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Uber’s California Shutdown Threat Won’t Impact Its Real Money Maker: Uber Eats

The company says it will close down its rides service, but its food delivery service is the only part of its business that’s doing well these days

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Uber’s ride hail business has tanked, but its food delivery business is stronger than ever.
Photo by Arnoldo Robert/Getty Images

A fight over worker classification could prompt Uber to “shut down” in the state of California, company CEO Dara Khosrowshahi said in a TV appearance. That might sound like a big deal, but there’s an aspect to this threat worth noting: Uber has no plans to cease California operations of Uber Eats, a spokesperson confirms to Eater SF. And as of Uber’s last earnings report, Uber Eats had grown bigger than the company’s ride-hail business. In other words, Uber’s threat to take their ball and go home if forced to comply with California law really only applies to a ball that, right now, isn’t the one that the other kids want to play with all that much.

Khosrowshahi made his announcement during an appearance on MSNBC, saying that a court decision on Monday spurred the plan. Khosrowshahi was talking about San Francisco Superior Court Judge Ethan Schulman’s ruling to grant a preliminary injunction requiring the company’s ride-hail drivers working in California to be reclassified from contractors to employees, a move required under AB5, the state’s landmark legislation that seeks to ensure employee protections for people who work for the same company on a regular basis.

Though the law took effect on January 1, 2020, companies including Uber, DoorDash, Postmates, and Instacart have failed to comply, instead dumping millions into legal challenges of the legislation and on Proposition 22, a measure backed by the tech companies that will appear on California’s November ballot. Even that measure has been mired in a court battle, as the companies opposed the wording describing the initiative on the ballot, saying it was “slanted” against the apps. (The language, which a Sacramento Superior Court judge ruled last week was just fine, is that the prop “exempts app-based transportation and delivery companies from providing employee benefits to certain drivers.”)

While these multi-billion-dollar food delivery companies joined together to mobilize against the legislation, Uber’s ride business faced a separate assault: a May lawsuit from California Attorney General Xavier Becerra and the city attorneys of San Francisco, Los Angeles, and San Diego that seeks unpaid wages for misclassified workers, civil penalties, and an injunction requiring that Uber and Lyft drivers immediately be reclassified as employees.

That’s the injunction that was announced Monday, though Schulman put a stay in the ruling for 10 days to allow the companies to appeal the decision. According to Khosrowshahi, if Uber doesn’t prevail, his company will “shut down” until at least November — when, he hopes, Proposition 22 will succeed and his company can continue with its contractor model.

Speaking with Eater SF, Davis White, the Director of California Public Affairs for Uber, says that that shutdown only applies to the company’s ride hail business, and that Uber Eats will continue as-is. Delivery drivers for Uber Eats and Postmates, the company that Uber agreed to buy in a $2.65 billion deal last month, are also independent contractors that state and local officials say should be reclassified as employees under AB 5.

But those delivery workers weren’t the subject of the suit filed by Becerra, White says — only ride-hail drivers were. So it’s that business that the company would close down in the entire state, even as food deliveries continue.

It’s a clever move from Uber, as the company gets the headlines with the threat, but all that’s at risk is the part of their business that’s already flailing. According to the company’s second-quarter 2020 earnings report, its ride-hail business fell by 73 percent year-over-year, while Uber Eats grew by a whopping 113 percent in that same period. “Uber Eats was more than double the size of Uber’s rides business in the quarter,” Yahoo Finance reported Monday of the disparity between the units.

Even then, New York magazine noted that Uber Eats is still losing money hand over fist. “Cumulative payments to Drivers for Delivery deliveries historically have exceeded the cumulative delivery fees paid by consumers,” Uber said it its earnings report, another way that paying drivers to deliver food costs more than the company can make on every order. For now, though, they aren’t running into any new costs associated with its gig-worker workforce of delivery drivers, as it’s only its ride-hail workers that are under legal scrutiny.

Obviously, the main reason all these apps are fighting so hard against AB5 is because it’s significantly more expensive for a company to pay a worker as an employee than as a contractor. DoorDash CEO Tony Xu, in fact, has publicly said that a law requiring his company to reclassify delivery drivers “would have disastrous results” for his company, and per the Financial Times, “could mean the end of DoorDash, which is already, according to reports, losing $400m a year.”

$400 million pales in comparison to the shortfall at Uber, which lost $1.8 billion in the last quarter alone. (Remember, that’s even with the huge jump in Uber Eats sales.) What happens when Postmates, which Bloomberg reports has also never been profitable, enters the Uber fold? Or when California officials look beyond the company’s ride-hail drivers to the drivers who are actually working these days, delivering food without employee protections...and yet are still making more per order than their company does.