Digital delivery aggregators get a rubber stamp from regulator as competition concerns give way to COVID-19 urgency

While COVID-19 is crippling a lot of business sectors, as noted yesterday with Domino’s, it’s fuelling a boom in takeaway food delivery. In an unexpected side effect, the current crisis has also knocked down the barriers to two potentially market-changing shifts in the digital delivery aggregator platform space.

The UK’s Competition and Markets Authority (CMA) has cleared two huge deals that had come under scrutiny amid dominance concerns - Amazon’s planned £442 million stake in Deliveroo and Takeaway.com's £6.2 billion takeover over of Just Eat.

With the food industry clearly an essential service in the current climate when restaurants are shuttered for in-house business, the regulator would have needed to be very bold to put barriers in the way of both those moves, particularly the Amazon/Deliveroo arrangement, without which the latter argued it would go bust.

The CMA had voiced concerns about what it saw as a “real risk” of higher prices and poorer service if Amazon’s investment allowed Deliveroo a competitive advantage to squeeze out other players. Andrea Gomes da Silva, head of the Competition and Markets Authority, justified the CMA’s concerns on the basis of Amazon encroachment on another business sector:

Millions of people in the UK use online food platforms for takeaways, and more than ever are making use of similar services for the same-day delivery of groceries. There are relatively few players in these markets, so we're concerned that Amazon having this kind of influence over Deliveroo could dampen the emerging competition between the two businesses.

Make no mistake - a CMA objection is a big deal. It was the CMA that put paid to Walmart’s plan to offload its ASDA operation onto Sainsbury’s to create a new market leader in the UK grocery market, for example. It also scuppered a planned merger between mobile telcos O2 and Three, among other significant rulings. So the threat to Amazon and Deliveroo’s intentions was a real one.

Then along came COVID-19. While on the face of it, Deliveroo looks like a healthy business model, a lot of its major partners shuttered their doors when the virus outbreak kicked in, including the likes of KfC, Nando’s and Pret. If there’ no Peri-Peri Chicken being cooked up in the kitchens, then there’s none to deliver.

While a number of Quick Service Restaurants (QSR) are now cautiously re-opening or planning to reopen their doors for delivery, the timing was ripe for the CMA to have second thoughts in the interests of public service, judging that the "imminent exit of Deliveroo would be worse for competition” than letting Amazon get its foot in the door.

That the “wholly unprecedented circumstances” of the pandemic were the reason for giving a green light to the investment was made clear by Stuart McIntosh, Chair of the CMA's independent inquiry group:

"Without additional investment, which we currently think is only realistically available from Amazon, it's clear that Deliveroo would not be able to meet its financial commitments and would have to exit the market. This could mean that some customers are cut off from online food delivery altogether, with others facing higher prices or a reduction in service quality. Faced with that stark outcome, we feel the best course of action is to provisionally clear Amazon's investment in Deliveroo."

In its ruling, the CMA states:

The ongoing lockdown in the UK has resulted in the closure of a large number of the key restaurants available through Deliveroo, and a significant decline in revenues. While Deliveroo has sought to expand its supply of convenience groceries during the crisis, these sales are limited and have not made up for losses in its restaurants business. As a result, Deliveroo recently informed the CMA that the impact of the coronavirus pandemic on its business meant that it would fail financially and exit the market without the Amazon investment.”

Beneficiaries

While there were undoubtedly sighs of relief to be heard around Deliveroo HQ, it’s equally likely that that there was a sense of relief over at rival JustEat. With the Amazon/Deliveroo plan given the go-ahead, blocking the tie-up with Takeaway.com was immediately made more of a difficult sell for the regulator.

In practice, the merger may raise some market competition concerns for the CMA, but it also fits into a ‘concerned about Amazon’s intentions’ narrative as well. As diginomica noted last August when the tie-up was proposed:

The planned merger is a compelling proposition. Just Eat and Takeaway.com have dominant footprints in countries around the globe, but only overlap in Switzerland. This is a complementary merger and one that sets up the combined entity to hold off challenges from Amazon - whose planned investment in Deliveroo is subject to regulatory scrutiny - and Uber in an increasingly competitive digitally-disrupted sector.

The merger was accepted by Just Eat shareholders back in January, but the two firms had to continue to operate as independent businesses while the CMA launched an inquiry. The regulator queried whether the creation of Just Eat Takeaway.com would reduce competition in the market. Amsterdam-based Takeaway.com had previously pulled out of the UK market, but the question was raised as to whether it might have made a re-entry in its own right, given the rise in interest in digital delivery aggregation platform provision.

But again, COVID-19 has changed everything and there’s been a rethink of priorities.   

According to Just Eat’s own data, nearly 3,000 restaurants have signed up with the platform since lockdown began in the UK, bringing the total of outlets using the digital aggregator to more than 35,000. That’s a lot of food that can be ferried to the doors of people without them needing to breach social distancing guidelines.

Colin Raftery, Senior Director of Mergers at the CMA, now sees no competitive concerns:

Millions of people in the UK use online food platforms for takeaways and, where a merger could raise competition concerns, we have a duty to rigorously investigate whether customers could lose out. In this case, we carefully considered whether Takeaway.com could have re-entered the UK market in future, giving people more choice. It was important we investigated this properly, but after gathering additional evidence which indicates this deal will not reduce competition, it is also the right decision to now clear the merger.

My take

The ultimate impact of COVID-19 on the food and beverage industry worldwide isn’t yet clear, but these two decisions are necessarily pragmatic given the immediate circumstances, regardless of what the longer term impact on competition ends up being. It’s good to note that the UK regulator is aware of the changing nature of the environment in which it operates, as it states:

During the Covid-19 outbreak, the CMA is working with businesses where it can to be flexible – for example, by recognising that there may be delays in providing the information it needs to conduct investigations. However, it is also trying to complete investigations efficiently at this time, wherever possible, to provide businesses with certainty. In this case [Just Eat Takeaway.com],  the CMA was able to publish its final decision 26 days ahead of the statutory deadline.