Today, Uber agreed to acquire Postmates in a deal that bets big on our collective and continued desire for takeout.
Uber officially agreed Monday to acquire the food delivery start-up Postmates for $2.65 billion, as the ride-sharing company seeks to increase its share of the world’s food delivery market.
In other words, a large unprofitable company is purchasing a smaller unprofitable company, in the hopes that our Covid-era eating habits will continue to ring doorbells in the elusively distant, post-Covid future, therefore setting both companies on a solid path to profitability.
THE DEAL LOGIC
Grubhub was taken. It sold last month to Just Eat Takeaway, a European delivery company for $7.3 billion. Uber had made its own bid to buy Grubhub, but was ultimately scuppered for price and regulatory reasons. (Uber Eats combined with Grubhub, which merged with Seamless in 2013, would likely have raised antitrust issues).
Meanwhile, back in San Francisco, things were looking dire. As more people followed civic stay-at-home orders in May, Uber posted a $2.9 billion loss for the first quarter of 2020 and announced it was laying off 14 percent of its workforce. At the same time, revenue for its Uber Eats division rose 53 percent. “As more people and more restaurants have come to use our services, Q2 bookings on Uber Eats are up more than 100 percent year on year,” said Uber CEO Dara Khosrowshahi in today’s press release.
This deal is a product of the pandemic. Uber now finds itself in need of positive revenue streams that aren’t dependent on global mobility. And here comes Postmates, reporting 50% quarter on quarter bookings growth at the end of June. It is unlikely that Postmates would have seen such quarterly growth without Covid.
It’s also good timing from a tech perspective. Uber can use its marketplace technology —including routing, dispatching, and dynamic pricing—to help Postmates sharpen its most valuable skill set: facilitating delivery for non-partnered merchants, long considered a competitive edge in America’s food delivery wars.
For consumers, this deal doesn’t seem to change much, other than the fact that soon we may have more takeout options to choose from (Game-time decision: Pad Thai, tacos, or Tandoori from that place around the corner..?) Yet, today’s release reads as if Uber and Postmates are planning on world domination, rather than ensuring our lukewarm Kung Pao chicken makes it to us by dinnertime.
“Over the past eight years we have been focused on a single mission: enable anyone to have anything delivered to them on-demand. Joining forces with Uber will continue that mission…” said Postmates Co-Founder and CEO Bastian Lehmann.
As for operational integration, Uber “might” adopt Postmates services, such as its $9.99-per-month subscription that provides no-fee delivery on any orders over $12, but that’s not guaranteed. When asked whether Postmates will adopt Uber’s new “No mask. No ride.” policy requiring drivers throughout the U.S. and Canada to wear masks indefinitely, both companies declined to comment. Each will operate independently through the deal close in the first quarter of 2021.
Assuming we won’t all stay home forever, how long can this trend continue? Wall Street analysts are ducking this question, and instead focus on the future fundamentals—i.e. how many new markets and demographics can Uber penetrate?
According to Uber’s investor briefing, Postmates offers Uber Eats access to more than 10 million active customers and a “strong presence” in U.S. cities such as Los Angeles, Las Vegas, Orange County, San Diego, and Phoenix. In reality, the 10 million customer number seems overly optimistic, as it includes any customer who has placed at least one order on the platform during the 12 months leading up to March 31, 2020.
Not so long ago, food delivery was considered completely saturated, given the cutthroat competition between Uber Eats, Grubhub, DoorDash, and Postmates, which all provide essentially the same service. But that status quo is beginning to change, as consolidations such as today’s deal promise to squeeze profit from new Covid-era customers.
“This pandemic is probably permanently expanding the size of the online food delivery market. At a minimum, it’s pulling forward a lot of future demand for online food deliveries that was inevitably going to take place over the coming years,” D.A. Davidson analyst Tom White told Bloomberg earlier this month, adding: “This is a good time to try and consummate a deal.”
The pandemic has us forming new habits, affecting the way we dress, how we choose to get around (if at all), and even the way we eat (it’s pizza night! …again). From Uber’s perspective, whether or not many of us go back to pre-Covid cooking or actually dining out is almost besides the point. This new deal is a bullish bet that swathes of the American population who didn’t use online delivery before Covid will continue to use these services going forward, now that they’ve relied on it so much. Humans. We’re creatures of habit.
IS THIS GOOD FOR RESTAURANTS?
Today’s acquisition promises to help strengthen delivery networks by offering merchants the “ability to add delivery capabilities to their websites and apps and fulfill on-demand orders.”
And, so what? While many restaurants already rely on third-party delivery for a significant portion of their income, the fees and commissions that delivery companies typically charge, which range from 20% to 40%, often swallow most of the restaurant’s profit.
As the pandemic has so painfully revealed, the ability to switch from dine-in to takeout services hasn’t been enough to stem the shuttering of restaurants nationwide. Until the Uber Eats-Postmates partnership proves otherwise, there is no indication that restaurants will benefit from this deal in a meaningful way.
As for Uber itself, things are looking up, at least on paper. Its stock closed Monday at $32.52, up 6% on the day.