How long will Uber keep its appetite for new acquisitions?
By: Enrique Dans
Tags: Coronavirus, Food Delivery, Uber, Delivery, Acquisition

IMAGE: Hany Alashkar — Pixabay (CC0)

After trying unsuccessfuly to buy Grubhub and ending up in despair after it was sold to European player Just Eat for $7.3 billion, Uber has announced the acquisition of another food delivery company, Postmates, for the much lower price of $2.65 billion, paid in full in shares. Basically, if you’re the third-largest food delivery company in terms of market share (22%) and you can’t buy the leader in your industry, DoorDash (45%), or the second one, Grubhub (23%), try the fourth (8%). And if instead of paying with money, you can do it with paper, even better.

Uber’s CEO, Dara Khosrowshahi, who handled more than a few acquisitions during his previous tenure at Expedia (41, which totaled $12.7 billion), was not going to miss the opportunity to grow in this way in a market that he sees as his lifeline in the face of a pandemic that in the United States looks set to remain part of the picture at least until the present occupant of the White House moves out and one capable of coming up with solutions that make a minimum of sense moves in.

Postmates, on the other hand, seems to care little about being Uber’s second choice. In this environment, and after having postponed its IPO last year, an acquisition for $2.65, after the company was valued at $2.4 billion is no small thing.

Why is Uber so keen to increase its market share in the volatile food delivery market? Simply because it sees it as a solution to a very important problem: the strong decline of its core business, transporting people, during the lockdown. During that time, Uber Eats kept the company alive. Given that many Americans (who in in many states were never really under a proper lockdown and many of whom are even now still refusing to wear face masks) will still be living under the shadow of the virus for quite some time, the idea of propping up a counter-cyclical business, i.e. one that is favored by lockdown measures such as home food delivery, makes sense.

Where’s the problem? The food delivery business doesn’t add up. Look at Grubhub’s figures: during the lockdown, the company saw sales rise but that increment caused it to lose even more money. Indeed, the home delivery industry, as the famous and viral pizza arbitration experiment showed, is running at a loss: according to some analysts, UberEats is losing around $3.36 per order, a situation that is expected to continue for at least the next five years.

Why try to expand aggressively and through acquisitions in a business where you lose money every time a customer places an order? Very simple: because it is expected that this trend, at some point and due to some kind of change in the environment, will be reversed, and the business will become profitable. Sound familiar? It is exactly the same as with Uber’s other business, the main one: for a long time, Uber — and Lyft, and many others like them — have lost money transporting us from one side of the city to the other, waiting for the main cost factor of those trips, the driver, to disappear from the equation. The only explanation for why supposedly rational investors like venture capitalists invest in a company like Uber is that they are capitalizing on the advent of a technology, the autonomous vehicle, which at the stroke of a pen makes no less than 70% of the operating costs of a taxi service disappear. From there, to the days of wine and roses and enjoy the hard-earned share of market during the losing stage.

The same thing happens with food home deliveries: make the driver of the moped, bicycle or car who does all the work disappear, and automatically, the numbers add up. In fact, Postmates is a leader in this regard, with its robots, even if they have babysitters. But as long as you still have to pay for human drivers, the only thing to do is to get more of us to order food in — there is no other company, perhaps with the exception of YouTube and LinkedIn, whose aggressive promotions I have ignored more times than Uber Eats — and make sure people know who you are. As long as the picture is not clear, war is the only option, and this one in particular is expected to be very long and very bloody. Without a doubt, this is an area where we will see more acquisitions.

The question is whether in the future we’re all going to abandon cooking and order our meals in? How many times a week do you order food eat at home? I ask this not only to assess the potential business of such companies, but also for a number of other reasons, first of all, your health. Meals on wheels tend to be generally much less healthy than those cooked at home. Secondly, your finances: the same food cooked at home will almost always be cheaper, in many cases even if you put the time you spend on it into the equation, unless, of course, you have a six-figure salary and you intend to put that same salary into your cooking. And thirdly, for the planet: takeaways generate a large amount of waste.

Everything can be changed. It is possible to prepare healthy and nutritious takeaway meals, prepared with carefully chosen ingredients, although they tend to be more expensive. Similarly, the problem of waste and intensive use of plastic can also be moderated. But as things stand, regular consumption of home-delivered food can be as much of a health or economic problem as an environmental one. And yet Uber’s move seems to show that it is not only here to stay, but that it believes it has plenty of room to grow and that many more people will stop cooking at home and instead order their food from one of these services.

Only time will tell. But for the moment, Uber seems to be much clearer about how we will eat in the future than I am.