On 9th November, the online food delivery company DoorDash announced the acquisition of Finnish food delivery company Wolt for 7 billion EUR. The all-stock transaction is expected to be completed in the second half of 2022 and represents DoorDash’s largest purchase to date. The announcement received a positive reaction from investors, with the price of DoorDash stock rising over 20% in after-hours trading on the day of the announcement. The deal marks DoorDash’s entry into the European delivery market, as the firm currently only operates in the US, Canada, Australia and Japan.
DoorDash’s core product offering is a technology platform that, according to company filings, matches over 450,000 merchants, 1 million delivery workers and 20 million consumers in the online food delivery market. The company has grown rapidly in recent years, resulting in a 57% share in the US market for meal delivery sales, according to Bloomberg. The COVID-19 pandemic has allowed for DoorDash’s business to thrive, and revenue in the first quarter of 2021 grew 198%. As the market transitions out of the pandemic, growth has understandably slowed, meaning the business will need to seek other methods to boost growth, potentially by acquisition.
Wolt’s business model is extremely similar to that of DoorDash. The company began offering its food delivery technology platform in Helsinki in 2015. This was an unorthodox city for a food delivery service to begin its operations, due to its low population density when compared to other cities – the Finnish capital is approximately ten times less dense than Paris. This makes it difficult for a business in the food delivery sector to achieve the scale and efficiency required for a successful operation. Labour costs for any type of employment in the country are also extremely high, which lowers margins in a market with an already thin bottom line.
Wolt has developed unique technology solutions that allow for the business to operate as efficiently as possible. Wolt’s late entrance to the market in 2015 also meant that it began operating at a time where technology was more advanced, so it did not struggle with efficiency as much as firms founded earlier, such as Just Eat or Deliveroo, who were founded in 2000 and 2013 respectively. Giles Thorne, an analyst at investment bank Jefferies, said that Wolt “was doomed to fail according to the yardsticks of the false narrative at the time… Instead, it flourished: above all else, the late entrance afforded Wolt a technology edge in delivery that in turn allowed for superior selection, consumer experience, and unit economics”.
These unique factors of Wolt’s business will be attractive to DoorDash, which has adopted similar tactics in its quest for growth in the extremely competitive US delivery market. Wolt’s technology advantage will no doubt be attractive to DoorDash, with Tony Xu, the CEO of DoorDash, saying that the transaction “will accelerate our product development, bring greater focus to each of our markets and improve the value we provide to consumers, merchants, as well as Dashers and couriers around the world.”
The scale of Wolt’s operations may be the factor that is most attractive to the acquirer. Wolt now operates in 23 countries and 129 cities across the Nordics, Baltics, Central and Eastern Europe, serving over 10 million customers altogether. This will allow DoorDash to gain market share in areas experiencing huge levels of growth, such as Germany’s 26% growth in the online delivery market between 2019 and 2020, without having to enter these markets as a new entrant. This has proved difficult for firms like Deliveroo, who was forced to exit the German market in 2019 after a failed attempt to compete with Takeaway.com, a firm which achieved a near monopoly status in the country after it acquired Delivery Hero’s operations in the country. Wolt’s technology proposition that allows it to operate in smaller, less dense markets will help DoorDash to grow in a manner that is less risky.
DoorDash paid a considerable price for these attractive features of the Wolt business model. Using a ratio of Enterprise Value to Order Value, a commonly used comparison method in delivery businesses, the price that DoorDash paid for Wolt values the business at 3.2x order value: this compares to 1.9x for the acquirer, which is far higher than other rivals such as Just Eat and Deliveroo. Despite Wolt’s appealing qualities, this is a high price to pay for a business in a market that is unfamiliar to DoorDash and it remains to be seen whether this substantial investment will be worthwhile in the long term.
The acquisition of Wolt will provide DoorDash with access to successful established food delivery operations, in the form of a business that has a proven track record of flourishing in markets deemed difficult for food delivery businesses. Wolt will allow DoorDash to achieve greater economies of scale, which help the firm to increase margins in its path towards profitability, a feat it is yet to achieve.
By Archie MacKechnie
Sector Head: Hortense Comon