San Francisco-based Uber has always run at a loss: In its last quarter before the pandemic, it lost $1.1 billion (a 24 percent increase year-over-year). $461 million of that shortfall was from Uber Eats, its food delivery business. Looking at numbers like that, one might wonder if reports that Uber is in talks to purchase Chicago-based Grubhub are worth taking seriously. But given the even greater losses that Uber is facing as passengers that used to use its ride hail services stay home, pivoting whole-heartedly into delivery might be Uber’s best chance to make it through the coronavirus crisis.
The news broke early Tuesday: Citing unnamed sources, the Wall Street Journal reported that Uber has been in talks with Grubhub since February to purchase the delivery company in an all-stock deal, about a month after Grubhub reportedly contracted with a group of financial advisers to explore “strategic options including a possible sale.”
Grubhub’s recent road has been pretty rocky since it went public in April of 2014, as it was valued at $13 billion in the beginning of 2019, but that value had dropped to around $5 billion as of late last year. In its Q1 2020 earnings report released last week, the company reported record business — a result, of course, of an uptick in deliveries as much of the nation remained sheltered at home. Even so, it still lost $33.4 million in the first three months of this year.
Meanwhile, there’s Uber. It lost $2.9 billion in the first three months of 2020, in part because its Rides business dropped by 3 percent as the world kept close to home. But Eats stepped into the spotlight, ticking up 54 percent year-over-year. Via statement, Uber CEO Dara Khosrowshahi emphasized the growing importance of Eats to the company, saying “While our Rides business has been hit hard by the ongoing pandemic, we have taken quick action to preserve the strength of our balance sheet, focus additional resources on Uber Eats, and prepare us for any recovery scenario.”
That statement was made just days after Uber laid off 3,700 people, mostly in its customer support and recruiting teams, part of what Khosrowshahi characterized as “refocusing some of the investments that we’re making.” But Eats, Khosrowshahi said, has “allowed us to maintain high engagement with our existing customers and to bring in new customers,” and “positions us to have a faster recovery than rides-only players.”
On Uber’s earnings call last week Khosrowshahi even seemed to signal an interest in snapping up other delivery players. “There is a bunch of consolidation happening on a global basis where bigger players can not only provide better service for restaurants and consumers, but can provide a better service kind of on an economic basis that is sustainable,” the New York Times quotes him as saying.
If Uber did buy Grubhub, it could turn the two also-ran delivery players into the top delivery app in the country. According to a Wall Street research note by Wedbush Securities and reported on by the San Francisco Business Times, DoorDash (which also owns Caviar) has 35 percent of the nation’s delivery business, Uber Eats has 32 percent, and Grubhub has 24. If Uber absorbed Grub, it could capture 55 percent of the market, Wedbush analyst Daniel Ives says.
Other market experts say that a sale might be the best thing for Grubhub, which “faces an increasingly uphill battle in the world of logistics giants like Uber,” Clockwise Capital analyst James Cakmak tells the NYT, saying “an exit like this is a best-case scenario.”
Logistics giants aren’t the only factors Grubhub is likely worried about. So far, Seattle, D.C., and Jersey City have joined San Francisco in capping the fees delivery apps can charge restaurants, with other urban centers like New York expected to follow suit. Meanwhile, Chicago has enacted a law requiring transparency from delivery apps on all fees charged by delivery companies, itemizing food costs, taxes, delivery fees, and what restaurants pay in commissions and service fees. It seems like the legislative environment is getting chillier for delivery apps across the country — conditions that Uber, with its longstanding reputation as a company willing to fight city hall, seems uniquely positioned to weather.
So, we have Grubhub, which is likely motivated to sell. Then there’s Uber, which is seeing its food delivery business blossom and its ride hail business whither. Right now, all signs suggest that food delivery isn’t going away any time soon, but ride hailing looks more dicey. Recent polling data suggests that somewhere between 13 and 20 percent of folks in the U.S. say that they’ll start venturing back out once their regional shutdowns are lifted, and about half, CBS News reports, say they won’t resume normal social activity until it’s clear the outbreak is over. If those numbers are accurate, Uber’s Rides’ business is likely down for the long haul, Eats will continue to shine, and Uber will be best served by going where the money is: food delivery.
As of Wednesday, neither side has denied that the companies are in sale discussions, as Grubhub released a general statement saying, “We are always looking at value-enhancing opportunities. That said, we remain confident in our current strategy and our recent initiatives to support restaurants in this challenging environment.” Meanwhile, Uber tells the WSJ that it is “constantly looking at ways to provide more value to our customers, across all of the businesses we operate.”