, many of these delivery companies operate “in the red”. Even iFood in Brazil is still not profitable with supermarket deliveries, as Prosus disclosed in its latest report on the platform.
“You need a large customer base to then start selling more stuff to those people. If you already have a large customer base, you end up attracting those people to your platform,” Marinho said.
He believes that with the IPO in the US, Merqueo is looking to capitalize on itself to make the necessary investments. “This is a market that to be a relevant player, you need investment. Of course this money has some risk because it is entering a very challenging market, but there is no way, it is all or nothing”.
Marinho believes that both in the United States and Brazil IPOs will be a way to seek resources and make this operation happen.
“I think that the IPO market will come back. In Brazil, we know that several companies have pulled back due to the uncertainty of the post-pandemic moment, and economic and political uncertainties, but there are many people that I believe will return to seek this path of IPO in 2023.”
Rappi’s country, Colombia has a relevant delivery culture, according to Marinho, and the valuation obtained in Merqueo’s IPO will be a sign of how much the market is betting on this segment, in addition to how much this specific player will gain in terms of investor confidence. “In terms of the market, I don’t think there is much doubt that this is a very promising market. The doubt is how much the operator will know how to carry,” he said.
Guilherme Zanin, an analyst at Avenue, recalls that companies in the American and Brazilian markets have not made IPOs given the more troubled economic moment with rising interest rates to combat inflation.
“It is natural that economic agents make choices between assets with potential returns and allocate their resources to fixed income. With fixed income high, we see a mass migration of investors seeking security and stability and taking less risk in the stock market. That said, this more troubling economic moment tends to bring fewer IPOs and it is rarer to see companies seeking capital”, he said.
Zanin recalls that when a company is doing an IPO, it seeks a high valuation, a price above average and that investors buy the business believing that it can grow more and that at least the company can raise more funds to be able to invest in its business. “When times are more complicated, the company can raise fewer resources, finds it more difficult to find buyers, and naturally ends up having its valuation depreciated.
By entering the US stock market, Merqueo will have competition for investors in the international market where Uber Eats already exists, and Instacart is expected to make its stock market debut in 2023. “It is already a market that shows some consolidation around the world, but also high competition. Despite being the leader in its segment in the Colombian market, it is natural that we see it with a certain concern because players can enter this market where the barriers to entry for technology are lower.”
In this unstable environment, Merqueo will try to raise funds from investors who are not so willing to take risks. “We believe that Merqueo has potential with the adoption of technology, which is increasingly becoming part of investors’ lives. In our view it will probably be a very depreciated valuation because the moment is not propitious for a company in an emerging market that is more susceptible to crisis”, he said. For Zanin, it is worrisome that a company that might have a greater growth potential is trying to gain resources at a time that is not so propitious.
Miguel Armaza, co-founder and managing partner of Gilgamesh Ventures, told Bloomberg Línea that he doesn’t believe Merqueo’s request marks the beginning of a wave of IPOs for delivery or any other category. “I think it will take a little longer before we start seeing larger companies going public frequently,” he said.
Merqueo could not speak to the press during the quiet period.