Written by Toby Sterling

AMSTERDAM (Reuters) – Getir’s $1.2 billion deal to buy rival Gorillas is a significant step toward consolidation in Europe’s food delivery market, as the companies struggle amid a post-COVID slowdown.

After expanding rapidly, these companies took a hit in March as a drop in demand prompted by shutdowns of deliveries and higher interest rates, while investors soured on loss-making tech companies.

Food delivery groups have begun to combine quickly, cut costs, and exit markets in which they have been weak, in their pursuit of profits.

Business and industry watchers say the painful cutback will continue – but survivors are starting to see the first green shoots.

Mergers and cost-cutting to remove excess capacity are happening more quickly than expected, and unit economics, including order volume per delivery, are improving, said Citi analyst Catherine O’Neill.

But she said cost-of-living pressures in Europe remain a significant negative.

“We haven’t seen how these companies will weather the recession yet.”

Istanbul-based Getir and Berlin-based Gorillas were among several venture capital-backed retail firms racing during the pandemic to create “dark stores” — delivery centers in city centers used to quickly transport groceries to customers.

The dark shop model is fundamentally different from that of more established groups such as Just Eat Takeaway and Uber (NYSE: Eats), which take restaurant orders and deliver meals, though they are often seen as competition.

Quick trade

The acquisition of Gorillas made Getir Europe’s largest express trading company.

Analysts said Getir was valued at about $8.8 billion in Friday’s deal, seven times more than Gorillas because of its strong position in Turkey where it is headquartered.

Gorilla and Jetter did not respond to requests for comment.

Other consolidators are Berlin-based Flink and Philadelphia-based GoPuff, which operate in the US and Europe.

“In Germany we see direct competition from Guerrilla and Jeter. All the others are gone,” Flink’s spokesman Boris Radke said.

Flink operates 190 darkroom stores, compared to 180 for Gorilla.

Radke said Flink is thriving because of close partnerships with REWE supermarkets in Germany and Carrefour (EPA:) in France, both of whom are shareholders in the company.

Analysts believe that the dark store center generates revenue somewhere between 500-1000 orders per day.

“We closed a few hubs that weren’t profitable, and we certainly put aside any kind of larger expansion plans” amid the economic downturn, Radke said.

However, he said, the number of profitable Flink hubs is growing, and sales are going up “consistently month after month”.

Less capital, less coupons

More than a dozen small European express trading companies have failed or been acquired since mid-2021.

Venture capital firms invested $125 million in the sector in two deals in 2022, down from $1.3 billion in 13 deals in 2021, based on PitchBook data.

With less competition and less new capital coming into the market, the remaining companies in both grocery and food delivery have cut spending on coupons and promotions.

While most meal companies have experimented with the fast food business, both types of companies are now collaborating frequently, which is a sign of things to come.

Last month, Getir struck a deal with Just Eat Takeaway to include Getir groceries on the Takeaway app.

That would give Just Eat Takeaway additional high-margin orders, while Getir gets more deliveries and sales from its darkroom stores.

“I expect we’ll see more activity either in the form of mergers and acquisitions or deep business partnerships,” said Larry Elg, head of the food business at technology investor Prosus (OTC:), which owns a stake in Delivery Hero.

While earnings may still be a long way off for the privately owned express business, all of Europe’s listed meal delivery companies have set formal targets for earnings before interest, taxes, depreciation, and amortization (EBITDA).

Just Eat said it’s already profitable before interest, taxes, depreciation, and amortization. Delivery Hero says it will get there in 2023 and Britain’s Deliveroo by the first half of 2024 at the latest.

Shares in the European delivery companies are down about 60% from a year ago, but they have been trading sideways since June.

Uber and DoorDash, both already positive in EBITDA on the strength of their US operations, say their European subsidiaries are growing.

“We continue to see strong demand for groceries, and we continue to see groceries as a driver of growth for our overall business next year,” Uber spokesman Caspar Nixon said.

He said the takeaway grocery options are “completely available on the app, but we don’t think it makes sense to own the entire supply chain” as Getir does.

The negativity about fast trading has been exaggerated, says Sajal Srivastava, a founding partner at TriplePoint Capital, which provided project debt financing for Flink.

“Consumers are still using it. The numbers are still going up and the economy is getting better,” he said.

So “all the naysayers who say flash trade is over – no. It will be there and the data will show it.”