Uber & Grubhub
game-changing Merger that could change everything, also it could be expensive….
The food delivery industry remained largely unprofitable despite the pandemic that has accelerated market adoption to its services. Largely contributed to its inefficient “many-to-many” business models from restaurants to households, companies have to provide incentives to consumers (lower price), drivers (higher wages) and the firm (higher % of service charge). In addition to its fierce competition from various startups such as Doordash and Postmates etc. Some argued that the food delivering service market is growing yet saturated by the current amount of players, Recoded suggested that in such a price-sensitive business model with no other form of revenue, there is minimal to no competitive advantage to any single player yet. In order to scale, one of the very few options is to consolidate.
In the context of Uber, its first-quarter earnings in 2020 announced a loss of 3.54 billion revenue compared to 3.02 billion, adjusted net loss of 2.9 billion instead of 1.153 billion. Shares of Uber appreciated by over 8% the next day implied investors are bullish on Uber’s market share capture during the pandemic, not too concerned about its cash flow.
According to a New York Times article, ignoring the crazy mark-up of the food delivery services, customers realize there are not legitimate differences in terms of the service, by reducing the number of options customers have is the only way to mark-up your price without losing a substantial amount of customers.
According to a Toronto Magazine, local restaurants that do not have their in-house delivering services, are being charged by these food delivery services. Extracting 25–30% from sales as commissions, mostly due to their reliance on these platforms. Consolidations in the space would potentially provide more exclusivity to each local restaurant by offering a wider range of individualized support and yet extending its pricing power to not local but larger restaurants as well.
Plot Twist — Just Eat and Delivery Hero has entered the chat
Just Eat and Delivery Hero, are two lavishly funded companies that resided in the U.K and Germany have begun a bidding war against Uber for Grubhub. These companies are equally hit by the pandemic and realize the American food delivery market is greater than Europe’s market (less competitive as well as faster growth). Grubhub is seen as a market-entry opportunity to them while to Uber Grubhub is a domestic competitor.
If Uber can eliminate one of its chief rivals while absorbing its market share, then Uber is able to take on the dominant role in the food delivery market which gives them great pricing power over their stakeholders; If not, Uber is likely to encounter tougher competitions despite its growth demonstrated during the pandemic.
A little conclusion has to be drawn that the Uber Grubhub acquisition is going to be expensive to Uber, financially and strategically.
Question 1: When will Uber become profitable?
“Uber chief Dara Khosrowshahi announced last week the company was cutting 14 percent of its workforce and indicated more job losses are coming”, “Khosrowshahi said the company makes about 12% of any order’s total. The goal is to get that figure (service fee) closer to 15% by scaling the business”, “Ride-hailing giant Uber reported first-quarter results Thursday, including revenue of $3.54 billion and a net loss of $2.9 billion”
Some argued that Uber is structurally unprofitable, no matter how large it becomes — Uber loses money for every dollar it makes
Not only does Uber lose money for every dollar it makes, it is losing more money on every dollar it makes than it was three months ago.
During the pandemic, Uber sees an 80% decline in its ride-business and a 52% increase in food delivery, it fortunate that the food delivery business despite was not able to generate positive cash flow but indeed saved the business from underperforming its competitor.
To become profitable, Uber needs to continue to layout new innovations such as its cruise and helicopter experience in other sectors, micro-mobility demand has increased but its rental service remained unprofitable. In the ridesharing and food delivery service, the driver and end-consumer incentives have to remain attractive to complete while services fees have to increase. There are a lot of problems for Uber to solve and its $7 billion in liability will take a lot longer to pay off.
Question 2: How sustainable is the food delivery service.
The idea of a shared economy is the backbone of Uber’s services, there are two major factors that impact the success of these markets. Uber is created to substitute taxis and provide delivery services to end-consumers, yet its product is a platform, the mobile application that you installed on your phone. The transactions cannot be without labour input by its part-time drivers nor corporation with contracted restaurants. Despite its user-friendly features and amazing market campaign, the fact that Uber is still a platform.
In the best-case scenarios, this food delivery and ride-share economy are proven sustainable and profitable, consolidations have happened within the space in the meanwhile demand remained high despite increased services fees and commission by these platforms.
- Mid-large restaurants are not incentivized to utilize these platforms to expand their businesses, launching its in-house delivery service always outweighed the 25%+ margins charged by using 3rd party platforms.
- Small businesses will not stick with the business for too long as they will eventually grow and establish their delivery system to save costs.
- Debates about drivers compensations and benefits will increase as businesses have more controls over their finances
Worst-case scenarios, innovations in the transportation sectors could 100% disruptor the ride-hailing/food service delivery sector. The introduction of autonomous cars with full self-driving capabilities could provide the customers with the same service at a steep discount due to the absence of drivers. In addition to benefits such as contactless service, additional privacy and car owner’s incentives could be a game-changer for the industry.
Ultimate Question: What is Uber’s Priority?
Realizing Uber being lacked behind Waymo and Tesla in autonomous car development, it is unlikely to see Uber could compete with its autonomous technology with its vehicles. The acquisition bid on Grubhub has revealed Uber’s intention to double-down on the segment food delivery as its ride-hailing businesses have seen stagnated growth and legal oppositions
With the continued rollout of its alcohol/grocery delivery and trucking platform. Uber’s new products were not perceived positively by users and have remained an insignificant part of Uber’s “Other Bets” segments.
At the end of the day, Uber is starting to run out of alternatives to grow its vision in reshaping transportation. If the acquisition failed due to the lack of cash surplus, would Uber consider acquiring other similar companies?
Updates: Just Eat has already bought out Grubhub in an all-stock deal for $7.3 billion (Uber offered acquisition in 5.6 billion valuations). Uber is encountering more difficulties as one of its rivalries is bought out by a European company.