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5 takeaways from the Uber IPO filing

RB’s The Bottom Line takes a look inside the parent company of delivery service Uber Eats and finds profitability challenges.
Photograph courtesy of Uber Eats

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Uber, the fast-growing ride-hailing service, filed the registration statement for its long-anticipated initial public offering on Thursday.

The San Francisco-based company wants to raise up to $1 billion, though, according to IPO research firm Renaissance Capital, it could raise as much as $10 billion in its offering and have a valuation of as much as $100 billion. It would be the biggest IPO in five years.

Uber is the parent company of Uber Eats, one of the four biggest third-party delivery providers and the company that provides delivery for McDonald’s, among many others.

As such, the filing offers some key insights into the company’s performance and rapid growth, and what that means for the burgeoning third-party delivery business. Here are five takeaways:

Uber Eats is growing really fast

Uber created its delivery subsidiary in 2016. It reached a landmark deal with McDonald’s in 2017. And it raked in the revenue in 2018.

The service is like a sports car that goes from 0-60 in three seconds. The company generated $1.5 billion in delivery revenue last year.

Of the company’s 91 million users, 15 million received a meal through Uber Eats. That’s impressive growth by any standard.

Uber believes Uber Eats is the largest delivery provider outside of China.

But the company doesn’t make money

Uber generated $11.3 billion in revenue last year but recorded an operating loss of just over $3 billion.

Some of that could be attributed to increased marketing expenses: The company spent $3.15 billion on sales and marketing.

“We have incurred significant losses since inception,” the IPO says in one of its first risk factors. “We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”

The company has been spending a lot to grow. It also spends a lot on research and development, on future technology such as autonomous vehicles. But ultimately the company will need to generate a profit, and that likely means more volume.

That’s because all of its other trends suggest lower fees.

Uber Eats had to lower fees to be competitive

Uber’s top risk factor is the sheer competitiveness of the landscape in which it competes, and that definitely extends to its delivery service.

The company listed numerous competitors around the world, including Grubhub, DoorDash, Deliveroo, Swiggy, Postmates, Zomato, Delivery Hero, Just Eat, Takeaway.com and Amazon.

The company has lowered fees in part to increase its competitiveness against those companies.

“We charge a lower fee to certain of our largest chain restaurant partners on our Uber Eats offering to grow the number of Uber Eats consumers, which may at times result in a negative take.”

In other words, large chains are a loss leader.

This is an interesting contrast to a recent survey of McDonald’s franchisees by the independent National Owners Association, in which the overwhelming number of respondents said they want their deal with Uber Eats renegotiated. If the company is already getting a negative take on that business, what would a renegotiated offer do?

This is having an impact on its revenue

Uber Eats generates its revenue from fees paid by restaurants, as a percentage of its orders, as well as fees paid by consumers.

Based on the IPO documents, it has been giving better deals to get restaurants on its platform.

In 2016, when the service started, the company’s Uber Eats revenue as a percentage of its “gross bookings,” or total dollar value of delivery orders, was 22%.

That declined to 20% in 2017 and then to 18% in 2018.

The decline, the company said, was due to “a higher mix of restaurants with lower basket sizes and lower service fees.”

It also has to pay for drivers

Any restaurant operator understands that labor is tough to come by. This is also true for delivery providers that are competing with all of the other delivery providers and ride-hailing services for drivers. Uber Eats has been increasing its incentives for drivers in a bid to expand into new markets and better compete. At the same time, however, that could contribute to the company’s profitability challenges.

The company notes, for instance, that it receives fees paid by restaurants and also takes the difference between what it pays the driver, based on the time and distance required for delivery, and what the consumer pays in their fees.

But, Uber said, “The delivery fee paid by consumers has historically been less than the amount paid to drivers.”

It seems to me that Uber Eats will have to increase consumers’ delivery fees as pressure to generate profits builds. But that could keep some customers away. Or maybe not.

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