What Exactly Is Uber’s End Game?

Food delivery is a losing game — so why is the most aggressive unicorn on the planet betting everything on it?

When Uber’s board of directors searched for a new CEO to replace Travis Kalanick during the summer of 2017, they landed on Dara Khosrowshahi, an investment banker-turned internet dealmaker. Khosrowshahi had spent nearly two decades of his career working at online travel giant Expedia and before that at IAC, a holding company with a portfolio of over 150 media and internet brands, where he learned the art of the business deal — buying, selling, and spinning off companies (IAC purchased Expedia in 2001). Now nearly three years since taking the helm, Uber is starting to follow the same acquisitive, deal-heavy playbook that has become a corporate signature for Khosrowshahi.

While Uber is most associated with ride-sharing, its Uber Eats business has been a bigger growth story. In Q4 of 2019, Eats was 32% of Uber’s gross bookings (the total dollar value of its services, including ride-sharing, Uber Eats, Uber Freight, etc.), but accounted for 51% of the company’s gross bookings’ growth. That trend rocketed up in Q1 of 2020, with Eats adding $1.6 billion in bookings compared to the year before, while gross bookings for the Rides business shrank by 5% from the year before.

Food delivery is an exciting sector precisely because it’s growing so fast. There’s really just one problem: Delivery businesses work best when they have high market share, and every delivery player is gunning for growth (the classic example here being FedEx and UPS). Uber Eats, Grubhub, Doordash, and Postmates have spent the last few years flooding the market — desperately signing up restaurants and bombarding customers with coupons, discounts, loyalty programs, and more — in an effort to do anything and everything to snap up customers and keep them.

Cracking the business model of food delivery

There are two basic approaches to the food delivery business: One method is to build a passive, two-sided marketplace that matches customers with restaurants and lets them figure out the transaction. That model is attractive because it’s capital-light — build a website, hire nimble customer service support teams, and hope that the network effect takes care of itself.

The only drawback here is that the logistics are challenging and also inconsistent. Some restaurants deliver promptly and reliably. Some are not so great. Marketplaces shine when the customer is indifferent to the brand name of the ultimate seller; if people go to Seamless to order from one particular sushi restaurant, Seamless can’t charge that restaurant much. If they go to Seamless to buy sushi, and there are a couple dozen sushi restaurants in delivery range, those restaurants bid up to their entire margin to reach number one on the platform.

In food delivery, Uber faced the classic business dilemma: build it, or buy it?

But if the restaurants handle delivery, their incentive is to skimp on speed and focus on quality — so the paradox of the asset-light delivery model is that when pricing power is highest (because the brand that matters is the platform, not the restaurant), delivery problems are the worst — and reflect poorly on the platform, not the restaurant.

That leaves the other approach: offering a platform and overseeing delivery, too.

This has a number of advantages. For restaurants that don’t normally handle delivery, the sales process is easier: Instead of asking them to offer a new product, the platform allows them to focus on their core business (making food) and add a new revenue source with minimal inconvenience. It helps customers by offering a more consistent and streamlined delivery experience. And there are economies of scale from having one network that services multiple customers — it maximizes utilization, the sine qua non of any logistics business.

The only drawback is that delivery is a challenging, low-margin business. It requires a large workforce, high fixed costs, and facility to deal with uncertainty. Chicago-based Grubhub, which was recently acquired for $7.3 billion in stock by European food delivery service Just Eat Takeaway, launched a delivery service in mid-2014, and gradually expanded it across the U.S. But they were never especially exciting. Grubhub was intended to be an app that connected people to restaurants, not a courier service that delivered pizza.

For one kind of company, though, that fixed cost was not especially high: Uber already had a delivery network, matching commuters to drivers. They’d experimented with other kinds of courier services, like the short-lived UberRUSH, an on-demand package delivery service directly competing with Postmates in 2015. As Uber expanded its core ride-sharing service, it learned two things: 1) ride-sharing businesses are very expensive to operate, and 2) once they’re in place, it’s relatively easy to add additional logistics operations.

In food delivery, Uber faced the classic business dilemma: build it, or buy it?

Uber probably had a different vocabulary in their hyper-competitive recent past during the Travis Kalanick era. “Acquire or annihilate,” perhaps. Originally, they chose the annihilation strategy, expanding Eats into markets like New York (where Grubhub’s Seamless brand already had a significant position), Chicago (Grubhub’s home turf), and the Bay Area, home to Doordash, Postmates, and an ever-rotating cast of delivery services targeting a narrow and hyper-specific slice of the market, from Sprig to Munchery to Maple to Spoonrocket (for a while in 2015, it looked like San Francisco’s entire economy was an effort to convert venture capital dollars into on-demand burritos).

How the pandemic has shaped the delivery landscape

But in the wake of the Covid-19 crisis, the math has changed. At first glance it would appear that ubiquitous lockdowns would be great for delivery. But as it turns out, the most reliable customers for food delivery companies were office workers, and a combination of convenient access to at-home snack options and corporate belt-tightening crimped those dinner delivery budgets.

Uber’s Postmates bet is an interesting one: It’s doubling down on the delivery-as-logistics bet over the delivery-as-online-platform play.

As a result, the inevitable food delivery consolidation accelerated. In a matter of months after the pandemic hit, Uber and Grubhub went through extended negotiations over a merger, but ultimately couldn’t come to an agreement; both companies worried about antitrust scrutiny and couldn’t find a mutually agreeable price that factored that risk in. But once a company is for sale, the sale process has its own momentum. Just Eat Takeaway — a European delivery conglomerate cobbled together through acquisitions in the U.K., Netherlands, Italy, France, Switzerland, and other places — made a winning bid for Grubhub.

A month later, Uber settled. They paid $2.65 billion in stock for Postmates, the number four player in the U.S. food delivery business. Uber’s Postmates bet is an interesting one: It’s doubling down on the delivery-as-logistics bet over the delivery-as-online-platform play. Thanks to the vagaries of the delivery market, where every major entrant tried to dominate every market, there are only a handful of cities where Uber and Postmates together would have a majority of transactions. Outside of Los Angeles and Miami, the market will remain fragmented between the major players.

Why it matters that food delivery is going public

The market’s consolidation isn’t over yet, though the acquisition phase probably is. Now, two of the big three — Uber/Postmates and Just Eat/Grubhub — are publicly traded. And Doordash has confidentially filed to go public, too. This means that all three companies will have continuous access to capital. If they believe that delivery will work once the market’s a little bigger, they’ll keep on investing (and losing money, and subsidizing the occasional pizza arbitrage while they’re at it). Given how much antitrust skepticism Uber received over Grubhub, it’s hard to argue that Uber-sized companies can make meaningful acquisitions in the near future. It’s all about organic growth, instead.

But the fact that these companies are going public has another side effect: Public market retail investors are much more sensitive to short-term profits than private investors. A venture fund typically wants to make 10x or more on an early stage deal and to make at least 2x to 3x on later-stage ones. So they tend to invest in companies that are going to transform themselves, or their industry, before the exit. But public market investors are often looking for the chance to make a quick 5%–10%, or a steady 10%+ annually. They don’t want transformation; they want incremental improvement.

When the shareholder list is short, and it includes people like Softbank’s Masa Son, companies burn cash to grow fast (Softbank backed both Uber and Doordash when they were private). But when the list is longer, and includes a diverse basket of stakeholders, including conservative mutual funds, itchy-fingered hedge funds, and frenetic Robinhood day traders, the incentive shifts. A sweeping change in delivery economics is hard to pull off, but incremental improvements led by less-aggressive discounting and smaller marketing budgets could happen. Delivery is not at the point where there’s a single obvious winner, so everyone’s goal is to make tied-for-second-place as profitable as possible.