A week after GrubHub (GRUB) fell more than 40% post-earnings, Uber (UBER) provided fresh evidence of how tough of a business online food delivery is right now.Uber is down close to 9% following its Q3 report and earnings call, and has made new post-IPO lows along the way. And while there’s a concern or two that one can raise about the numbers shared about Uber’s core ride-sharing business, the selloff appears to have much to do with what Uber reported and said about its Uber Eats food-delivery unit.
Uber Eats’ Red Ink
Uber Eats reported Q3 gross bookings of $3.66 billion, falling short of a consensus analyst estimate of $3.96 billion. Bookings rose 73% annually, but that’s a slower clip than Q2’s 91% and Q1’s 108%.
Thanks to an improved take rate on bookings that stems from fee changes made earlier this year, Eats’ “adjusted net revenue,” which excludes referral and “incentive” payments to drivers, rose 105% to $392 million. However, that was still a little below a $398 million consensus. And Eats’ non-adjusted revenue growth, which doesn’t back out driver referral and incentive payments, slowed to 64% from Q2’s 72%.
Also, while Eats’ take rate improved by 0.4 percentage points sequentially and 1.7 points annually, it was still only at 10.7%. That’s well below Uber’s ride-sharing take rate of 22.8%, and speaks to just how intensely competitive the food delivery market remains, both in terms of winning over restaurants and winning over consumers.
This intense competitive environment, which also impacts things such as marketing and promotional spend, is for now causing Uber Eats to lose money hand over fist. In Q3, Eats had an adjusted EBITDA loss of $316 million, up sharply from a year-ago level of $189 million in spite of much higher revenue.
To be fair, Uber did say that more than half of Eats’ adjusted EBITDA loss stemmed from just 15% or so of its bookings. But it’s also worth keeping in mind that the adjusted EBITDA loss excludes Eats’ share of Uber’s total G&A and R&D expenses, which amounted to $623 million in Q3. And it also excludes Eats’ share of Uber’s depreciation and amortization expenses, which totaled $102 million.
Though an exact number is tough to estimate given Uber’s rather unique approach to financial accounting and reporting, it looks as if Eats is losing more than $1 for every dollar of adjusted net revenue it records. And judging by CFO Nelson Chai’s remarks on Uber’s Q3 call, the situation might not be a lot better in Q4.
“The Eats market will continue to be competitive as players have raised funds to invest in growth in this fast-growing category,” said Chai. “We will continue to invest including in Q4 of 2019 when seasonal courier costs increase and we expect category take rates to contract quarter-over-quarter.”For his part, CEO Dara Khosrowshahi insisted that Uber will be “disciplined” about how it tries to grow Eats, and that his company is seeing “some early signs of market rationalization and discipline” in the food-delivery space. But at the same time, he admitted (after an analyst referred to Eats’ Q3 bookings as “disappointing”) that Uber is going to make “tradeoffs” between spending and growth.
The Struggles of Competitors
Uber is definitely far from the only food-delivery player having a rough time right now. Last week, GrubHub, which has both large food delivery and pickup operations, issued Q4 sales and adjusted EBITDA guidance that was well below consensus estimates. And in its shareholder letter, which has been reporting positive adjusted EBITDA for some time, said it expects a 2020 adjusted EBITDA loss of “at least $100 million.”
GrubHub insisted that if it wanted to optimize for short-term profitability, it could (no doubt with the help of its more lucrative pickup operations) generate more than $2.00 of adjusted EBITDA per order in 2020. But it insisted that absorbing losses in the near-term is the better option as rivals continue doing the same to gain customers.
Notably, GrubHub also said that it thinks “supply innovations in online takeout have been played out,” and that it sees annual growth in the space slowing to a low-double digit clip. And it observed both that online diners are becoming more “promiscuous” when it comes to using multiple services and that the logistics portion of a food-delivery operation has effectively become a “commodity” with limited economies of scale.
While the differences between GrubHub and Uber Eats need to be remembered when reading GrubHub’s commentary — unlike GrubHub, Uber Eats has a large international presence and doesn’t participate in order pickup — the remarks still aren’t the kind of thing an Uber investor wants to hear at a time when Eats is registering massive losses in the name of pursuing growth.
Privately-owned food-delivery players DoorDash and Postmates are also believed to be generating sizable losses. Notably, Postmates is a month removed from postponing its IPO plans amid souring investor sentiment towards money-losing consumer Internet names.Square ( SQ) , meanwhile, chose this summer to exit the food-delivery market, selling its Caviar food-delivery unit to DoorDash for $410 million in cash and preferred stock. Judging by the financial states of the remaining players, it wouldn’t be surprising to see additional consolidation happen between now and the end of 2020.
The Big Picture
Over the long run, it’s possible that Uber’s unique ability to bundle ride-sharing and food-delivery services, via offerings such as subscription plans and loyalty programs, will become a bigger competitive strength in this space. But for now, these efforts are still in their early stages.
In the meantime, expect Uber to continue getting a lot of questions about the near-term losses being racked up by Uber Eats, and also about how profitable it will be over the long run as bookings growth slows.