In the quarter that ended on June 30, Uber saw wildly different tracks for its two main businesses, due to COVID-19. Gross bookings in the company’s people-transportation business fell 73 percent as people went out less and were increasingly afraid to get in cars with strangers when they did go out. But its goods-transportation business grew 113 percent, as people went out less and ordered food for delivery to their homes.
“It’s become clear that we have a hugely valuable hedge across our two core segments,” said Uber CEO Dara Khosrowshahi on the company’s earnings call, noting that as pandemic conditions improve, he expects people to be more inclined to ride in Ubers again — and that where they do not improve, he expects delivery demand to remain strong.
But there is one factor that undermines the value of this hedge. Uber loses money on delivery, and so the rapid growth in this business has not generated the thing companies are supposed to generate: profits.
“Cumulative payments to Drivers for Delivery deliveries [sic] historically have exceeded the cumulative delivery fees paid by consumers,” Uber noted in its earnings release. This has been an ongoing problem in the food-delivery industry: Huge growth in consumer demand has been achieved by charging customers less for delivery than drivers, who are not exactly highly paid, get paid to provide it. That’s no way to make money in the long run.
Uber would note that it is now losing less money on delivery than it used to. The company attributes a $232 million loss to its delivery segment in the past quarter, compared to a $286 million loss in the same quarter last year, when it did about half as much delivery. So at least this is not a situation where doing more business just leads to bigger losses; the company’s profit margin on delivery has improved, such that it is losing less money for every dollar of delivery services it sells. That’s good.
But there are key questions about whether the company can eventually get that less-negative profit margin on delivery to turn positive. First of all, Uber’s calculations of earnings by segment exclude general corporate expenses, like finance, accounting, human resources, and — especially important for a company like Uber — information technology. So not only does the company need to get to a point where the delivery business is showing a segment profit, it needs to get to a point where that profit is big enough to offset general corporate costs.
The second question is whether the pandemic has shoved customers and restaurants toward delivery in a way that will expand the delivery business permanently, or whether these strange times provide the optimal conditions under which a delivery-service provider should be most profitable. The pandemic doesn’t just increase consumer interest in having food delivered; it should presumably increase consumers’ willingness to pay to have food delivered. People really do not want to go out. So if we are in a period when consumers’ willingness to pay delivery fees is at its apex, Uber may face pressure on its delivery profit margins when it needs to continue to improve them.
Uber and its competitors have often shown apparent irrationality on fees, selling services at a loss in order to gain market share. The case for long-term profitability has been that that irrationality can’t persist forever: Competitors will fail or lose their appetite for losses, and then it will be possible to raise prices. A problem with this analysis is that Uber also faces price competition from consumers themselves: Uber’s transportation business competes against the option of driving somewhere in your own car, or taking transit or walking; Uber’s food delivery business competes against the option of picking up your own takeout.
This implicit competition has been one of the factors that has pushed Uber and its competitors to charge what appear to be irrationally low fees: Even if nobody else is offering to deliver more cheaply, the customer may decide to forego delivery altogether if the fee is too high. As the pandemic wanes, that competitor may become more fierce once again, complicating Uber’s effort to raise its delivery profit margins and finally make money in the business. That is, people may just go get their own food again.