Uber Eats is a promising growth business for the company. / Bloomberg Uber Eats is a promising growth business for the company. / Bloomberg

Uber’s Ultimate Success Could Depend on Uber Eats

If you want to believe that Uber Technologies Inc. can transition from a money-losing ride-hailing company to a money-losing global “platform,” then you need to believe that Uber Eats will become a powerhouse business. Uber’s food delivery effort needs to be Example A for the company’s diversified strategy. So, let’s dig into it.

When Uber filed its prospectus Thursday, the soon-to-be-public company offered the world a bunch of new details on its plans for food delivery. For one, it confirmed its interest in building out cloud kitchens, putting it in direct competition with its contentious co-founder, Travis Kalanick. Uber also revealed that its revenue for Uber Eats grew 149 percent to $1.5 billion in 2018. That’s 13 percent of its total annual revenue, a significant sum.

The revenue figure puts Uber Eats ahead of publicly traded Grubhub Inc., which reported $1 billion in revenue last year. Uber Eats had less than one-third the revenue of Grubhub two years ago before catapulting ahead. That’s a pretty stunning reversal of fortunes. Just one thing: Grubhub makes money, while Uber had a $3 billion operating loss companywide. (Uber doesn’t disclose its food delivery losses, specifically.)

Growth in the food delivery business is essential to Uber’s initial public offering pitch, because growth in its ride-hailing business is slowing significantly. Revenue from rides grew 33 percent in 2018, compared with 95 percent the year before.

But on a closer look, the outlook for Uber’s food delivery is bleaker. Uber offers a metric that close watchers of the company will need to learn, called adjusted net revenue. That’s revenue without excess driver incentives and referrals. It’s harder for Uber to juice adjusted revenue by underpaying drivers and then upping bonuses. This is a measure that Uber—to its credit—provides voluntarily.

If you slice food delivery that way, the business actually shrank in the third and fourth quarter. Uber Eats adjusted net revenue fell from a peak of $218 million in the second quarter to $165 million in the fourth quarter of the year. That doesn’t mean that Uber is selling less food. Far from it. The total value of the food Uber is delivering keeps going up. That number reached $2.6 billion in the final quarter of last year.

But Uber is taking a smaller cut as it faces intense competition. Uber Eats’s take rate was just 10 percent in 2018. Driver bonuses are clearly a significant factor, as well. Uber expects its take rate to keep falling in the U.S. and India. The company also acknowledges a problem that Grubhub’s CEO predicted: Big-name restaurants command lower service fees from Uber.

Uber is growing its food delivery unit by cutting its margins to the bone. That’s a common theme for this company. Uber is dropping its cut of the ride-hailing business to drive gross bookings. It would rather dominate the market, even if means losing money. It’s putting category positions over cutting losses.

If you’re bullish on ride hailing and food delivery, this is a smart strategy—grab customers, and the economics will figure themselves out in time. If you’re skeptical about the prospects for those businesses, Uber isn’t doing much work to change your mind. Ten years in, it remains focused on growth.

There’s a risk that even with these low margins, Uber could run out of room to grow. Ride-hailing adjusted revenue actually shrank—by $1 million—from the third quarter to the fourth quarter. For a company predicated on growth, the fact that the metric shrank for both ride hailing and food delivery into the end of the year should be worrying.

And Uber warns that it could keep getting worse. As it says in the prospectus: “Overall, we expect our take rate to decrease in the near term.”

And here’s what you need to know in global technology news

Still hungry for more Uber? There was a lot to digest. The company said it would “expect driver dissatisfaction will generally increase.” It confirmed it’s the target of criminal inquiries. It’s contending with rising insurance costs. The CEO said he “wont’ be perfect,” but he will make a lot of money if the stock exceeds a $120 billion market value.

WikiLeaks founder Julian Assange was dragged from Ecuador’s embassy in London, ending a nearly seven-year standoff with British authorities.

YouTube is trying to reward “quality” content, not just clips that keep people glued to their phones. It introduced new internal benchmarks for measuring performance, an apparent response to critics.

Disney+ will charge subscribers $7 a month, when it debuts Nov. 12. The price of the streaming service severely undercuts Netflix and will severely cut into Disney’s profits.

SpaceX pulled off an impressive feat. The massive Falcon Heavy rocket launched and recovered all three of its boosters, something it failed to do in a demonstration flight last year. Meanwhile, Israel failed to land a privately financed spacecraft on the moon.

Gamers were amused by Nintendo’s entry into virtual reality. GameSpot said the Switch’s cardboard headset is “wholly unique from anything else on the VR market,” and Gizmodo called it “cheap VR that doesn’t suck.” Polygon’s reviewer got a little too into the experience: “After playing with all of them for an entire day, my left shoulder definitely felt the stress.”

©2019 Bloomberg L.P.

This article was written by Eric Newcomer from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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