Uber (NYSE: UBER) Eats should be the saving grace of Uber during the pandemic.
The demand for their ride-sharing services has dropped as people all over the world work from home and traditional entertainment and socializing options remain largely unavailable – however, the demand for food delivery has skyrocketed for the same reasons.
Those trends play out as expected in the second quarter. Overall revenue dropped 29% to $ 2.24 billion, but revenue in their mobility business, formerly called Rites, tumbled 67% to just $ 790 million. Meanwhile, revenue from delivery, formerly known as food, rose 103% to $ 1.21 billion as demand for restaurant delivery increased.
Uber reported an adjusted EBITDA (income before interest, taxes, depreciation, amortization, and amortization) loss of $ 837 million for the quarter, excluding special expenses related to COVID-19. Based on the numbers above, you would think that the mobility company would be the primary culprit for the steep loss. But you would be wrong.
Image Source: Uber.
Delivery is a problematic business
Despite the wind through the pandemic, the mobility company still generates an adjusted EBITDA profit of $ 50 million, while delivery lost $ 232 million on an adjusted EBITDA basis. Even with revenue doubling from a year ago, that was only a modest improvement from the $ 286 million loss in the segment a quarter a year ago – and that includes Uber’s decision to outperform several Uber Eats brands in the past year. left, including India and South Korea, as management said it will only compete in countries where it no. 1 or no. 2 may be in market share.
A while ago, it was shown that supplying third party restaurant is a problematic business. Competitors such as Uber and DoorDash have lost billions fighting for profit in the market share. Grubhub, the former leader, has seen its profits disappear. Increasing competition has led to heavy spending on discounts and marketing, and restaurants often venture into third-party delivery companies that charge hefty fees that often render delivery orders useless. During the pandemic, restaurants and cities restored the model, limiting the fees that third-party suppliers may collect.
Uber’s latest report also highlighted another issue with the app-based delivery model.
No scalability
The coronavirus pandemic has been a gift to e-commerce and delivery companies. Companies like Amazon, Shopify, Wayfair, en Etsy in the second quarter, sales skyrocketed, and profitability grew as well, as these companies put an end to pandemic-related wine sales. Wayfair, for example, placed its first profitable quarter in its history as a public company, as revenue jumped 84% to $ 4.3 billion and it reported a generally accepted accounting principle (GAAP) net profit of $ 273.9 million. In the quarter to a year ago, Wayfair lost $ 181.1 million on GAAP basis, which means it experienced a turnover of almost $ 500 million.
Uber, on the other hand, was unable to make a profit in its delivery business, despite the increase in sales. Since Uber does not cost parts by business segment, it is not clear why the delivery company has lost so much money. But Uber dropped one indication in the release of earnings.
Uber often pays too much incentive for drivers for their deliveries, acknowledging that “cumulative payments to Drivers for delivery deliveries have historically exceeded the cumulative delivery costs paid by consumers.” Unlike in mobility, which is a company with higher margins, because Uber directly provides the service that customers pay for, with delivery most of the payment goes to the restaurant, so Uber’s drivers have to pay from restaurant- and customer costs. There is just less money to spread and cover overhead costs. As the statement above shows, customer costs alone are not enough to pay the driver, let alone overhead costs, so Uber has to tap the restaurant for the rest or lose money on the sale. That’s one of the reasons the tensions have increased with restaurants, because many of them believe that they are paid unlimited fees by Uber and its peers.
Uber’s adjusted EBITDA margin improved by 33 percentage points in the quarter, but that came as it pulled out of several weak markets, received a major demand breakthrough from the pandemic, and closed $ 1 billion in annual spending in areas such as its corporate offices and research and development.
After loss in his bid to buy Grubhub, Uber made a deal to take over Postmaten for $ 2.6 billion, and it’s expanding into areas such as shopping as it seeks to further expand its delivery network. The mail-order deal could help Uber get much-needed tax on food delivery, but for now, the delivery company’s economy seems fundamentally broken, and expanding to new verticals will only continue to weigh on the end line.
While the mobility company needs to return to health when the pandemic ends, delivery will be a drag for the company in the very future. That is one reason, among many, to tread carefully with the stock market.
