Hunger in the Food Delivery Sector
Credit: Polina Tankilevitch
On the 7th of July, Uber agreed to acquire Postmates, the metropolitan delivery service for $2.65 billion in an all-stock payment and Postmates will become a unit of the publicly traded Uber. This all stock transaction can be seen as valuable given that Uber shares have more than doubled off their lows in March and whose price is generally rising at a faster pace than the rest of the US stock market.
This transaction comes after Uber’s failed acquisition of Grubhub who instead were acquired by Just Eat for $7.3 billion. The Uber-Grubhub merger failed due to concerns about regulatory approval by competition authorities within the food delivery sector. With Just Eat’s hunger satiated, what is left is a hungry Uber looking to consolidate within the food delivery sector, aiming to gain advantages from synergies with another firm within the sector and to help lead Uber to a positive cash flow within the next year.
Within Q1, Uber recorded a gross revenue of around $500 million with an operating loss of $300 million. The current issues that Uber has at the moment is that it has an inflated cost structure, with more than $1 billion in losses in 2019. Gross booking revenues for Uber’s ride hailing service fell 80% in April and since February has lost $16 billion in equity value.
One of Uber’s biggest weaknesses has been trying to calibrate an expensive business model, with different industries such as ride hailing and food delivery services, whilst trying to achieve high levels of operating efficiency in industries where there are thin margins and high levels of competition.
This has been seen with Uber having to pull out of the Indian market for its ride hailing service due to low margins, high start-up costs and more efficient competition. Within the food delivery service, Uber sees an opportunity to capitalise on the current low valuation environment and acquire a firm who has an established infrastructure in order streamline its business model and turn a positive cash flow.
Uber stock as share rallied 6% on the day of the announcement (6th July). Source: Tradingview.com
However, as a result of the pandemic, there have been positives for Uber within the food delivery sector. Across the United States, food orders rose 40% in March according the NPD Group, a market research firm and in the first 3 months of the year, gross bookings for Uber Eats services jumped 50%. Thus, Uber, through the acquisition of Postmates, is looking to increase its market share in an industry that is projected to be worth $467 billion according the investment bank Morgan Stanley.
However, the industry remains a low margin, high volume industry and business remains arduous, regardless of the new increase in gross bookings. Moreover, Uber’s problems will not be alleviated solely by the acquisition of Postmates as it tries to plug in a $313 million loss in EBITDA in Q1.
Postmates is a logistics firm that specialises in delivery services within metropolitan areas. The firm currently has 500,000 delivery drivers (referred to as Postmates) and over 600,000 merchants whose products Postmates delivers. Currently headquartered in San Francisco, the firm currently employs 1,000 employees. In terms of the food delivery service, Postmates launched 3 years before Uber in delivery however fell behind other competitors such as GrubHub and DoorDash due to a lower level of funding and cash flow.
Postmates has also benefitted from the pandemic’s effect on the industry by posting 50% quarter on quarter bookings growth. The firm is mainly dominant in Los Angeles with the United States as its only market. It is centrally placed to benefit from networks and economies of agglomeration given that it collects commissions from its merchants (usually small restaurants and fast food chains) and uses the vast network of delivery drivers to delivery directly to the consumer.
The CBRE Group, the real estate and investments firm, projects that about 70% of restaurant deliveries will come from intermediaries such as Postmates by 2022 as restaurants expand their reach past in house dining, a trend accentuated by the pandemic. In Q1, Postmates generated more than $600 million of gross bookings which it converted into more than $107 million of revenue, $100 million more than Uber Eats.
Postmates is a smaller prize than Grubhub, however the acquisition of Postmates by Uber would mean that Uber could remove one of its biggest competitors and add synergies that could help to cut costs. With the Postmates acquisition, Uber would command 37% of the national market versus DoorDash’s 45% market share, which would outweigh Just Eat-Grubhub’s market share.
Moreover, the deal is beneficial due to the fact that it is an all stock deal and therefore Uber could preserve its $9 billion cash pile to make investments into its ride hailing service and be able to cushion it from the pandemic, cut its bloated cost structure and help to turn a profit. Uber can also use its software in routing, dispatching and dynamic pricing to sharpen Postmates’ most valuable asset: facilitating delivery for non-partnered merchants. Moreover, Uber may stand to benefit from its $9.99 per month subscription service that provides a no-fee delivery service on orders over $12 which has proven successful. Moreover, Postmates will offer Uber access to more than 10 million customers that have used the service thus far, offering an even stronger presence in the US market. Each will operate independently through deal close in Q1 of 2021 and thus has sufficient time to integrate the best areas of both parties.
Food delivery service market share by firm. Source: Edison Trends.
Although Uber’s CEO Dara Khosrowshahi is confident that they will become profitable next year and diversify its portfolio in order to have multiple various positive cash flows, this optimism remains to be substantiated. Firstly, Covid-19 cases are increasing again in states such as Texas and Florida with many pausing and delaying re-openings, imposing lockdowns and further hurting Uber’s main business, its ride hailing service, despite bookings apparently slowly starting to return back to normal.
Moreover, Uber would have been better off with the acquisition of Grubhub. This is primarily because Grubhub has a leaner and more efficient business model. Grubhub takes commissions from different merchants and offers a platform for these merchants to sell on, whereas Postmates has a network of delivery drivers. Through this leaner business model, Grubhub has reported an operating profit whereas Postmates has not.
So, Uber may be entering a venture that helps to streamline its business model, yet still remains unprofitable. Regardless, Uber shares rallied 6% on the day of the announcement, so Postmates and Uber shareholders should feel content already.