Uber, Postmates, and DoorDash: Where Do We Go From Here?

Delivery is an undeniable and growing trend. But where is it headed?

The largest of the delivery companies – Uber – has gone public. Postmates has confidentially filed to go public with an IPO likely later in 2019. DoorDash just raised $600M at a $12.6B valuation and will need to find liquidity for a growing list of investors. All of this means we’ll soon have some great insights into the delivery business model underneath the hood. Today, however, we must rely on Uber’s public documents to read between the lines and guess, intelligently, where third party delivery ends up.

First we’ll look at how Uber defines the size of the food delivery market.

According to Euromonitor International, the global spend for consumer food services, which includes full-service restaurants, limited-service restaurants, cafés and bars, and other consumer foodservice, was $2.8 trillion in 2017. Of this amount, we believe that our Uber Eats offering addresses a SAM (service addressable market) of $795 billion, the amount that consumers spent in 2017 on meals from home delivery, takeaway, and drive-through worldwide from these consumer food services, including in the 19 countries we address through our ownership positions in our minority-owned affiliates. The home delivery market, which accounts for $161 billion of the global spend for consumer food services, has grown 77% year-over-year since 2013, significantly faster than the growth rate of the consumer food service market, which grew 5% over the same period. We expect that the home delivery market will continue to grow as a result of the convenience that it provides consumers. We believe that we penetrated 1.0% of this $795 billion market given our $7.9 billion of Uber Eats Gross Bookings for the year ended December 31, 2018.

Uber S-1, page 11

Uber also made sure to note that a growing percentage of the dine-in spend will be migrating to off-premises. Uber wisely noted the competition that now exists between restaurants and prepared meals at grocery retailers; the market is as saturated as it’s ever been.

We also believe that home delivery can address a portion of the $2.0 trillion eat-in restaurant spend, as more consumers choose to have prepared meals from restaurants delivered. Therefore, we estimate our TAM to be the entire $2.8 trillion consumer spend at retail restaurants. However, given that spend at eat-in restaurants is often tied to the dining experience, we do not expect to address all of the eat-in spending included in our TAM. Euromonitor International estimated spend through store-based grocery retailers was $6.3 trillion in 2017. While we do not include this spend in the estimates for our TAM, we believe that Uber Eats can address a portion of the spending on groceries with our existing meal delivery product.

Uber S-1, page 11

What was most surprising was how Uber presented its Uber Eats business as a competitor to the restaurants they’re supposed to be partners with. Using this frame of reference Uber can’t possibly want more business going to its restaurant clientele if it’s not going through Uber first. In other words, the “incremental” customer sales pitch is not supposed to drive more organic traffic directly to the restaurant: Uber (and other third parties, no doubt) want to own the digital storefront for the restaurant, reaping commissions on ever order.

Our Uber Eats offering competes with numerous companies in the meal delivery space in various regions for Drivers, consumers, and restaurants, including GrubHub, DoorDash, Deliveroo, Swiggy, Postmates, Zomato, Delivery Hero, Just Eat, Takeaway.com, and Amazon. Our Uber Eats offering also competes with restaurants, meal kit delivery services, grocery delivery services, and traditional grocers.

Uber S-1, page 26

Curiously, Uber doesn’t even set out to defend their marketing phrase of “incremental customers” in any tangible way. They also don’t do any justice to providing the math behind margin increases from their service. It’s simply stated as “we believe”:

Uber Eats provides restaurants with an instant mobile presence and efficient delivery capability, which we believe generates incremental demand and increases margins by allowing restaurants to serve more consumers without increasing their front-of-house expenses.

Uber S-1, page 3

That said, Uber is directly integrating into POS systems where possible to (wait for it…) grab the data. If you don’t already know why that’s their focus, you should read up on it here. But at least Uber is doing something with the data, which is more than most POS companies can say for themselves.

Unlike most competitors in the meal delivery space, we currently partner directly with substantially all restaurants on our platform, allowing us to directly integrate and update a restaurant’s menu on our app in real-time. With each order, we gather information that improves our ability to provide personalized recommendations to consumers based on personal order history, restaurant popularity, and frequently ordered menu items. This algorithmic recommendation engine enables consumers to easily access old favorites and discover new restaurants.

…

We currently partner directly with substantially all of the restaurants on our platform, from global chains, such as McDonald’s, Subway, and Popeyes, to local restaurants. Restaurants can sign up to work with Uber Eats on a self-service basis. We provide all of our partners the ability to market directly to consumers in our app through personalized, sponsored advertisements such as “Recommended Dishes.” Our mobile app removes friction from the ordering process by storing consumer order history and payment information. Facilitated by our acquisition of orderTalk, we also integrate directly with many restaurants’ point-of-sale systems to help them analyze orders and predict demand.

Uber S-1, multiple pages

Uber also plans to expand its market in other ways, including the fabled ghost restaurant or cloud kitchen, the latter of which Uber founder and former CEO Travis Kalanick has been toying with since leaving Uber.

We plan to explore expanding into new food verticals, such as grocery, and different types of food providers, such as cloud kitchens, to our Uber Eats offering.

Uber S-1, page 169

Uber Eats continues to be the leading growth engine for the company. As a percent of gross booking Uber Eats went from comprising 6.5% in Q1 2017 to 18.1% in Q4 2018.

Despite the large top line growth, Uber Eats is being massively subsidized to grow market share. Adjusted net revenue, which is the bookings revenue minus the cuts for the Driver and Restaurant, is actually decreasing as a percentage of contribution.

Core Platform Adjusted Net Revenue has historically grown faster than Core Platform Gross Bookings, and our Take Rate, calculated as Core Platform Adjusted Net Revenue divided by Core Platform Gross Bookings, has historically increased. Our Take Rate is a function of product mix and competition that we face for each offering. Our Core Platform Take Rate was 20% in 2018. In Ridesharing, only one partner, the Driver, has earnings, whereas in Uber Eats two partners, the restaurant and Driver, have earnings… Our Uber Eats Take Rate, calculated as adjusted net revenue for Uber Eats divided by Gross Bookings for Uber Eats, was 10% in 2018… Our Uber Eats Take Rate has declined in recent periods as we have onboarded large-volume restaurants at a lower service fee and in geographies with greater competition, such as the United States and India. Overall, we expect our Take Rate to decrease in the near term.

Uber S-1, page 103

We juxtaposed the percent contributions of Uber Eats as a percent of Gross Bookings and as a percent of Adjusted Net Revenue to show you what we mean.

Given the competition (i.e. investor subsidies re-spun as “marketing” to attract consumers and drivers) it’s no wonder that Uber Eats has to use their balance sheet to compete.

To remain competitive in certain markets, we have in the past lowered, and may continue to lower, fares or service fees, and we have in the past offered, and may continue to offer, significant Driver incentives and consumer discounts and promotions.

…

Further, 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, which may at times result in a negative take rate.

Uber S-1, multiple pages

Uber explains this behavior as a major risk for investors.

Our Uber Eats Take Rate has declined in recent periods, and may continue to decline, as we onboard large-volume restaurants at a lower service fee and restaurants with lower average basket sizes, and as we invest in more nascent and competitive markets, such as India.

Uber S-1, page 93

However, Uber Eats has been slowly increasing their take rate. While it’s not quite keeping up with the overall growth of Uber Eats Gross Bookings, it is ticking up and to the right. This is a hallmark of venture capital, by the way: use balance sheets to pervert market economics and grab as much share as possible. Then, when you’ve driven out all competition, ratchet rates because there will be no substitutes at scale. One would need to believe there would not be regional players that could facilitate the same level of consumer demand as Uber in order to buy into this theory… but if Uber gets to autonomous vehicles first, then their venture investors will look very smart.

Our Uber Eats Take Rate improved to 12% in 2017 compared to 4% in 2016 as a result of an increase in the delivery fees and declining Driver incentives.

Uber has enough capital to operate at this subsidized rate for quite a while. At last glance, Uber had more than $8B in current assets on their balance sheet and their IPO raised another $8B. Yes, Uber is losing ~$3B a year, but they’ve bought themselves 6 years to get it together.

We plan to invest in Uber Eats to both expand into new markets and further penetrate existing markets. We plan to primarily invest in Driver incentives and rewards programs to attract and retain more Uber Eats Drivers and also to invest in our sales infrastructure to expand our restaurant selection.

Uber S-1, page 107

What could really catapult Uber is the successful adoption of autonomous vehicles for delivery, where Uber is investing heavily. But this is riddled with technical and regulatory risk over the next decade, maybe even longer. If we think that Uber has 6 years of cash left, Uber might need to materially increase their commissions to reach profitability. This is surely in line with their investors’ thinking on how the market should work anyway.

Then what becomes of Postmates and DoorDash? Can the market support multiple players?

It’s really hard to do everything well. Uber, however, benefits from the driver supply generated by its taxi business. This is an unfair advantage that Postmates and DoorDash don’t have going for them. And if we believe this is a game of subsidies, nobody has more cash on the balance sheet than Uber. Yes, Uber must also support its other business lines, but $16B can be stretched for a long time by any competent leadership.

Postmates and DoorDash will be opening their kimonos soon enough. But at the end of the day the restaurant needs to make money or the third party delivery premise is a house of cards. Until those economics are transparently proven this whole industry has a long way to go.