With little certainty how long the gut blow to the ride-hailing business last, Uber CEO Dara Khosrowshahi has renewed interest in Uber Eats but his tried and tested pre-pandemic approach with the proposed Grubhub acquisition already has critics calling out the concerns.
The Coronavirus induced lockdown dropped a bombshell on the ride-hailing business. As a consequence, the world’s biggest ride-hailing company Uber saw a huge question mark appear on the future of its golden goose. The fallout of the new normal has made Uber rethink the focus it needs to put loss-making food delivery business, deciding to strengthen it by acquiring Grubhub that boasts thrice the market share of Uber Eats. But interesting enough it the fact that Uber’s new strategy for the post-pandemic era takes the same approach it did in the pre-pandemic business environment.
Uber CEO Dara Khosrowshahi wants to be the best or at least the second-best business in whichever market they operate in. To this cause, they decided to exit from the Indian food delivery arena letting the bigger shark in Zomato acquire Uber Eats’ business. But in the US, Uber has instead taken a bold step with its food delivery ambitions.
Why does Uber want Grubhub so bad?
Uber has pulled out of Uber Eats’ business in seven countries where the brand failed in gaining popularity among the core customer group. Uber Eats’ adjusted losses from these markets (which represent 1% of its gross bookings) amounted to 4% in the first quarter of 2020. Pulling out of these countries seemed like a no-brainer for the company. But the retrenchment hasn’t meant that Khosrowshahi has lost faith in the food delivery business. Instead, there is a renewed interest of an unprecedented scale
After dropping out of unprofitable markets, Uber Eats is focusing on ones that hold strategic importance. In the mother market US, UberEats’ share stands third at 20% behind leader DoorDash at 42% and Grubhub at 28% market. Grubhub acquisition transforms Uber Eats from a loss-making offshoot into a market leader. Grubhub has been around since 2004, the oldest food delivery start-up in the US. If Uber succeeds in acquiring Grubhub, it not only adds 300,000 more restaurants to its’ 100,000 but also bags industry professionals who were in fact pioneers of the trade.
Time – Perfect of Pandemic-induced?
Let’s not forget the fact that Uber’s ride-hailing business has taken a lasting hit because of the pandemic. Uber might be able to recover these losses with the help of its food delivery services.
Food delivery has been hot amid the pandemic. With more people staying home, the demand for food delivery services has shot up. In Q1, Uber Eats grew by 52% compared to its position a year ago in the same quarter. The gross bookings hovered at $4.68 billion for the food delivery business. In the same quarter, Grubhub jumped from $1.5 billion to $1.6 billion compared to last year in gross food sales.
With Grubhub, the position Uber Eats can establish now would outlast the pandemic.
That said, food delivery isn’t very profitable, to begin with. And it goes without saying the small-time partner restaurant’s struggling to cut across margins leaves no room for rampant growth commissions for food delivery businesses. Moreover, allegations of monopoly have already started to raise eyebrows. Former presidential primary candidate Senator Elizabeth Warren called out the proposed deals monopolistic outlook.
Uber’s proposed acquisition of Grubhub has raised concerns among small restaurants vocal. Reported by Reuters, the eateries are worried about what they see as an extension of exploitation by app-based food delivery companies like DoorDash, Grubhub, and Uber Eats. In the past, small standalone restaurants working on thin margins have claimed that companies charge them 15% to 30% commissions on each order but give discounts breaks to giants like McDonald’s.
How far is Uber from acquiring Grubhub?
Grubhub wants 2.15 Uber shares for each Grubhub share but it seems like Uber doesn’t want to give any away. After a few rounds of discussion, Uber has reportedly rejected the all-stock offer. What the future of this deal is going to look like is difficult to say as of now. Uber might come up with an offer that Grubhub can’t refuse.
Failing to bring out the right cards would effectively leave Khosrowshahi with two loss-making machines. But the recovery path Uber has chosen is also carpeted with critics, economic risks, and ethical conundrums.
With contribution from Syed Ali Mudassar