Fast-Growing UberEats Creates Hunger For Profit

Whether or not Uber Technologies Inc. UBER will profit as a public company permeates the news cycle, and the pressure is now on UberEats – the smaller, fast-growing Uber segment. 

Days ago, Forbes asked in a headline, "Is Uber Eats Keeping Uber Stock Healthy?" Thirteen percent of Uber's revenue in 2018 came from Uber Eats, growing from only 3 percent in 2016. 

In a recent interview with Bloomberg TV, Uber CEO Dara Khosrowshahi discussed Uber's plan to expand its delivery services beyond food to groceries and other local goods. This expanded service is already being tested in Tokyo through a partnership with convenience store operator Lawson, Inc. Japan Today reports the delivered items include "cooked meals, lunchboxes and salads as well as daily necessities such as tissue paper."

As Uber's ride-hailing momentum slows, analysts and investors turn their hopeful attention toward UberEats to see how it might evolve or compensate for that loss, but according to investment firm Cowen, UberEats won't generate a profit for another five years. The report focused on Uber Eats' per-order costs and discovered that the company loses $3.36 on every order. By 2024, Cowen says, the orders still will not generate a profit, but the losses will be  reduced to $0.46 per order. 

Image: Quartz

"Driving better unit economics for Eats is a key issue among investors as it remains one of the primary growth engines for the company," Cowen reported.

Quartz speculated a few reasons for this slow-to-profit projection. For one, Uber paid $253 million more to drivers than it made from them. Uber also gave referral bonuses, pay-for-performance incentives and discounts to Eats patrons. 

Also, in March, Uber complicated its fee system. Instead of one general booking fee, Uber split the fee into a delivery and small order fee. This means that if an order is less than $10, there is an additional $2 fee. Delivery fees vary based on the restaurant location and availability of drivers. The results of this more complicated system also vary in regard to spending or saving.  

Perhaps this fee adjustment is one way UberEats is trying to gain momentum and compete with Doordash and Postmates. Before this change, UberEats may have been over-subsidizing its rides. 

While Uber skeptics populate newsfeeds, there's little reason why keen observers should be surprised. When Uber first filed its initial public offering in April, the company admitted the demands of the operating budget and how those could prevent any profit in the foreseeable future. 

Kent Schofield, Uber's Head of Investor Relations, opened the second quarter conference call on August 8, 2019 with a disclaimer for Uber's self-generated projections – "Actual results may differ materially from these forward-looking statements, and we do not undertake any obligation to update any forward-looking statements we make today."

Perhaps not generating a profit (at least not initially) was always part of Uber's plan. With enough investor capital and vision, profit might not matter as much as analysts think.

Image Sourced from Google