Uber (NYSE: UBER) Eats would be Uber’s saving grace during the pandemic.
Demand for their ride-sharing services has declined as people around the world work from home and traditional entertainment and socializing options remain largely unavailable – but demand for food delivery has skyrocketed for the same reason.
These trends played as expected during the second quarter. Total revenue fell 29% to $ 2.24 billion, but revenue from mobility activities, formerly known as rides, tumbled 67% to just $ 790 million. At the same time, revenue from delivery, formerly known as eating, increased 103% to $ 1.21 billion as demand for restaurant delivery increased.
Uber reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $ 837 million for the quarter, excluding special expenses related to COVID-1
Delivery is a problematic business
Despite the headwinds from the pandemic, the mobility business still generated an adjusted EBITDA profit of $ 50 million, while the delivery lost $ 232 million on an adjusted EBITDA basis. Even with revenue doubling from a year ago, it was only a modest improvement from the $ 286 million loss in the segment for the quarter a year ago – and that includes Uber’s decision to leave several underperforming Uber Eats markets over the past year, including India and South Korea, as the management said it will only compete in countries where it may be No. 1 or No. 2 in market share.
For a while, it has been obvious that restaurant delivery from third parties is a problematic deal. Competitors such as Uber and DoorDash have lost billions struggling to gain market share. GrubHub, the former leader, has seen his profits disappear. Increased competition has led to large expenses for discounts and marketing, and restaurants have often attacked third-party delivery companies that charge steep fees that often make delivery orders unprofitable. During the pandemic, restaurants and cities have pushed back the model and limited the fees that third-party delivery providers can charge.
Uber’s latest report also highlights another problem with the app-based delivery model.
The coronavirus pandemic has been a gift to e-commerce and delivery companies. Companies like Amazon, Shopify, Wayfair, and Etsy saw sales skyrocket in the second quarter, and profitability also increased along with that when these companies took advantage of sales of windfall from pandemic-related demand in the end. For example, Wayfair published its first profitable quarter in its history as a public company, as revenue jumped 84% to $ 4.3 billion and reported a generally accepted accounting principle (GAAP) net profit of $ 273.9 million. During the quarter a year ago, Wayfair lost $ 181.1 million on a GAAP basis, which meant a reversal of almost $ 500 million.
Uber, on the other hand, was unable to deliver a profit in its delivery business, despite the increase in sales. Since Uber does not break down costs by business segment, it is unclear why the delivery business lost so much money. But Uber released a clue in the winning edition.
Uber often pays excess incentives for drivers for its deliveries and acknowledges that “cumulative payments to drivers for delivery deliveries have historically exceeded the cumulative delivery charges paid by consumers.” Unlike mobility, which is a higher margin business because Uber directly provides the service it charges customers for, with delivery, most of the payment goes to the restaurant, so Uber has to pay its drivers from restaurant and customer fees. There is simply less money to distribute and cover overheads. As stated in the statement above, the customer fees are not enough to pay the driver, let alone the overhead costs, so Uber has to push the restaurant for the remainder or lose money on the sale. This is one of the reasons why tensions have risen with restaurants, as many of them believe they are being charged exorbitant fees by Uber and its peers.
Uber’s adjusted EBITDA margin improved by 33 percentage points during the quarter, but it came as it pulled out of several weak markets, received significant demand from the pandemic and cut $ 1 billion in annual spending in areas such as corporate offices and research and development.
After losing in his bid to buy GrubHub, Uber made a $ 2.6 billion takeover partner, and it’s expanding into grocery stores as it seeks to further expand its delivery network. The postal partner agreement may help Uber get much-needed leverage in food delivery, but at the moment the economy in the delivery business looks thoroughly broken, and expanding to new verticals will only weigh further in the end.
The mobility company should return to health when the pandemic is over, but the delivery will be a feature for the business for the foreseeable future. It is a reason, among many, to tread carefully with the stock.