How Much More Cash Can Uber Burn?

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Yves here. Although this post does not answer the headline question, about how deep the Uber money pit will prove to be, it is gratifying to see more commentators taking up Hubert Horan’s skepticism about the local transportation company and focusing its continuing-to-be-Gawdawful cash flow prospects. I’m still amazed after extension gimmicks like scooters proved to be a bust, that investors somehow are convinced that combining two deeply unprofitable businesses with illusory synergies makes any sense.

By Michael Scott, a news editor for Safehaven.com and Oilprice.com. Originally published at SafeHaven

Eternally unprofitable and burning cash because the name of the game is now consolidation or bust, Uber has made an offer to buy rival food delivery company Postmates as the mobility war intensifies.

As it stands, ride-hailing alone isn’t going to cut it, and investors still seem to not be shying away from a company itself it has admitted may never be profitable.

CIting unnamed sources close to the deal, the New York Times says Uber has made a $2.6-billion takeover offer for Postmates delivery service, with talks still ongoing and neither party willing to make any comments on the potential deal.

While Postmates could give Uber Eats a boost because it’s all about a spending spree to gobble up market share right now, it’s not Uber’s first big deal dreams in recent months. In other words, they’re only interested in growth prospects right now.

Just a month ago, Uber was prepared to pay a premium for the Grubhub–the delivery service with the biggest US market share. That deal fell through because Grubhub was instead acquired by Netherlands-based Just Eat Takeaway in a $7.3-billion deal.

But not even food delivery is profitable at this point, despite the fact that demand is soaring due to the coronavirus lockdown.

While demand soars, with Uber Eats posting $4.68 in gross bookings last quarter, investors don’t even care if there’s still no profit, or if restaurants are balking at the exorbitant costs of joining in. All they care about is the company that can steal the most market share when the segment finally figures out how this should all work.

In the early March, when a national emergency was declared in response to the COVID-19 pandemic, overall food delivery industry sales increased by 51% from the week prior. In April, third-party delivery orders were up 204% in versus April 2019. In May, nearly 30% of American consumers had ordered from one of the food delivery services.

For now, the industry leader is DoorDash with 44% of U.S. consumers’ meal delivery sales in May, followed by Uber eats with just over 23%. Grubhubcame in just under 23% of U.S. meal delivery consumer spending, while Postmates grabbed 8%.

DoorDash just raised $400 million in a funding round that valued it around $16 billion.

That’s why Grubhub was Uber’s first choice, and PostMates, with a valuation of $2.4 billion, was only second.

The Grubhub deal would have created the country’s biggest food-delivery service and would have given the combined companies control over a majority of the U.S. food delivery business.

According to Uber’s latest earnings, its ride-hailing business lost nearly $3 billion in the Q1. During the same period, the company’s food delivery segment had a gross booking of $4.68 billion, up from $3.07 billion in the year-ago quarter, or 52%.

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17 comments

  1. Thuto

    Uber throwing spaghetti at the wall and hoping something sticks. Re: combining car hailing with delivery, maybe they’re trying to amp up third party (I.e. contractor) asset utilization by making the same vehicles available for both parcel/food delivery and passenger rides, with this scheme to be marketed as an “asset sweating” boon to the driver/owner side of the platform. It sounds attractive in theory, but the economics of parcel delivery are surely distinct from those of ride hailing so the owners/drivers, most of whom are notoriously ignorant of the nitty gritties of said economics, will likely be seduced by the glossy sales pitch from Uber. Otoh, investors will be sold a thesis of synergies and cost rationalizations, and given the proclivity to swallow what Uber says without much interrogation, this will likely seduce a good portion of the wide eyed retail market.

    Reply
    1. Sacred Ground

      they’re trying to amp up third party (I.e. contractor) asset utilization by making the same vehicles available for both parcel/food delivery and passenger rides, with this scheme to be marketed as an “asset sweating” boon to the driver/owner side of the platform.

      Yep, this sounds great. To people who only know these apps as consumers. Investors need to talk to the drivers.

      The thing is, it’s been the case all along that it’s already the same vehicles and drivers doing both taxi and delivery service. The drivers for Uber were the first targets of UberEats marketing; the same drivers doing both was their model all along. So what’s new?

      Everyone who does rideshare operates both Uber and Lyft apps at the same time (logging out from one when accepting a ride from the other) and most of those also do delivery, again running multiple apps at the same time. Some drivers with older cars unsuitable for passenger service will just do food delivery but that’s barely a living even with much lower car expenses (and no proper insurance). Now with the mass of passenger drivers with no passengers, there’s a new glut of delivery drivers as well. So again, what’s changing, really?

      Change of ownership of those app companies doesn’t change anything about how drivers OR restaurants OR customers use those apps. Consolidation doesn’t change anything about how struggling restaurants, and that’s ALL restaurants now, cannot absorb the cost of a service that reduces their marginal profit down to nothing. So they have fewer restaurants even open (as many as a third won’t ever come back) and more dropping out of the apps as an unnecessary and excessive expense.

      Reply
  2. chuck roast

    There should be no pretense that there is anything “rational” about the Uber economic model or its share price. The only analogy that I can conjure is the Dutch Tulip Mania. However, the Dutch, in their blundering psychosis, didn’t apparently, have any historical precedent to draw upon. So, maybe they can be forgiven their overzealousness, and the tulip did have, after all, the intrinsic value of beauty.

    It’s long past time that the regulatory authorities punctured the mania for monopoly in every economic sphere. This might bring the Ubers of the world back to earth.

    Reply
  3. PlutoniumKun

    One thing I’ve noticed locally is that some established restaurants seem to be backing away from the delivery companies – they seem to think they are more hassle than the cost is worth (not least because some seem to have issues with delivery guys waiting for pick-ups annoying incoming customers). Three of my most popular local restaurants use their own staff now to do deliveries and give discounts for pick-ups. As has been said here before the cost of entry is very low, it can’t be long before it becomes easier and easier for local businesses to co-operate and set up similar systems that suit local needs more.

    Reply
    1. Louis Fyne

      In the pre-smartphone days, I ring the local Chinese restaurant and have my food in 20 minutes via a bicyclist who traveled the 1/3 mile.

      All it took was the “horror” of dialing a human and having a paper menu.

      Restaurants need to conquer their “fear of missing out.”. There is no scale in mass app delivery unless maybe if you run a well-oiled “ghost restaurant” aka a kitchen with no dine-in

      Reply
    2. ChrisPacific

      There was a brief but intense “delete Uber Eats” campaign here during the lockdown when restaurants complained about the high commission and Uber (initially) refused to lower it. A few high profile local celebrities (and the Prime Minister) weighed in on the Delete camp, before a bunch of obviously planted stories started showing up, like a sob story from an Uber driver on how he needed to work to feed his family, and a country manager explaining how the business model didn’t work without rapacious margins and exploitative driver relationships because the alternative was customers paying more, which they would never do, so what alternatives were there? Once the intensity of public sentiment became clear they caved pretty quickly and lowered the commission (a bit) but it remains to be seen whether it was enough, or in time.

      A number of local alternatives have sprung up with lower commission rates, so it will be interesting to see how they perform. I’ve noticed on the few occasions that I consume ad-supported media that Uber Eats ads are pervasive, so they are up against it, but it may depend on how persistent the anti-Uber sentiment is. I do think the obnoxious Uber manager might have a point in that you can’t have a viable delivery service for things like sub-$10 McDonald’s orders while also paying your drivers a living wage. Whether to abandon basic labor rights for slightly more convenient fast food wouldn’t even be a question in the US, but New Zealand values are different (for now) so I am hopeful that we might reach another conclusion.

      Reply
    3. eg

      I have the wherewithal to pick up my take-out, so I do so in part to ensure that the establishment is keeping all of the money I pay for their product.

      Reply
  4. JE

    Personally, after a few attempts to utilize these delivery services during the lockdown, I’ve gone to picking up myself. One, these services cut deeply into the profits of the restaurant. Two, I’ve had some abysmal experiences with wrong orders, super late deliveries, and poor food condition on arrival. Three, it’s nice to get out of the house and with a mask the experience of take-out has been quick, simple, and safe. Also I can give the restaurants a big cash tip to help keep them going. These services have a place in the economy, but a sideline that will shrink as CV-19 ebbs, and certainly nothing that will bring profits to the independent contractor strip mining operation we know as Uber.

    Reply
  5. The Rev Kev

    If Uber wanted people who know how to burn cash for no good results, then they should put Hillary Clinton on the Board. She set $2 billion on fire in 2016 and had nothing to show for it at all. It is all just a sign that there is far too much money in the world trying to find profit in any possible venture, no matter how dodgy. Doesn’t help having the US Feds print up & leverage several trillion dollars into existence the past few months as all that money is going to have to go somewhere.

    Reply
    1. RepubAnon

      Hillary won the most votes – she just didn’t win the Electoral College. How about Michael Bloomberg’s campaign?

      At some point, I expect Uber will run out of folks pretending that the market is a form of roulette, and putting their money on 00 hoping for a big win. Once the foreclosures hit from all the folks who can’t pay their rent, we’ll see “interesting times.”

      Reply
    2. Sacred Ground

      Off topic and irrelevant. So much so that it’s obvious now that you’re just looking for any excuse, no matter how flimsy, to blame everything on That Woman.

      Believe it or not, there all kinds of things wrong in business and government that have nothing to do with the Clintons. Your urge to tie them to anything and everything, no matter how unrelated, is obviously motivated by pure hatred. I get it, I can’t stand her either. But this is becoming ridiculous.

      I’m assuming the “Rev” in your name is ironic. Unthinking hatred is a bad look for an actual preacher, Rev.

      Reply
  6. HotFlash

    I maintain, and I maintain strongly, that purpose of Uber of whatever stripe is not to make money but to break local governments by flouting municipal regulations, such as taxi licensing and parking regulations — eg, the times I have been nearly doored by passengers getting out/in of Uber and Lyft vehicles *in the bike lane*! It is Uber’s value as shock troops and guerilla fighters that, IMHO, keep ‘investors’ putting their cash in. Why pay lobbyists and make campaign ‘contributions’ when Uber, Lyft, Amazon, and the other ‘move fast and break things’ guys can destroy it for you wholesale?

    Reply
    1. Appleseed

      Well said HotFlash! These disrupters cultivate civic lassitude – I’ll leave this scooter wherever I want and take no responsibility for making sure it doesn’t block access to public right-of-way or doesn’t encroach on private property. I’ll park wherever and whenever I want to pick up/drop off a rider – who cares if it’s in a handicap parking space, or no parking zone, or blocking my driveway when I’m trying to back out! The sentiment is: My convenience über Alles.

      Reply
  7. cnchal

    > How Much More Cash Can Uber Burn?

    Are we out of Nimitz units already? With two to three sinkings annually the fleet must be down to it’s last boat.

    Reply
  8. Savita

    ‘While demand soars, with Uber Eats posting $4.68 in gross bookings last quarter,’

    $4.68 in gross bookings. That sounds about right!

    Reply
  9. Phil in KC

    I am with cnchal, how much more cash? I would have thought Uber would be dead by now, with car trips down significantly because of the virus. As a guy who used to make his money by hailing cabs on the front drive of a hotel, I have a real dog in this race.

    More to the point: is the idea that the “profitable” branch of Uber (food delivery) subsidize the taxi service side? If so, what happens when we either get a vaccine or attain herd immunity and things snap back to normal, i.e. food delivery demand diminishes? Right now, these companies are doing big business, but it can’t last forever, can it? So Uber is wanting to buy at the top of the market!

    Reply

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