Skift Take
Thanks to its parent company's IPO filing, we're finally learning more — officially — about the food delivery giant and how it expects to grow.
— Kristen Hawley
Uber filed its IPO paperwork on Thursday afternoon, officially pulling back the curtain on its Uber Eats food delivery business, which launched as a standalone app in December 2015. So far, we’ve only known what the company has told us: the Eats business provides spectacular opportunity for the company, and will be a huge part of its success on the public market. Now, we can see a little more clearly into the inner workings of the delivery giant to get a sense of just how big — and important it is.
Uber Eats is a workhorse for its parent company.
Uber Eats has experienced massive growth since its inception. In the last quarter of 2018, the company saw $2.6 billion in gross bookings, which is the metric used by the company to define total sales. Gross bookings — which include the dollar value of all orders and taxes, but not driver tips — increased nearly 500 percent from the first quarter of 2017 through the final quarter of 2018.
The addressable market for restaurant delivery is massive and Uber Eats is only scratching the surface.
Uber Eats estimates global consumer spending on off-premise orders via restaurants is currently at $795 billion, with diners shelling out 20 percent of that figure on home delivery. The third-party service has only captured 1 percent of the total market so far, it said. Uber Eats gross bookings totaled $7.9 billion in 2018.
But Uber Eats is not stopping at home delivery. The company also wants a larger piece of overall restaurant sales, including dine in. It believes customers’ growing appetite for eating meals prepared by restaurants at home is a trend it can capitalize on.
“We expect that the home delivery market will continue to grow as a result of the convenience that it provides consumers,” the company said in its filing. Overall consumer spending on dining out eclipsed $2 trillion in 2017, according to Euromonitor International.
Eats opens the door to the rideshare business, and is an indicator of brand loyalty.
In the last quarter of 2018, half of Uber’s new customers came to the service via Uber Eats. While this number includes markets that don’t offer ridesharing, it also includes plenty of customers in markets that do. Customers who, presumably, can be converted into Uber riders.
In fact, Eats users are loyal Uber riders. According to the filing, Uber Eats users average 11.5 Uber trips per month, while the non-Uber Eats user only averages 4.9.
Chain partnerships are valuable to Uber Eats. More valuable than they are to the restaurants.
Uber Eats started testing out its exclusive partnership with McDonald’s in January 2017. While the fast food chain isn’t mentioned extensively in the filing, Uber does address how it works with partners in general. “We charge a lower service fee to certain of our largest chain restaurant partners on our Uber Eats offering to grow the number of Uber Eats consumers,” it reads.
Chains from Subway to Starbucks have partnered with Uber Eats for delivery, though most of these deals are not exclusive. As an early and exclusive partner, McDonald’s likely enjoys even more favorable treatment. Both McDonald’s and Uber executives have spoken to the incremental increase in business for the fast food giant. In some restaurants, delivery via Uber Eats accounts for up to 10 percent of sales.
Uber has concerns about diner safety, and perhaps food safety.
Uber does not vet its Eats drivers as rigorously as its rideshare drivers. On the surface, this makes sense. A driver tasked with transporting humans should be held to a higher standard than a driver tasked with handling food. But it could introduce food safety concerns: third-party delivery drivers don’t require the same food handlers’ licenses as restaurant workers.
Additionally, while an Eats driver may not be transporting a person to his or her home, they are, in many instances, delivering food to that home — and still know where you live.
Uber Eats stands to profit from larger orders.
Eats’ take rate, or adjusted net revenue per order, was just 4 percent in 2016. The following year, Eats took in 12 percent in revenue on each order. But in 2018, that number dipped to 10 percent. (Comparatively, Uber’s ridesharing business generated a 22 percent take rate in 2018.)
Uber blamed the loss on lower average orders, large-scale restaurant partnerships that command lower service fees, increased driver incentives, and new market expansion. The company is already working to fix it: Last month, Uber Eats announced that it would be changing its fee structure for customers. Service fees are now calculated at 15 percent of a customer’s order, and Eats started charging a $2 flat fee on orders under $10 to make up for revenue losses on small orders.
Uber Eats’ ultimate success could depend on the success of the restaurant industry.
“A significant amount of our Uber Eats Gross Bookings come from a limited number of restaurant chains,” according to the filing, “and this concentration increases the risk of fluctuations in our operating results.” This means that bad news for restaurants can quickly translate to bad news for Uber Eats. This leaves Uber vulnerable to the same issues that can plague restaurant businesses: food safety, food quality, and employee behavior.
Like the volatile and fickle restaurant industry, business is sometimes dependent on the weather. “We expect to experience seasonal increases in our revenue in the first and fourth quarters compared to the second and third quarters, although the historical growth of Uber Eats has masked these seasonal fluctuations,” the company said.
This also speaks to Uber Eats’ interest in working closely with restaurant partners to create options like “ghost restaurants” — those delivery-only operations that often exist within larger restaurant kitchens, and “cloud kitchens” which it is rumored to be backing in at least one market. If the company can control the restaurant environment, it can better control its service, and, ultimately, customer happiness.
