Online e-commerce platform Amazon (AMZN) has grown to such epic proportions that its every move could cause a ripple effect. Amazon’s investment in the UK-based Roo Foods is creating a massive wave with regulators in the United Kingdom.
The Competition and Markets Authority or CMA has flagged the million-dollar investment from Amazon.com NV Investment Holdings LLC. Now the CMA will be scrutinizing the deal’s market impact. The regulatory body will also release its findings on December 11, 2019. If the CMA remains concerned, it could take the investigation to the next level. Read on to learn more.
The backdrop on Roo Foods
Roo Foods or Deliveroo is a private limited company incorporated in August 2012. The UK-based start-up operates in 12 countries and 200 cities around the globe. Deliveroo is active mainly in Europe. The business competes with other food delivery companies, like Uber Eats and DoorDash.
The takeaway delivery business model caters to both restaurants and customers. Restaurants can serve more customers without hiring in-house delivery staff, and customers don’t mind paying a minor premium to get food delivered to their doorstep.
Nevertheless, the food delivery business can be demanding. And it faces its own unique set of challenges. For instance, the upper cap on the earnings margin requires careful analysis. If a delivery company increases its margin, it could hurt the business. Customers may choose to opt out if the complany doesn’t carefully plan its pricing. So, rather than raising prices, the next best bet for Deliveroo is to expand its revenue segments.
Amazon and Deliveroo
For almost two years, Amazon was a competitor in the takeaway food delivery business. But the e-tailer couldn’t sustain the market pressure from competitors Deliveroo and Uber Eats (UBER). In December 2018, Amazon decided to back away from this business in the UK.
Within six months of exiting the market, reports suggested that Amazon was investing in a competitor from the takeaway industry. In May 2019, Amazon had invested $575 million in Deliveroo. According to reports, the last valuation for Deliveroo was roughly $2 billion. Interestingly, even Uber Eats was considering an investment in Deliveroo. But the deal didn’t go through because of differences in valuation.
Founder and CEO of Deliveroo Will Shu commented, “Amazon has been an inspiration to me personally and to the company, and we look forward to working with such a customer-obsessed organization,”
Amazon & Roo Foods face delivery trouble
Roo Foods and Amazon have something in common in the way they operate. This connection is evident from the controversies relating to their delivery workforces. Riders with Deliveroo are self-employed contractors, not employees. One of the clauses in their contract allows Deliveroo a “right to appoint a substitute” in place of the rider.
Let’s set the grievances aside for a moment. If you look at business models, Amazon and Deliveroo could mutually benefit from a partnership. Amazon could use Deliveroo riders for its e-commerce product shipments. In my opinion, this is what Amazon had in mind when acquiring Roo Foods.
Sources suggest that Amazon will have a minority stake in the company. Yet some reports suggest that Amazon will acquire Deliveroo. However, both companies have refuted claims of any mergers or acquisitions.
Amazon also has a Delivery Service Partner program in the United States. Under the program, the e-commerce company assists startups in setting up Amazon delivery centers. Support includes reimbursement up to $10,000 for setup costs, delivery vans, as well as additional gadgets and devices to complete deliveries.
Amazon versus the Competition and Markets Authority
The Competition and Markets Authority in the UK is responsible for ensuring that the markets don’t turn monopolistic. There should be a fair competition among the different market players.
Could Deliveroo end up being one of the Delivery Service Partners for Amazon? Or will it continue its flagship business of food delivery and make Amazon deliveries a second revenue segment? And what could happen to the market competition with Amazon investing in Deliveroo? These and other questions could be concerning the CMA.
As per a notification from the CMA, the deal between the two companies is under scrutiny. An investigation will take place in two separate phases. Initially, in phase one, the CMA will determine the market impact of Amazon’s investment. It may also consider aspects like how market competition has changed. It could also look at whether there’s a fair play among the companies. The deadline for the CMA to announce its decision is December 11, 2019.
A closing note on the CMA Investigation
If the phase-one investigation suggests a negative impact on the market, the CMA would initiate phase two of its investigation. Phase two would entail more severe consequences. The CMA could also block the merger or acquisition deal. And it could recommend that Deliveroo dilute its ownership. Another alternative could be that Amazon has to reduce its holdings in Roo Foods.
Want to read more about merger complications? Check out T-Mobile–Sprint Merger Uncertainty Remains.