14 ★ FINANCIAL TIMES Friday2 August 2019COMPANIES
I
f you thought the red-hot food delivery business was
entering its consolidation phase, think again. The
pressures are starting to show on some weaker apps,
prompting the first stirrings of mergers. But this looks
like being just the beginning of a long and very expen-
sive battle for the world’s collective stomach.
European online ordering and delivery servicesJust Eat
and Takeaway.comconfirmed plansto combine their busi-
nesseslast weekend. This week, both companies revealed
a dent to profitsfrom rising competition, as rivals turn to
subsidies to win customers.
In the US, GrubHubhas been wilting under the same
pressures. Its shares jumped 7 per cent on Monday on
merger hopes, only to drop nearly 15 per cent asit also
warned of a dent to its profits.
These ructions reflect the arrival of a raft of competitors
with deep-pocketed backers in what is still a highly frag-
mented market. Taking a leaf out of Uber’s book, for
instance, DoorDashin the US has been on a fundraising
tear, taking in nearly $2bn since early last year. The theory
is brutally simple: out-raise and out-subsidise less well
capitalised rivals to win over diners and become the domi-
nant delivery marketplace. DoorDash has already over-
taken GrubHub to become the leader in the US.
It could beat Uber at its own game. With little growth in its
ride-hailing business, Uber leans heavily on theUber Eats
business to show it can be a growth company. But its
underwhelming IPOchanged the equation, sending a clear
message that Wall Street’s tolerance for losses is limited.
Some of the biggest private-market investors have been
lining up to pour money into delivery apps. They include
Temasek, the Singapore government vehicle, and Naspers,
the South African investment group, which has led a $1bn
round into Swiggy in India and $500m in iFood in Brazil.
And SoftBank, being SoftBank, seems happy to play all
sides at once: its Vision Fund has backed both Uber and
DoorDash, as well as dropping $1bn on Latin American
delivery company Rappiearlier this year.
Plenty of others still seem to be working out how to play
this sector. They include Amazon, which closed a failed US
delivery service of its own and is now reportedly looking to
enter India, while also await-
ing regulatory approval for a
big investment in Deliveroo.
The enthusiasts claim the
food delivery market will
rivalride-hailing in size.
According to one big inves-
tor, the margins also look
better — particularly in sub-
urbs and towns where a
higher proportion of families leads to larger orders.
Marginsdepend on what customers are willing to pay,
whether thatbe restaurants (for whom the delivery apps
are a valuable source of additional eaters to help cover
fixed costs) or diners (who pay fees for the convenience).
The impact in the restaurant sector is already being felt.
Domino’s Pizzahas seen its same-store sales suffer from
thecompetition, wiping 12 per cent from its stock price last
month. As Domino’s executives warned, the economics of
the food delivery aggregators are “an open question in the
long term” — but for now, the new apps have cash to burn
and there’s no way to predict how long this will last.
As with all sectors facing the arrival of a new set of digital
aggregators, the threat to restaurants is clear. Many have
rushed to sign up the delivery services, reportedly handing
over a big slice of the money from take-out orders to secure
the extra business. But the apps, amassing eyeballs, could
end up with the upper hand.
Thinking of ordering from your local pizza restaurant?
DoorDash will be in a position to suggest a rival chain, or
put a cut-price offer in front of you. Or in future it could
sidestep restaurantsand feed you from a cloud kitchen —
one of the low-cost, purpose-built facilities thatwill act as
food factories for the burgeoning food delivery sector.
That points to a fierce battle ahead, as restaurants try to
avoid becoming the victims of new digital aggregators, like
music companies, retailers or newspapers before them.
The biggest chains started out by signing exclusive deals
with delivery companies but seem to be rethinking that
strategy. McDonald’s, which signed a deal with UberEats
two years ago, recently agreed to test DoorDash. As with all
digital storefronts, smaller restaurants with less brand rec-
ognition are likely to be the ones to lose out.
Negotiating leverage, for the aggregators, will come from
scale. That guarantees that plenty of cash will be burnt on
subsidised deliveries — and happy eaters will get to enjoy a
lot more subsidised food — before the dust settles.[email protected]INSIDE BUSINESS
TECHNOLOGY
Richard
Waters
Food delivery wars are
just starting as rivals
spend to win diners
New apps have
cash to burn and
there’s no way to
predict how longthis will last
NICHOLAS MEGAWThe positive effects of the European
Central Bank’s quantitative easing poli-
cies have “dried up”, according to the
chief executive of one of the eurozone’s
largest retail banks.In an unusually outspoken call with
analystsyesterday,INGchief executive
Ralph Hamerssaid further stimulus
would damage consumer confidence
without helping the central bank reach
its inflation target.
“We have to move away from the pol-
icy that is currently anticipated.. .The
discussions and ideas around how to
stimulate inflation, I think, are not going
to help,” he said.
Record-low interest rates have
weighed on retail banks’ profits as theyhave been forced to lower borrowing
charges and in some cases pay to store
money at central banks, without a simi-
lar cut in the rates they pay to savers.
The ECB’s benchmark interest rate is
minus 0.4 per cent, and outgoing presi-
dent Mario Draghi saidlast week that he
was “determined to act” to lift inflation
towards its 2 per cent target, paving the
way for further rate cuts or asset pur-
chases in September.
However, Mr Hamers said such meas-
ures would have little impact because
the recent economic weakness was due
to geopolitical uncertainties such as
Brexit and trade tensions, rather than
any shortage of credit supply.
“I don’t see any credit demand in
Europe unanswered, so there’s no need
for further liquidity to be injected,” hesaid. “I actually see that the negative
rate environment is making consumers
so uncertain about their financial envi-
ronment that they’re starting to save
more rather than less.”
The uncertain outlook cast a cloud
over relatively strong second-quarter
results published yesterday. The Dutch
bank beat forecasts for revenues and
profits, attracting twice as many new
customers as in the first three months of
the year despite continuing pressure
over anti-money laundering failures.
Revenues rose 4 per cent year on year
to €4.7bn. The gain, along with lower
provisions for bad loans, helped it avoid
a forecast drop in profits. Net profit rose
0.6 per cent to £1.4bn, about £100m
higher than consensus forecasts.
See MarketsFinancials
ING warns against more central bank stimulus
MICHAEL POOLER AND
PHILIP GEORGIADISThe chill blowing through Europe’s
manufacturing sector gathered pace as
two of the continent’s largest industrial
companies revealed a drop in quarterly
earnings and felt the impact of a stall-
ing motor industry.Siemens, the German engineering
group, missed analysts’ profit expecta-
tions in all its industrial businesses
except mobility, which supplies trains
and technology for transport systems.
Europe’s largest industrial conglom-
erate spoke of “a significantly weaker
environment in [its] key markets”, such
as flagging appetite for factory automa-
tion equipment from the carmaking and
machine building industries.It came alongside a deeper forecast
contraction in European steel demand
this year than previously outlined from
ArcelorMittal, the largest producer of
the metal, which is often regarded as an
economic bellwether. The Luxem-
bourg-based groupblamed its outlook
on a lean automotive market.
The sober results were delivered as a
closely watched survey indicated that
the eurozone’s manufacturing sector
shrank last month at its fastest rate
since December 2012.
There was also the sharpest recorded
reduction in employment in the sector
for more than six years, according to the
purchasing managers’ index compiled
by IHS Markit.
Europe’s economy has been weighed
down by global trade tensions and sof-tening demand from China, which
together have led to fears of a sustained
global economic slowdown.
Net income at Siemens slipped 6 per
cent to €1.14bn in the three months to
the end of June, largely due to declines
in its digital industries and gas and
power businesses.
Despite the headwinds, the German
group confirmed its full-year outlook as
orders grew 8 per cent to €24.5bn, while
revenue rose 4 per cent to €21.3bn.
ArcelorMittal’s earnings before inter-
est, tax, depreciation and amortisation
were $1.56bn in the second quarter,
slightly better than predictions.
It also swung into a net loss of $477m
due to non-cash writedowns, whilesales
fell 3.6 per cent year-on-year to $19.3bn.
See LexIndustrials
Siemens and ArcelorMittal suffer setbacks
ANJLI RAVAL
SENIOR ENERGY CORRESPONDENTRoyal Dutch Shell’s second-quarter
earnings fell 26 per cent after a volatile
period that saw lower energy prices
coincide with weaker performing gas,
refining and chemicals businesses.
The Anglo-Dutch oil group said its
earnings in the three months to June 30
declined to $3.5bn on a current cost of
supply basis, the measure tracked most
closely by analysts, and adjusted for
exceptional items.
This is down from $4.7bn reported in
the same period a year ago and far below
analysts’ consensus estimates of $4.9bn.The worse than expected results trig-
gered a 4.9 per cent drop in Shell’s
shares, markingits biggest one-day fall
sinceJanuary 2016.
“Shell had a shocker this quarter,”
said Colin Smith at Panmure Gordon.
“Earnings missed our estimates across
all businesses.”
Shell’s integrated gas division per-
formed the worst, with earningsdown
25 per cent. But profits across its busi-
nesses fell, including exploration and
production, refining and chemicals.
Ben van Beurden, Shell’s chief execu-
tive, said it was able to generate good
cash flow despite “earnings volatility”.
The quarter had “challenging macr-
oeconomic conditions”.
Aside from lower oil and gas prices,
petrochemicals took a hit amid mount-
ing concerns about global economic
weakness.The chemicals industry was “the sec-
tor that traditionally, and typically, gets
most hammered if there is a global slow-
down or macroeconomic concerns, or in
this particular case a trade war”, Mr van
Beurden said.
Operational issues compounded
Shell’s problems. These included under-
performing wells in the Gulf of Mexico,
maintenance in a chemicals facility in
the Netherlands, and “unplanned
downtime” at a Singapore plant.
The results showed refining and
chemicals margins were exceptionally
weak in Asia.
Cash flow from operations rose to
$11bn from $9.5bn in the same quarter
a year ago. Free cash flow, which
enables the group to pay for dividends
and share buybacks, dropped from
$9.5bn to $6.9bn.
Shell has in recent months picked upthe pace of the $25bn buyback pro-
grammewhich was promised after
it acquiredBG Groupfor $54bn in- The share repurchases will
amount to nearly $2.8bn in the
next three-month period. Shell posted
a second-quarter dividend of 47 cents
a share.
In recent years Shell has cut costs,
kept spending in check and sold $30bn
in assets to shrink its debt pile.
Gearingwas at 28 per cent. This com-
pares with a target of 25 per cent by next
year, using new accounting standards
BPthis week reported earningsthat
beat estimates following disappoint-
ments from European rivals including
France’sTotaland Italy’sEni, which —
like Shell — saw big drops in second-
quarter profits.
ExxonMobilandChevronof the US
will also report this week.
Oil & gas
Shell ‘shocker’ as earnings tumble 26%
Softer prices take toll in
quarter with weakness in
chemicals, gas and refining
OLIVER RALPH— LONDON
DAVID KEOHANE— PARISWhen French insurerAxabought Ber-
mudan rivalXLgroup for $15bn in
March last year, chief executiveThomas
Buberlwarned his board that the move
would go down badly with investors.
“I said the share price would fall 9 per
cent,” said Mr Buberl, who expected
shareholders to be worried about the
size of the deal and the execution risk.
In the event, the shares fell 10 per cent
on the day and struggled for the rest of
the year as the market digested a trans-
action that few had seen coming.
James Shuck, analyst at Citi, said:
“Investors were surprised at the nature
of the target and the price. Their previ-
ously communicated strategy was
bolt-on M&A, not large [deals].”
“Obviously, when you are faced with a
situation where the market falls 10 per
cent... you always ask yourself what
the market has seen that I did not, what
did I get wrong,” said Mr Buberl.
But in 2019, there has been something
of a revival. Axa shares have risen 25 per
cent, beating rival insurersAllianzand
Generaliand making up most of the
ground lost since the XL deal was
announced. A wider bump in share
prices has helped.
So has a recovery in the markets that
Bermuda-based XL serves. After years
of falling prices and rising claims, rates
for commercial insurance and reinsur-
ance have started to tick up over the
past 12 months.
“The uncertainty around the deal has
reduced,” Mr Buberl told the Financial
Times. “Many people who were critical
are now convinced that it was the right
deal at the right time.”
The deal was part of a bigger shift in
strategy under Mr Buberl, who wants to
move Axa away fromproducts where its
profits are dependent on movements in
financial markets — such as life insur-
ance in the US — and towards commer-
cial property and casualty underwriting
where earnings are tied to its skills as an
underwriter.
Axa’s first-half results yesterday
showed that the company has made
progress in that direction. The group’s
revenues rose 4 per cent to nearly
€58bn, but at XL revenues were up 9 per
cent, thanks partly to rising prices.
Over four-fifths of Axa’s earnings now
come from the areas it sees as a priority,
such as property and casualty insurance
and health, up from 66 per cent of earn-ings two years ago. “Axa’s business was
focused on retail and SME [insurance]
as opposed to corporate clients and rein-
surance,” said Benjamin Serra, senior
vice-president at rating agency
Moody’s. “[Following the deal] Axa’s
global commercial lines were considera-
bly increased.”
The flotation of Axa Equitable, the
group’s US life insurance business that
relied on the sort of financial market
risk Mr Buberl was keen to escape, was
another significant part of the strategic
shift. The proceeds of the IPO had been
earmarked to fund the XL deal.
The IPO got away in May last year —
albeit at a price below what the com-
pany had hoped for. And since then, the
French insurer has sold down its stake
in the US business to 39 per cent.
And Mr Buberl insists XL has been
integratedas he has spent most of his
time on the culture. “Axa and XL are
very different animals,” he said. “You
have to spend a lot of time with people,
and emotionally tie them to the new
ensemble.”
Not everybody wanted to be part of it.
Since the deal was announced, anumber of high-profile managers and
underwriters have quit.
Many of them have gone toConvex,a
start-up led by insurance veteran
Stephen Catlin, who sold his original
business to XL in 2015.
People in the industry say they were
attracted by the chance to work in a
more entrepreneurial company, and
were wary of working in a group the sizeof Axa. Ben Bolton of Gracechurch Con-
sulting, an insurance-focused research
business, said: “My sense is that they
have lost more people this time than
after the XL Catlin deal,” but he added:
“I don’t think it has been too damaging. I
think the market has got used to people
moving after a deal.”
Mr Buberl is not worried by the depar-
tures. “We are talking about 25 people
out of 7,000, that is not a reason to
worry,” he said, adding that Axa gave its
staff a bigger balance sheet to work with
than they would have access to else-
where.
Despite the recovery in the shares this
year, the valuation still lags behind that
of Allianz. “It will take a long time to lure
back long-only funds who bought into
the story of simplification and digitali-
sation at a time when the CEO then went
and did a large, unexpected deal,” said
Mr Shuck.
But Mr Buberl is not for turning, say-
ing he had refused to stay quiet after
doing the deal despite some advisers
telling him to do so.
“You should stay true to your convic-
tions and defend them,” he said.Interview.Thomas Buberl
Axa chief begins to win over doubters on XL deal
Scale of $15bn transaction
alarmed investors but the
stock has staged a recovery
Thomas Buberl
wants to move
Axa away from
products where
profits depend
on market
movements —
such as US life
insurance —
and towards
commercial
property
and casualty
underwriting
Kristoffer Tripplaar/Alamy;
Eric Piermont/AFP/GettyThe stock
suffered adrop of
nearly 5%,the steepest
one-dayfall since
January2016
Axa
Share price ( )Source: Refinitiv Aug Aug
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