In the last few days, Uber made two major announcements: 1/ they bought Postmates for more than $2.6 billion and 2/ they are entering the grocery delivery market. In this post, I’ll lay out my thoughts on the two moves.
Uber Then vs Uber Now
In the early days, growth at all costs was Uber’s mantra. The company tried to grow fast and aggressively in many markets around the globe, with just one service: ride hailing. Even though it made the brand a household name and raised a lot of hype for the company before its IPO, there were major problems with that strategy:
- Uber had to subsidize rides a lot to attract drivers and users. Consequently, the company burned a lot of money, especially in markets where Uber didn’t have advantage over local competitors
- There was no stickiness with riders who could change services on a whim. Acquiring customers is one thing. Keeping them loyal is a totally different matter.
After the current CEO, Dara Khosrowshahi, took over from its co-founder, there was a shift in strategy. Instead of stretching itself too thin in many markets and bleeding cash, Uber scaled back in markets where it was not a market leader. Uber sold its operations in South East Asia and Russia to its competitors while exiting some markets altogether.
Over time, Uber has tried to deepen its relationship with customers and expand its revenue stream by offering other services such as Uber Eats, Uber Freight, Uber Bikes, Uber Elevate, Uber Business, Uber Rewards, Uber Cash and an unnamed grocery delivery. Uber’s ambition, in their own words, is “bringing you closer to the things you need, all in one place“.
Despite the change in strategy and introduction of more services, profitability has still eluded Uber. In Q1 2020, Uber reported a net loss of more than $2.9 billion. Those numbers already included the performance of two strong months in January and February, and they were achieved even before the pandemic entered its most critical phase. While Covid-19 boosted Uber Eats business as revenue for the segment in Q1 2020 increased by 53% and Q2 bookings grew by 100% YoY, it thoroughly decimated the ride business which is the only profitable segment in Uber’s operation. The situation was dire enough to force a layoff of 14% of its workforce. But the show must go on and Uber had to find a way to generate revenue and keep the lights on.
How will these moves help Uber?
Postmates is an on-demand delivery service founded in 2011. Here is how the company described itself: “Able to deliver anything from anywhere, Postmates is the food delivery, grocery delivery, whatever-you-can-think-of delivery app to bring what you crave right to your door”. Essentially, Postmates generates revenue by charging a percentage of an order’s value as well as a fixed delivery fee to customers, and by taking a small fee from merchants who want access to an expanded customer base.
The acquisition of Postmates gives Uber an immediate boost in terms of market share. By absorbing 8% market share from the acquired, Uber will become the #2 player in food delivery market with 37% market share, behind the leader Doordash. Plus, Postmates’ strong presence in the lucrative Southwest area of the US gives Uber access to an important market with reduced competition. While the deal may look forced by the current pandemic, I think there is more to it, than just consolidating the market, cost synergy or reducing competition.
The CEO of Postmates said in 2015: “The idea behind Postmates is what if you can use the city as a warehouse”. Last-mile delivery is notoriously difficult and expensive for brick-and-mortars to master. While they can certainly work with Amazon, there is always fear that the Seattle-based company can turn around and develop its own competing private label products. Uber can be an enticing alternative as it is unlikely that the ride hailing app will develop its own products to compete with retailers. Instead, Uber can be a last-mile delivery partner to brands without having to build warehouses itself, leveraging the drivers in its network. That’s a potentially huge opportunity. Even though Uber may use its own infrastructure and resources to build something similar to Postmates, why wasting valuable time when they can gain the necessary skillset quicker with an acquisition?
This transaction brings together Uber’s global Rides and Eats platform with Postmates’ distinctive delivery business in the U.S. Postmates is highly complementary to Uber Eats, with differentiated geographic focus areas and customer demographics, and Postmates’ strong relationships with small- and medium-sized restaurants, particularly local favorites that draw customers to the Postmates brand. Additionally, Postmates has been an early pioneer of “delivery-as-a-service,” which complements Uber’s growing efforts in the delivery of groceries, essentials, and other goods.Source: Uber
This is also a play to create stickiness with customers. Imagine this scenario: you are about to leave work for home. You order an Uber and while you’re waiting for your ride or while you are already in the car, you open Uber app and have your grocery or a new appliance ordered and delivered to your home. These transactions will help accrue cash back in your Uber Cash, which can later be used in the future for more services. By offering multiple choices and services under one app, Uber does two things: 1/ make competitors that offer few choices like Lyft less attractive and 2/ allow customers the convenience of not having to open multiple apps.
Furthermore, it can be a boon to drivers as well. To facilitate all the delivery services it wants, Uber needs drivers. Drivers have limited resources in the number of hours in a day and just one vehicle to drive. Hence, they will prefer working with a partner who can help them maximize revenue as much as possible. With a variety of delivery opportunities, Uber can sell drivers on that promise. In the future where Uber does indeed become an on-demand delivery platform, if a driver is without a Ride customer, he or she can either deliver food, grocery or basically an item ordered by another customer. Minimizing dead time and maximizing income can be an attractive value proposition to drivers.
It’s not an all rosy prospect
Uber’s ambition is without challenges. Take grocery delivery as an example. Heavyweights such as Walmart, Amazon or Target all invest in their delivery capabilities. It will not be easy or cheap to enter a highly competitive field with these behemoths. While these strategic initiatives may make sense to me, I do think Uber may not be any closer to profitability. In fact, they may even suffer more losses in the short term.
Postmates had its own controversies with lawmakers and its own workers in the past. The future “delivery-as-a-service” vision of Uber doesn’t change the core model. It uses the same model and expands the scope. As a result, run-ins with gig workers and lawmakers will likely happen more often in the future.