Is Uber Eats the new savior? (Part 1)
Remember when Uber was hailed as “the next Facebook”? Everybody was talking about it and how rich they were going to get from it. The TV pundits and stock market experts hyped it beyond belief, and everybody believed it.
Well, things didn’t exactly turn out that way, did they? Sure, everyone uses Uber and the company has disrupted the taxi industry and changed transportation as we know it. But honestly, Uber is a terrible business model and even worse investment.
Ever since the company went public in 2019, the share price has rarely gone above the IPO price and to say the stock has been “underperforming” is an understatement. And its business model in its current form is simply unsustainable. Due to its obsession with grabbing market share over profits, Uber is still highly unprofitable after 10 years.
Worse than that, its losses are growing at astronomical rates. In Q2 2019, Uber suffered a record $5.2 billion quarterly loss. And while $4.2 billion of that was related to expenses from its 2019 IPO, the remaining $1 billion in losses is still a 14% increase from the $878 million it lost in Q2 2018. And, while its revenues are increasing, they are not even close to catching up to its expenses. In fact, Uber loses 25 cents on every dollar it brings in and an average of $1.20 on every ride.
Even before coronavirus, Uber experienced its lowest-ever quarterly revenue growth in Q2 2019
Uber Eats to the Rescue
But, while it all may look like “doom and gloom” for Uber, there is a savior coming. In fact, it’s been here for a while already – and it’s called Uber Eats.
Uber has had many “saviors” before:
While Uber’s ride-hailing business is stuck in neutral, Uber Eats is in overdrive. Although Uber’s ride-sharing segment was hemorrhaging money in 2018 and 2019, Uber Eats saw a big jump during the same period. Actually, Uber Eats was the one lone bright spot in the company profile, growing 53% YoY and accounted for $337 million in adjusted net revenue, a record high for the segment.
Uber Eats accounted for almost 12% of Uber’s total adjusted net revenue in Q2 2019, up from just over 8% in Q2 2018
And though still a small part of Uber’s total revenue, Uber Eats has the potential to enter more markets that its ride-hailing counterpart. Uber currently offers ride-hailing in more markets than Uber Eats (71 for the former vs 47 for the latter). But Uber Eats is likely to outgrow its ride-hailing counterpart, as the food delivery segment represents a stronger long-term revenue opportunity for the company.
Some countries and localities have strict regulations surrounding their taxi market, which prevents or limits competition from ride-hailing services. However, these regulations don’t lock out food delivery services like Uber Eats, enabling the company to generate revenue in markets where their core platform is restricted – a tactic the company is pursuing in Japan.
The Bigger Picture
Uber Eats is poised to become a bigger part of Uber’s business than its ride-hailing segment, but it will need to continue leveraging the popularity of its mobility service.
"Uber’s ride-hailing app has a growing user base, and direct integration will give its Uber Eats business more exposure. In June 2019, Uber began to embed Uber Eats directly into its core app in select markets. Embedding Uber Eats in the app instead of requiring a separate app raises its profile significantly, as it places it in front of more of the company’s growing base of monthly active platform consumers (MPACs) — in Q2 2019, the number of MPACs grew to 99 million, up 30% YoY, and the company stated it surpassed 100 million in July 2019.
While Uber Eats faces stiff competition in the food delivery market, the wide proliferation of its core ride-hailing app could help it increase its share of sales. With Uber’s trip requests in Apr 2020 down about 80% from the previous year, it might take awhile for Uber recover on the ride hailing side. Meanwhile, the surge in food-delivery orders at Uber Eats recorded in Q1 2020 showed no signs of slowing in May, easing concerns of investors who thought it could be a one-off trend during the pandemic. And Uber Eats revenue grew 230.1 percent over the past year, with the average person spending $220.37 per year on the service. The only other company of the five major online food-delivery apps — Doordash, GrubHub, Postmates, Seamless, and Uber Eats — to see growth double year-over-year was Doordash, which grew by 106.4 percent. Postmates, with 41 percent growth, rounds out the top three.
Q2 2016 – Q1 2018 Revenue and User Growth Among Food Delivery Competitors
Beyond leveraging the app, Uber could also strengthen its product via an acquisition.Last week, CEO Dara Khosrowshahi revealed the company had considered buying rival food delivery service Caviar — which was ultimately acquired by DoorDash — signaling the company was exploring ways to quickly grow its business.
While Khosrowshahi said Uber is unlikely to make an acquisition, we think it could become a necessity for the company, especially as the market further consolidates around it and rivals quickly gain market share."
https://www.businessinsider.com/uber-earnings-show-eats-could-be-core-business-2019-8
Fast Forward to Present Day
Although the deal with Caviar never came to fruition last year, Uber is currently negotiating an acquisition of one of its main competitors, Grubhub. Although margins are currently low in the food-delivery business, combining these two companies would cut costs and increase profitability. It would also make it the largest US food delivery service with 55% of the market, surpassing current leader Doordash. However, this proposed merger would definitely draw the intense scrutiny of anti-trust regulators.
And since news broke of Uber’s interest in Grubhub, other food-delivery companies have also been sniffing around Grubhub for a possible acquisition. Ironically, two of the publicly revealed companies (Delivery Hero and Just Eat Takeaway) are both from Europe, which may have a greater chance of consummating a deal with Grubhub due to the reduced regulatory risk. But it also drives up the bidding for Grubhub, increasing the price Uber would have to pay if it is successful. But, it seems that might be the price that Uber must pay in order to survive.
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This article first appeared on the Entrepreneurial Minded blog (www.rogerkuo.com) on June 10, 2020.