What Merqueo’s IPO Bid Tells Us About the Future of Delivery Apps

Rapid delivery is one of the most in-demand services in the new economy, but the segment still faces the challenge of being profitable and stopping cash burn

Startups in the supermarket and food distribution sector continue to face the challenge of reducing their cash burn
January 03, 2023 | 12:42 PM

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Bloomberg Línea — In the first two years of the pandemic, high-speed delivery companies saw rapid growth and received money from investors at an unprecedented pace, but the sector is now experiencing a slowdown, in a business that burns a lot of cash and in an adverse scenario where capital is scarcer and more expensive, and in which delivery start-ups have seen the end of the ‘free lunch’.

Under pressure, startups have cut costs and seen their valuations suffer. The most recent example is Instacart, a US supermarket delivery startup, which cut its internal valuation by 20% to about $10 billion, two people familiar with the matter told The Information. Still, bankers are working toward an IPO for the company this year.

This was the second time that Instacart has reduced its valuation, and which is now almost 75% lower than its $39 billion valuation of early 2021. Instacart’s new valuation may give guidance on what the company can raise when it goes public for its stock market debut, according to The Information.

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In the US, DoorDash (DASH), also a high-speed delivery company and which is listed on the New York Stock Exchange, has seen its shares fall by around half since early last year.

Instacart’s valuation cut comes at a time when Merqueo, a Colombian company in the same sector, filed for an IPO on Nasdaq in late December. So far, Merqueo has not disclosed how much it intends to raise in its initial public offering, or the expected price range for its shares.

The IPO, a move that practically sold out in the US in 2022, is one of the main ways for startups to capitalize, but it only applies to those that are already at an advanced stage, with a validated business model and on the road to profitability, even more so in today’s times.

Merqueo is a startup that has already raised a Series C round and has already raised around $80 million. With operations also in Brazil, it competes with Latin American delivery giants such as iFood - valued at $5.4 billion after the purchase of the whole of Prosus, and Rappi, the most recent valuation of which is $5.25 billion, as well as new entrants to the market such as Mexico’s Justo, and Jokr, which is based in New York and recently started operating in Mexico, having also launched operations in Brazil.

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Daki, meanwhile, according to people familiar with the matter, recently received a new round of investment with a higher valuation, and which achieved unicorn status, with a valuation above $1 billion or more, in 2021.

Merqueo, which had announced an expansion of its business in Mexico, said in June that it was abandoning its operations in the country, however.

In 2022, the startup received $22 million from the Inter-American Development Bank (IDB) and a year earlier, it raised $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 filed with the US Securities and Exchange Commission (SEC), Merqueo touted itself as an “emerging growth company”.

“Investing in our securities involves a high degree of risk,” the company said in the document.

What to expect in Merqueo’s IPO

Merqueo’s CEO is currently Felipe Ossa, former managing director of Domicilios.com, which acquired by iFood and Delivery Hero.

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Ossa was COO until five months ago, when he replaced former CEO Miguel McAllister, who co-founded Merqueo with José Calderón of RobinFood.

Saulo Brazil, who is Brazilian and was Merqueo’s COO in the South American country, has been promoted to the position held by Ossa, and who co-founded and was CEO of Delivery Center, a company that was active in the delivery service by stores in shopping centers in Brazil, and which was created from investments by Multiplan (MULT3) and brMalls (BRML3), two of the largest shopping center management groups in the country.

Merqueo began operating in Brazil in July 2021 and planned to double its size by the end of 2022, expanding the number of so-called ‘dark stores’ (points that serve only to dispatch deliveries, without serving the public) in São Paulo for deliveries in up to 60 minutes.

Is the high-speed delivery business model sustainable?

In Brazil, department store Magazine Luiza (MGLU3) also launched one-hour delivery services through Magalu Entregas in 2021, while Americanas (AMER3) also offers the service, called Americanas Entrega, and Rappi offers Rappi Turbo and iFood does the same with its Entrega Express.

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In a January 2022 report on e-commerce models based on ultra-fast delivery, Goldman Sachs (GS) analysts acknowledged the convenience for urban consumers, but saw the associated pricing as limiting the addressable market, especially in the current macroeconomic environment.

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In an interview with Bloomberg Línea, Luiz Alberto Marinho, a retail and marketplaces specialist and director of consultancy Gouvêa Malls, said he believes in the importance of these delivery services, but perceives that there is still a lot of progress to be made in e-commerce for groceries in Brazil.

“There are a number of problems with the habit of Brazilians, while in the United States it has grown faster. For these markets to grow in this segment of digital food sales, you need to have fine-tuned logistics. And this is a business where you need scale, and flexibility to be able to dilute costs and make this business work,” he said.

According to Marinho, many of these delivery companies operate on a cashless basis. Even iFood in Brazil is not profitable with supermarket deliveries, as revealed in a Prosus report.

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“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 says.

In his view, with its planned IPO in the US, Merqueo is looking to capitalize to make the necessary investments.

“This is a market where, to be a relevant company, you need investment. Of course, this money has some risk because it enters a very difficult market, but there is no way, it’s all or nothing.”

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IPOs as a means of capitalization

Marinho said he believes that in both the US and Brazil, IPOs will be a fundamental way to seek resources and make operations viable.

“The IPO market will bounce back. In Brazil, we know that there are several companies that have retreated due to this moment of post-pandemic uncertainty and a lack of economic and political clarity,″ he said.

The Colombian market, Rappi’s home country, also has a significant delivery culture, according to Marinho, and the valuation obtained in Merqueo’s IPO will be a sign of how far the market continues to bet on the segment, and how much confidence it will gain from investors.

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“In terms of the market, I don’t think there’s much doubt that this one is quite promising. The doubt is how much the operator will know how to take it,” he said.

Guilherme Zanin, an analyst at Avenue, a US-based, Brazil-focused brokerage, said companies in the US and Brazil have not carried out IPOs because of the economic timing, with interest rate hikes imposed to combat inflation.

“It is natural for economic agents to choose between assets with potential returns and allocate their resources to fixed income,” he said. “That said, this more troubled economic time tends to bring fewer IPOs, and it is rarer to see companies seeking capital.”

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Zanin said that when a company launches an IPO, it seeks a high valuation, with an above-average price, so that investors will buy into the business believing it can grow further and that the company can raise more funds to be able to invest in the business.

“When the timing is more complicated, the company can raise fewer resources, because it has difficulty finding buyers and, naturally, ends up with a depreciated valuation.

By going public in the US, Merqueo will have competition for investors in a market where Uber Eats and, likely soon, Instacart already co-exist.

In other words, Merqueo will be trying to raise funds from investors who may not be as willing to take risks.

“In our view, it will probably be a well-priced valuation because it’s not the right time for a company in an emerging market that is more susceptible to downturns,” he said.

Miguel Armaza, co-founder and managing partner of Gilgamesh Ventures, told Bloomberg Línea that he doesn’t think Merqueo’s plan to launch an IPO, even if it goes through, will usher in a wave of IPOs by delivery startups, or by companies in any other category.

“I think it will be a little bit longer before we start to see larger companies going public frequently,” he said.

Merqueo declined to comment for this article due to the current holiday season.