Uber & Grubhub

game-changing Merger that could change everything, also it could be expensive….

Source: HBS Digital Initiative

Context

Source: Recode

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.

Reduce Competition

Source: New York Times Article

Customer

Restaurants

Plot Twist — Just Eat and Delivery Hero has entered the chat

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.

Source: The Verge

Question 1: When will Uber become profitable?

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.

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?

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.

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