Uber Eats + Postmates = Uber Mates : Winner winner chicken dinner?
Uber let the dogs out...finally
Uber finally decided to bite the bullet and acquire Postmates for $2.65B in stock. Uber’s day gain was ~6% which means the stock price gained ~$3.1B. This essentially means that the market has estimated that the gains that this transaction will have are slightly more than Uber paid ….
Uber’s CEO, Dara, has also mentioned that he is “very confident” that this will help the company to reach profitability in 2021. There is, for the first time, since I have been looking at Uber’s business, potential for this statement to be true. Is this an “efficiency gains from consolidation” play? “Weakened supplier power” play? Does the deal make sense overall? Does the deal help make Uber profitable? To note, I haven’t thought about how the regulators will look at the consolidation part of the transaction or the actual deal but Ranjan Roy from “The Margins” has, so read his interesting post on debt v/s equity!
There are quite a few things to unpack so let’s get into it.. Some of what is happening is positive, some negative, and some neutral depending on how things play out. Also this does not consider the fate of Uber’s ride hailing business, which to be clear, will probably not make money until autonomous cars are commonplace. At that point Uber might not even be able to win the battle. I mean do you really care which airline you use? No you don’t. You care about the price. There is this subtle point of rewards (airlines/hotels) and subscriptions (Airlines have tried this in the past with limited success). To get subscriptions to work, I think autonomous vehicles are the key that will unlock this, but I digress.
Back to Eats …
Consolidation (Slight Positive)
The basic dynamics of food delivery are simple : Low margins, too much competition, price wars, aggressive players (most of whom are well funded) and with COVID we have a lockdown situation where people are ordering more. Reducing capacity to deliver (i.e. read weakening supplier power) sure helps but does it help if you are selling a dollar for 80cents? (Unit economics)
From Food Delivery Apps Investing: Growth vs. Costs:
Consolidation in the industry could also narrow the competition and help usher in a détente in the cash-burning promotions war. Last year some of the top players in the U.S. market discussed various merger permutations, however no progress came from the discussions according to news reports. Globally, however, other regions have already seen moves toward consolidation with a number of mergers and acquisitions between aggregators.
In the long run though it might help. While at Berkeley-Haas (Go bears!) I took a class on pricing and we covered Price signals in that class. The core principle being how you price will impact what your competitor does. In the US the 4 main players are Uber Eats, GrubHub, Postmates and DoorDash. By eliminating a competitor, price “signals” become easier. Consumers are happy to get subsidized/free delivery forever or go to the competitor app but signals prevent this from happening. When the competitor food delivery app has the same pricing as another food delivery app, the consumer has 3 choices 1) Order, 2) Pick up, 3) Abstain. This solves the problem partially since there is one less company that needs to understand the signal - price higher, we all need to make money.
Here is how competition looks today (Approx.)
DoorDash: 44%
Grubhub: 23%
Uber Eats: 23%
Postmates: 8%
Other: 2%
After this acquisition ... the numbers don’t swing too much in favor of Uber Eats over not considering hyperlocal effects (next section)
DoorDash: 44%
Grubhub: 23%
Uber Eats: 31% (I am so tempted to call it UberMates ;))
Other: 2%
Buy a market (Positive)
The thing about hyperlocal markets is that the aggregator has to start off from scratch building relationships. So this definitely gives Uber Eats the option of owning a market that they could not own before (Los Angeles). Sarah Tavel has written this medium post (below image credit to her) and it is kinda clear that Doordash is beating Uber in most markets. Postmates is winning only in Los Angeles (and is a close 2nd in a couple of other markets) so this helps Uber increase the advantage (size of #1 vs #2) from 1.3x to 1.8x (still quite weak) but definitely better. Phoenix, Miami, and Atlanta become “Uber Eats” markets. The desired position though per Sarah’s article is to be 8-10x the size of the previous market. Too small to be a United States monopoly but big enough to be a hyperlocal monopoly.
As she has written:
“In other words, dominance in a market, not aggregate GMV across many markets, is the goal of any marketplace and ultimately what determines equity value.”
That argument is sound but Uber will need to do this many times over in many markets to win. Definitely plausible but hard.
A look at some other markets from From Second Measure also shows the same thing:
Unit economics (Negative)
Acquiring Postmates does not solve the underlying Unit Economics issue (or I fail to see how) I don’t really know very much about their Unit economics but anecdotally from what I have read and understood the unit economics are just not there for an Uber Eats order. Also this article talks a bit about it but nonetheless this isn’t clear cut.
Exclusive Supplier Lock in. A McD’s when nothing else will do (Positive)
A popular strategy for meal delivery companies has been “exclusive” partnerships (not in all cases) with top chains. In January, DoorDash partnered with Little Caesars Pizza. DoorDash has deals with Wendy’s, Chick-fil-A, and McDonald’s. Starbucks has a contract with Uber Eats, Popeyes with Postmates, and Taco Bell and KFC with Grubhub. Yet, As Uber Eats and Grubhub public filings show, partnerships don’t always lead to revenue.
Is this a win-win? Nope. Partners generally such large ones have LOWER take rates, AOS’s are generally smaller and this results in more money lost at the cost of having a “desirable” restaurant (McD’s is desirable??) In some cases the partnership can pay off. The Cheesecake Factory and Chipotle have publicly credited DoorDash with boosting their revenue.
This deal in essence allows Uber+Postmates to have larger exclusive supplier lock in (and most of them are getting wise!)
Pickup (Neutral)
Assuming that most restaurants (suppliers) do not have exclusive agreements with restaurants then eliminating competition is a great idea. What it also helps with is actually becoming a true aggregator where you do not have to participate in the logistical delivery of the transaction AND you get to keep ~15-30% of the commission. Win? Not quite the aggregators passes on the tax to the customer (similar to how folks do with the Apple App Store) so you’ll see higher prices
PandaExpress.com (2 item combo at $8.50). Doordash has it listed at $10.20. That is a full 20% higher which is probably the commission deal that Panda Express has with DoorDash in this case. People will get wise to this and unless they really can’t order from Panda Express they will pay more money to PICK UP their order. This of course is quite true with local restaurants. If you call them the prices are cheaper than with Uber Eats or anyone else.
All that did was make me hungry!
Market Trends (Neutral in the future)
With more people staying home these days, this is an advantage today. From Second Measure:
As many Americans continue sheltering in their homes due to the coronavirus pandemic, meal delivery sales have reached new heights. Our data reveals that, through the end of May, sales for meal delivery services more than doubled year-over-year, collectively. These thriving businesses are in the spotlight during the COVID-19 era—and with recent news that Grubhub is to be acquired by Just Eat Takeaway for $7.3 billion—while Uber’s rideshare business has taken a major hit.
Shelter-in-place orders may also be driving more Americans to make their first meal delivery purchase. In May, 29 percent of American consumers had ever ordered from one of the services in our analysis, up from 23 percent a year ago.
The assumption here is that such “first orders” will lead to habit formation. I think that will be unlikely. On average, an American eats ~18 meals a month out but this is all external consumption. In the long run how much that can be converted into “delivery” orders is to be seen. Sure in the short run as the Second Measure article talks this is a positive trend.
Cloud Kitchens (Neutral)
Cloud Kitchens are popping up all over the place. My guess is that smaller restaurants have no choice but to be strong armed into accepting the take rates. If cloud kitchens become popular the dynamic will be similar to larger partners (lower take rates).
Dealmaker CEO (Positive)
Dara is known to be an effective dealmaker. From Chicago Business when the Grubhub deal was in the pipeline … He is using the “Expedia” playbook and he is best suited to doing this …
Khosrowshahi, 50, cultivated a reputation as an effective dealmaker when he ran Expedia Group Inc. for more than a decade. He completed 41 transactions there with a total value of $12.7 billion, according to data compiled by Bloomberg. His tenure at the online travel giant was defined by a strategy he picked up as a top lieutenant to IAC/InterActiveCorp’s billionaire chairman, Barry Diller: roll up competitors, integrate them and reap the rewards of scale.
The plan for Grubhub follows the same playbook. The companies anticipate there would be major cost savings by eliminating jobs seen as duplicative, a person familiar with the negotiations said. This form of corporate efficiency—embraced by investors based on the market’s reaction to the news this week—sparked a swift rebuke from some officials in the U.S., one of whom described the proposed merger as “pandemic profiteering.” Through a spokesman, Khosrowshahi declined to be interviewed.
Multihoming (Neutral)
No customer is loyal to one service so if Uber thinks that it can build market power by consolidating, this will not result in less multihoming. Multihoming is caused by two things in no specific order 1) Exclusive Food options (Starbucks is Starbucks) and 2) Price. Both these need to be solved. Multihoming will not reduce, really.
From Second Measure:
In the first quarter of 2018, 75 percent of Grubhub’s customers didn’t use other meal delivery services. Two years later, it’s fallen to 58 percent, as competing services woo customers with different restaurant offerings and promotional prices.
Postmates has the lowest percentage of exclusive customers (41 percent). DoorDash and Grubhub both saw 58 percent of customers use them exclusively in the first quarter of 2020, and for Uber Eats, it was 53 percent. All the services in our analysis have a lower percentage of exclusive customers than they did two years ago.
Autonomy (No change)
Autonomy in general for delivery is a lot easier to achieve. I mean you kill a McD’s burger not too many people are upset. You kill a human being and its a lot worse! In fact Uber should focus its efforts on building Small Autonomous Vehicles, easier, less risky!. This allows them to experiment with a variety of hyperlocal delivery options (groceries - below, goods, laundry pickup, the options are endless)
Grocery Delivery (Positive)
Just today Uber has announced that Cornershop, its Oct 2019 acquisition will start delivering groceries in Latin America followed by United States. From Verge:
Uber is launching an on-demand grocery delivery service in Latin America and Canada, the company announced on Tuesday. It’s Uber’s first major move into the competitive world of online grocery shopping since acquiring Cornershop, a leading online grocery provider in Chile, Mexico, Peru, Canada, Brazil, and Colombia.
Grocery delivery will be available through both Uber’s main app and its Uber Eats app. Customers will see food delivery available from local grocery stores and will be able to receive their orders “in as little as one to two hours,” according to Uber Eats head of product Daniel Danker.
The service is available starting today in 19 cities across Latin America and Canada. Later this month, it will be available in the US, Danker said. And when it launches, it will be included in Uber’s subscription services, Rider Pass and Eats Pass, in which customers can get free delivery on orders over $30.
There is not much to add to this. Delivering more types of products is definitely a good idea and a step in the right direction.
In conclusion, the end result is that Uber rides are far away from being “Unit Economics” profitable. Unlocking food delivery and maintaining that lead is one of the ways that Uber can earn the respect of the market. More accurately, Uber’s survival depends more and more on Uber Eats and less on the rides business. Also expect to see a larger emphasis paid to the non-human delivery side of things at Uber (smaller autonomous vehicles)
Thank you for reading! Stay safe, be well and if you liked reading this please share (or subscribe)
Once Uber has autonomous vehicles, they can integrate delivery (driving labor costs) reducing costs. Assuming their market share of users remains high, they can eliminate the competition, by pricing lower, dominating this market. It is a similar play as what they did with Uber (as explained in this Thompson article https://stratechery.com/2015/netflix-and-the-conservation-of-attractive-profits/)