Food delivery volumes more than doubled through the pandemic, yet profits remain elusive for many popular platforms, including Just Eat Takeaway (JET) and Deliveroo (ROO), following a wave of a new investment chasing an expanded addressable market.

Data from Daxue Consulting and Bloomberg estimates the UK market was worth $6.7 billion in 2021, with $9.2 billion revenues across mainland Europe.

While analysts agree that local scale remains paramount to network effects, global scale is proving a double-edged sword as battle lines are redrawn.

This week saw shares in meal kit provider HelloFresh (HFG:ETR) rally after strong interim results showing €89.5 million of net profit. With a reported €642 million of cash, it is also buying back its heavily discounted stock after plunging more than 50% in 10 months.

Deliveroo and Just Eat have been successful in passing rising costs on to consumers, illustrated by revenue rising faster than overall orders, or GTV (gross transaction volume) as it is sometimes called. How far and for how long diners will be willing to stomach rising prices for home-delivered dinners remains to be seen, but investors should beware.

Marketing costs continue to rise sharply too. In the six months to 30 June, Deliveroo’s marketing spend soared from £286.2 million a year ago, to £368.8 million, or from 8.6% of GTV to 10.4%, helping explain ballooning losses, up 261% to £68 million.

Berenberg analysts estimate that Just Eat will run up nearly €800 million in net losses this year, and that’s presuming further cost control initiatives in the second half. The investment bank certainly isn’t buying management’s talk of positive-adjusted EBITDA in fiscal 2023. Berenberg forecasts net losses of €530 million and €378 million for 2023 and 2024, respectively.

Just Eat is also tackling the aftermath of its Grubhub acquisition folly in the US, which it is trying to sell. Just Eat earlier in August booked a €3 billion loss on Grubhub, bought for $7.3 billion last year. That is arguably yet to fully reflect the financial millstone Grubhub will end up being, with some analysts predicting a final sale price of less than $1 billion.

With Numis predicting that Just Eat’s cash forecasts need to come down by circa €280 million this year to around €608 million, it could result in ‘immediate liquidity concerns and potentially require a fire sale of assets at the expense of equity shareholders.’

Most growth stocks have declined this year as inflation and recession spooked equity investors. Yet the rot had set in on Deliveroo and Just Eat before the market’s de-rating, losing 74% and 84% respectively from their highs. Recovering those losses may be beyond both companies.

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