Though the U.S. food-delivery market isn't consolidating in quite the way that bulls hoped, it's hard to blame Uber (UBER) investors for being pleased that their company is buying Postmates, the market's #4 player, in a $2.65 blliion, all-stock deal. That is, up to a point.
The deal, which is expected to close in Q1 2021, should solidify Uber's Eats unit's position as the U.S. food-delivery market's #2 player, behind DoorDash. While market share estimates vary from company to company, Uber and Grubhub (GRUB) are generally seen as fighting for the #2 spot.
Spending data provider Second Measure put each company's May 2020 market share at a little above 20%, albeit while admitting that its stats exclude certain Uber Eats transactions. DoorDash was assigned a 45% share; Postmates was given a mere 8% share, though it's worth noting its share is much higher in metro areas such as Los Angeles (35%), Phoenix (19%) and Miami (16%).
Uber of course held buyout talks with Grubhub this spring, but backed off after politicians and regulars voiced concerns about its combined market share in a number of big metro areas. Grubhub then decided to ink an all-stock deal to merge with top European food-delivery player Just Eat Takeaway.com, which itself is the product of a recent merger.
A U.S. food-delivery market with three players probably won't be as profitable as one with just two. And acquiring Postmates, which has been carrying out layoffs as it struggles to turn a profit, probably won't do as much to boost Uber's bottom line as acquiring Grubhub, which in addition to being bigger gets a lot of high-margin revenue related to takeout orders and orders fulfilled by restaurants rather than Grubhub's own drivers, would have.
But it should still yield a better environment for Uber than the status quo, in which it's one of four players dealing with low transaction take rates amid intense price competition and promotional activity.
Uber is coming off a Q1 in which its Eats business -- in spite of seeing 52% annual bookings growth and 121% adjusted net revenue growth -- had just an 11.2% take rate, less than half of its ride-sharing business' 22.8% take rate. That's a big reason why the segment posted adjusted EBITDA of negative $313 million, even after backing out its share of company-wide G&A and R&D expenses, as well as stock compensation.
It's worth noting that Uber did disclose on a Monday call that Eats' bookings growth (excluding divested Indian operations) accelerated to 89% in Q2, thanks in part to COVID-19. That said, the business is also benefiting right now from Uber's decision to waive delivery fees for independent restaurants for the time being.
Aside from (probably) creating a less intense competitive environment, a Postmates deal should improve the profitability of Uber Eats' U.S. operations by boosting its economies of scale. Also, on the call, Uber talked up its ability to use Postmates' algorithms for deciding which order pickups and deliveries a particular driver handles to improve the efficiency of its operations.
Over the long run, the fact that Uber and DoorDash each have substantial in-house delivery operations could help both firms take share from Grubhub and Just Eat, which are trying to avoid making similar investments.
In addition, though it's worth keeping in mind that DoorDash is going in a similar direction, and that Amazon.com (AMZN) could eventually use its burgeoning fleet of last-mile delivery vans to do the same, Uber sees an opportunity to handle a variety of local, non-restaurant deliveries. In April, the company unveiled Direct, a deliveries service for local retailers, and Connect, a peer-to-peer deliveries service.
That's the good news. The bad news is that -- as Grubhub highlighted in a late-2019 shareholder letter -- there are limits to the scale and efficiency benefits a food-delivery provider can obtain by a having a greater volume of orders to fulfill.
In the end, if a delivery driver has to take around 30 minutes of his or her time to pick up and deliver a $30 order -- that's close to Uber Eats and Postmates' average order value -- the cost of paying that driver for his or her time is going to equal a substantial percentage of the cost of the meal. And if higher order volumes and smart algorithms make it possible to bring the average time per pickup/delivery closer to 20 minutes, the average cost will still be substantial, albeit somewhat lower. And that's before accounting for expenses such as insurance, G&A, R&D, cloud hosting, marketing and customer support.
Though the big losses racked up by food-delivery players in recent years are partly due to no-holds-barred competition, one also can't overlook the role played by the underlying economics of food delivery. While it's possible that Uber, DoorDash and Grubhub/Just Eat will all have profitable delivery operations in time, generating high margins without carrying out major price hikes could be easier said than done.
Also, for the moment at least, DoorDash, which lost $450 million in 2019 and was reported in June to expect its operations to break even in Q2 excluding one-time costs, appears to be running itself more efficiently than Uber Eats.
For these reasons, Uber investors probably shouldn't get too excited just yet about the Postmates deal, particularly at a time when Uber's larger and higher-margin Rides unit is still recording (per Uber's Monday call) annual bookings declines of around 60%. While the deal is a positive for Uber, it's not exactly a cure-all.
