50 Business The EconomistAugust 29th 2020
J
oining theindex of Germany’s 30 big-
gest listed companies is usually a cause
of celebration for the joiner rather than of
controversy. Yet the arrival of Delivery
Hero in the dax30 on August 24th ignited a
fierce debate. How, critics grumble, can a
food-delivery company that has never
made money or paid a dividend, and no
longer even does business in Germany, sit
alongside Siemens, a 173-year-old engi-
neering behemoth, and Volkswagen, Eu-
rope’s biggest carmaker, in the elite group
of the bluest of German blue chips?
The simple answer is that membership
of thedax is determined mainly by market
value and turnover of shares, with no prof-
itability test (unlike America’s s&p500 in-
dex of big firms, which requires four con-
secutive quarters in the black, among other
criteria). And in that respect, Delivery Hero
qualifies handily. Niklas Ostberg, its Swed-
ish chief executive, boasts that the firm’s
market capitalisation of €18.7bn ($22bn) is
higher than that of several dax members.
Its share price has tripled over the past cou-
ple of years and it has attracted invest-
ments from the world’s richest companies,
including Alibaba and Amazon, two global
internet giants.
Ironically, a big reason for investors’ en-
thusiasm is Delivery Hero’s non-German
focus. A few years ago it offloaded its Ger-
man businesses, Foodora, Lieferheld and
Pizza.de, to Takeaway, a Dutch competitor.
Since then it has eyed expansion in the
Middle East and Asia. At the end of last year
50% of the company’s revenue came from
the Middle East and north Africa, 30% from
Asia and 12% from Europe. “It is today es-
sentially an emerging-markets business,”
says Monique Pollard of Citigroup.
Many food-delivery firms do not oper-
ate their own fleets of vehicles but instead
match consumers with restaurants and
riders. That means they must share their
cut with both restaurants and riders. “It is
very hard to make a profit with the three-
way-split model in Europe,” explains An-
drew Gwynn of Exane bnpParibas. But the
model works in emerging markets where
order sizes are large and delivery workers’
wages low.
Delivery Hero could become a viable
business, if it manages to keep its focus on
the developing world and stay on top of the
next wave of consolidation, which began
with the combination of Just Eat and Ta-
keaway, two European firms, earlier thisyear,andtheirproposedtakeoverofAmeri-
ca’sGrubhubinJune.Attheveryleastit has
a decentshotatstayinginthedaxlonger
that firm it replaced. Wirecard, a pay-
ments-processorbankrupted earlier this
year by a huge accounting fraud, was
bootedoutoftheindexbarelytwoyears
afteritsownascension. 7BERLIN
Delivery Hero could last longer in the
dax 30 than the firm it has replacedGerman blue chipsAscend and deliver
Promising,witha fewridersF
ew industrieshave whipsawed in the
covid-19 recession as violently as medi-
cal-device makers. The pandemic led to a
collapse in elective medical procedures re-
quiring their sophisticated kit, dealing a
powerful blow to sales. At the same time,
the crisis created opportunities for firms
making ventilators and testing kit.
For an illustration of how this dynamic
has played out, consider Medtronic. On Au-
gust 25th the American giant, with a mar-
ket capitalisation of $138bn, reported its fi-
nancial results for the three months to July.
On the face of it, its performance was abys-
mal. Revenues fell by 17% compared with
the same quarter a year ago, to $6.5bn. Net
income plunged by nearly half. Citing the
pandemic, the firm refused to provide
earnings guidance.
And yet investors and analysts cheered.
One reason is that they had feared worse:
Medtronic handily beat forecasts for both
revenues and earnings. Another is that
sales of ventilators shot up five-fold, cush-
ioning overall revenues. Geoff Martha, the
firm’s boss, now expects a return to “nor-
mal growth” within a few quarters.
The revival at Medtronic might augur abroader return to form for medical-device
firms. Matt Miksic of Credit Suisse, an in-
vestment bank, notes that these compa-
nies came into the crisis “with the wind at
their backs”. They were propelled by strong
growth in global revenues. Last year kpmg,
a consultancy, had forecast global sales to
rise from to $795bn in 2030, from $371bn in- Tim van Biesen of Bain, a consultan-
cy, points to a pre-pandemic boom in sales
of highly profitable devices used in ortho-
paedics, neurosurgery and cardiovascular
procedures. As result, in the past five years
share prices have outpaced both Big
Pharma and the s&p 500 index of large
firms (see chart).
Whether or not this outperformance
can last depends in large part on the path of
the pandemic. To flog their lucrative de-
vices and associated services, kit-makers
rely on an army of highly trained sales rep-
resentatives to win over doctors and train
them. A survey by Bain found that nine in
ten medics wanted in-person interactions
with device salespeople before covid-19. As
Mr van Biesen explains, many surgeons
value advice from top-flight reps, who
know their company’s cutting-edge tech-
nologies better than doctors do, during
complex surgeries. Some even depend on
those reps to lay out preferred instruments
before operations. Now Bain finds that
more than 60% of surgeons foresee restric-
tions on such in-person contacts.
A prolonged period of restricted access
could affect the industry in unexpected
ways. Big companies may lose business
from ambulatory-care centres, reckons Mr
van Biesen. These tend to be smaller than
hospitals, more cost-conscious—and less
wedded to both expensive brands and their
sales reps. But Mr Miksic thinks that in spe-
cialities like spinal surgery, where a high
degree of on-site service is common, the
lack of access may entrench incumbents
and hobble upstarts. This week Medtronic
boasted that it was gaining market share in
its largest businesses. If the firm “is finding
a new gear”, as Mr Martha crows, it is
thanks to old-gear sales. 7
NEW YORK
Covid-19 has been a mixed blessing for
makers of medical equipmentHealth careLeft to their own
devices
Kit and caboodle
US, stockmarket indices, January 1st 2015=100Source:Bloomberg26022018014010060
20191817162015S&P 500 PharmaceuticalsS&P 500Dow Jones Select Medical Equipment