Uber’s recent moves suggest that the company is putting cogs in the wheel of its dream to become “the operating system for everyday life.”
In its constant search for new revenue sources, ride-hailing company Uber has decided to plunge into the already overcrowded grocery delivery market.
The announcement to enter the grocery market comes close on the heels of Uber’s acquisition of food delivery start-up Postmates, a move that will help Uber Eats to increase its market share to 37% in the food delivery business in the US. Significantly, Postmates also has a small grocery delivery business.
For Uber, which has seen its traditional rides business struggle in recent times, the expansion of Uber Eats, its food delivery business, and entry into the grocery delivery is a way to preserve its future revenue growth.
The ride-hailing business recorded a decline of 3% in the first quarter of 2020 as people stayed at home to prevent the spread of COVID-19 pandemic. On the other hand, Uber Eats struggles to record profits even as it witnessed a 54% year-on-year jump in gross bookings in the first quarter of 2020. The booking volume surged because of lockdowns to contain the COVID-19 pandemic.
The Current State of Food Delivery Industry
The food delivery industry is facing several challenges. Wafer-thin margins mean low profitability for all players. In its letter to the investors last year, GrubHub said it didn’t believe that “just the logistics component of the business” could be profitable.
“A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity,” says GrubHub’s letter to its investors.
Further, the restaurants have been protesting against the high delivery fees. This led to several cities, including New York, Washington and San Francisco, putting a cap on the fees charged by third-party delivery firms.
The challenges in this segment forced Amazon, the king of the delivery business, to exit the food delivery business last year.
At the same time, the recent consolidation in the industry may help the existing players. Four players dominate the restaurant delivery industry, GrubHub, DoorDash, Postmates, and Uber Eats. Uber’s acquisition of Postmates comes within a few weeks after Grubhub was acquired by Just Eat Takeaway, a European food delivery company, for $7.3 billion. Grubhub considered selling its business to Uber before being acquired by Just Eat Takeaway.
Uber’s acquisition of Postmates then promises to change the dynamics of the delivery business in the country. With this acquisition, Uber becomes the second-largest delivery service in the US, behind DoorDash.
Consolidation in the food delivery market means that the existing players will be able to rationalize their pricing, thus increasing the chances of better revenue and margins.
The acquisition will also help Uber in bringing down operational costs, helping it to get better returns on investment. The company mentioned that it could see $200 million in cost synergies in two years.
One Giant Supermarket
With low margins in the food delivery business, it is understandable that it is diversifying in the grocery delivery business.
Uber plans to introduce grocery delivery through both its main rides app and Uber Eats. The company soft-launched this business in Dallas and Miami, with partner Cornershop, before expanding to other cities. Uber acquired a majority stake in Cornershop, a Chile-based app, last year.
Uber is not the only one to diversify. DoorDash partnered with CVS Pharmacy for the delivery of grocery and non-prescription products. Further, Postmates itself delivers groceries and other essential items that seem to be in line with Uber’s overall strategy.
Uber Vs. Amazon?
With Uber entering into grocery delivery, it faces stiff competition from well-established players, including bellwethers, like Amazon and Walmart, in a largely overcrowded market. DoorDash and Instacart are other smaller competitors of Uber in this space.
Can Uber do to the grocery business what Amazon did with the marketplace model? Can it replace traditional brick-and-mortar grocers by directly delivering groceries to people?
Uber’s biggest asset is its massive user base. As of March 2018, it had 41.8 million users in America, and nearly 25% of American’s use Uber at least once a month. On the other hand, 62% of American households or over 100 million people in the US have Amazon Prime membership, according to Consumer Intelligence Research Partners. These figures would have changed drastically post the outbreak of the COVID-19 pandemic, which has accelerated the adoption of the online grocery delivery model.
Amazon comes with an extensive delivery base and expertise built over the last several years, and Uber may find it tough to match this. Even so, several factors promise to help Uber’s cause. To begin with, Uber seeks to connect drivers with local outlets, which may result in faster delivery of groceries, leading to better uptake of its business.
Besides, Uber is focused only on the delivery of products, unlike Amazon, and is not planning to sell its products. The retailers may want to align with a player who is not planning to come up with its products to rival theirs.
The ongoing COVID-19 pandemic is helping faster adoption of new businesses, which might help Uber’s new grocery business. “Consumers [in the US] have also tried new retailers and new brands during the crisis, possibly shifting the loyalty dynamics within the retail sector,” says a recent Mckinsey Report.
The two significant announcements reflect Uber’s zeal to transform from a ride-hailing platform to becoming a single go-to app or super app for Americans. While Uber was always clear about playing a more pervasive role in its users’ day-to-day life, the COVID-19 pandemic seems to have acted as a catalyst for this transformation.
Uber’s acquisition of Postmates is a significant towards industry consolidation and will impact all players, including Amazon. In the long term, it might push the retail industry to innovate and explore with new business models and technologies, like analytics and data science, to improve operational efficiency and profit margins.
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