Uber Eats adds $3 Portland customer fee on food delivery orders after city approves 10% commission cap

Uber Eats Portland screenshot
A screenshot from an Uber Eats order on July 13, 2020 shows a $3 fee added for customers buying food from Portland restaurants.

Correction appended

Uber has added a $3 customer surcharge on all food delivery orders from Portland businesses in response to the city’s new 10% limit on how much third-party food delivery apps can charge restaurants in commission during the coronavirus pandemic.

The new fee on Uber Eats, labeled the “City of Portland Ordinance,” began appearing on the receipt of orders last week after the city council passed the new rule.

“A recent City of Portland Ordinance temporarily limits what Uber Eats charges restaurants to fulfill orders,” an explanation of the charge reads. “To help keep delivery drivers on the road, a new charge is applied to orders from restaurants in the city of Portland.”

Uber also announced last week that the company bought Postmates, another third-party delivery app, for $2.65 billion in stock.

The city rule includes a 5% limit if the delivery service allows a restaurant to transport their own food or if a customer orders through the app and picks up their items at the business. The ordinance also makes it illegal for Uber Eats, DoorDash, and similar companies to decrease payments to delivery workers in order to make up lost money from restaurant fees.

The restrictions would end 90 days after Portland’s state of emergency order lifts. No date has been set to lift the order, which has been in place since March 12.

Delivery app companies would be liable for up to $500 in civil penalties if the order is violated and the fine would accrue every day and for every restaurant overcharged. The restaurant being overcharged would have to inform the city, which could then sue the third party delivery company.

Harry Hartfield, a spokesperson for Uber, said although cities like SeattleLos Angeles and Philadelphia are among several others who also have commission caps, Portland’s limits are the strictest. He said the surcharge is necessary for the company to provide a “fair pay” to it’s delivery workers.

“This was a tough decision, and we know it will impact customers and restaurants,” Hartfield said. “The fee will only apply to Portland restaurants, so customers in Portland can still order from surrounding areas to avoid the additional cost.”

Portland is currently the only city where Uber Eats operates that has the $3 customer fee.

The company previously imposed the extra $3 in Jersey City, New Jersey, where there also was a 10% cap that had been in place from March. That limit went away after a new state law passed earlier this month capping third-party food delivery fees at 20% if a restaurant uses the app to transport its items and 10% if the order is delivered by a restaurant employee.

Portland Commissioner Chloe Eudaly’s office described the commission limits Tuesday as “price-gouging protections for restaurants” and that it was “unfortunate” Uber Eats added fees for customers of local businesses.

“However, the delivery costs imposed on restaurants — as much as 30% — were untenable for businesses struggling to stay open and keep their staff employed during this emergency,” a spokesperson for Eudaly’s office said.

Her staff along with members of the Portland Independent Restaurant Alliance and the Asian Pacific American Network of Oregon crafted the city ordinance. Portland restaurants owned by people of color were especially struggling to make third-party deliveries work due to uncapped commission fees, they said.

Opponents of the rule, which included the third-party food delivery companies, argued that they already made some concessions for businesses, that fees may be passed on to customers and that could lead to fewer delivery orders through the apps and less profit for drivers and restaurants.

It’s unclear if other third party food delivery apps also have instituted higher customer fees due to the new city rule.

DoorDash, for example, charges customers a service fee ranging from 11% to 20% in addition to a delivery fee, as of Tuesday morning.

That company sent emails to their Portland-based drivers before the city council vote urging their workers send boilerplate emails to commissioners saying the 10% commission limit would have a “direct and detrimental impact” on their ability to earn money on city food deliveries through the app.

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‘Ruthlessly woke’: How Uber can redeem itself—and demolish Lyft

The first time I met Travis Kalanick, the cofounder and then CEO of Uber, he explained his vision in three blunt sentences: “One day, no one will own a car. Cars will drive themselves. And they’ll come to you at the push of a button.”

Like any venture capitalist, I hear endless pitches from starry-eyed startup founders. But this one stuck with me. Uber’s real value proposition, after all, goes far beyond ridesharing. Over the past several years, as the company’s ambitions have expanded to include trucking, food delivery, carpools, scooters and even flying cars, the message to investors has become clear: Uber can be the Amazon of transportation. Anything in the world that goes from point A to point B, whether it’s a person, a burrito, or a new sprocket for your boiler, runs through Uber. Like Amazon, Uber takes a cut of everything.

But of course, vision and reality are often two different things, and most of the master plan has failed to materialize. Dominating ridesharing in every market globally proved impossible. Even tackling the unit economics of ridesharing in the U.S. has proven challenging, to the tune of billions in annual losses. The acquisition of Postmates last week was a positive step, but until Uber can figure out how to make money on its core business, being the Amazon of transportation seems far-fetched at best.

There may be a way to do it, however—a way that combines the best of Travis Kalanick’s ruthlessness and current CEO Dara Khosrowshahi’s innate feel for public opinion. It’s a long-term play and it’s extremely counterintuitive. But the path to making ridesharing profitable may be the exact opposite of Uber’s current campaign to prevent drivers from being classified as full-time employees.

To date, Uber has aggressively opposed worker reclassification, even sponsoring a $90-million ballot initiative in California to overturn recent state legislation that turned every driver into a full-time employee. Of course they did. Opposing any regulation that threatens to add 20% in new costs makes sense. But embracing it would achieve far more.

Hear me out. Right now, just about every driver for Uber also drives for Lyft. As independent contractors, drivers can work on as many platforms as they want; accepting rides from every possible source is the best way to maximize revenue. If drivers were employees, that flexibility would go away. The people on your payroll can’t also work for your fiercest competitor. They’d have to choose: Uber or Lyft. And because Uber has more market share in just about every city in America, the logical choice would be clear. That’s a huge problem for Lyft.

Ridesharing works because of the network effect: the more demand there is from customers, the more drivers sign on to meet the demand, the faster they can respond to any request, the more that attracts both new and repeat customers, and so on. But network effects can work in both directions. Imagine if you’re Lyft and half of your drivers just deactivated their accounts because they’re now full-time Uber employees.

With only half the drivers on the road, your pickup time is now going to be twice as long. Customers notice that. And since all they want is the fastest ride at the cheapest fare, they’ll start using Uber and not Lyft. As demand for Lyft rides decreases, more drivers will switch to Uber. That increases Lyft’s wait times even more, which drives demand down further, which sends more drivers and more customers Uber’s way.

Uber, with a market cap six times that of Lyft, can sustain this game far longer. And in the end, Uber won’t have to keep subsidizing fares because Lyft won’t be able to compete on price. If Lyft can’t attract drivers, it can’t attract riders. Sooner or later, the business collapses on itself.

Stamping out Lyft may be the only way for Uber to make ridesharing profitable. Until then, Uber’s struggle to make money off its core business imperils every other facet of Kalanick’s vision, from food delivery to flying cars. Wall Street understand this, which is why Uber’s stock price has been stagnant ever since its failed IPO. Something has to give.

Yes, embracing a movement led by activists who despise Uber seems strange. Yes, actively agreeing to increase operating costs by upwards of 20% seems crazy. But ultimately, the best-case scenario for stopping worker reclassification just gets you more of the same: perpetuating a market that doesn’t really work.

Instead, Uber should lean into the progressive moment. It’s a PR masterstroke: The company continues its “we’re nice” campaign, with a twist. Of course Uber wants to help drivers at all costs, especially now! And if being nice happens to result in crushing a rival? Call it killing with kindness.

So far, Khosrowshahi’s tenure doesn’t suggest an appetite for Kalanick’s unconventional ruthlessness. But Amazon, the paradigm for Uber’s success, won by being both unconventional and ruthless. Four months into the pandemic, Amazon is the Amazon of everything more than it’s ever been. Uber is currently no one’s idea of the Amazon of anything. That can change—but only if Uber has the stomach to rewrite the rules.

Odds are, Uber will continue business as usual: neither Uber nor Lyft will fare particularly well economically or politically, and ridesharing will be continue to be a middling business. But in a global pandemic, at a moment in history when every assumption is being rightfully questioned, maybe this is the time to try something unexpected. On a macro level, the markets are already behaving irrationally. If ever Uber’s investors are going to permit higher losses in pursuit of world domination, this is the time.

If that happens, maybe Uber’s new motto can be “ruthlessly woke.” Because being tepidly conventional isn’t working at all.

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How the Uber and Postmates Merger Impacts the Industry

The food delivery market is quickly changing, and restaurateurs nationwide are left wondering how this evolution will affect their industry.

On Monday, Uber and Postmates officially announced their $2.65 billion merger, which is scheduled to close in Q1 of 2021.

This means the U.S. third-party delivery market has slimmed from four major players to three, with Uber/Postmates becoming the second-largest behind DoorDash.

According to Second Measure, DoorDash occupied 44 percent of the delivery market in May, followed by 23 percent for Grubhub, 22 percent for Uber Eats, and 8 percent for Postmates. Although Postmates is fourth-largest among its competitors nationally, it holds the biggest market share in Los Angeles with 35 percent.

Uber CEO Dara Khosrowshahi said the deal is expected to “drive significant efficiencies and cost savings” for all sides of the marketplace, including customers and restaurants.

“We believe that over time, we can offer wider selection and lower prices for consumers, generate increased demand, lower costs, streamlined operations with fewer tablets for restaurants, and provide more work opportunities and improved earnings for delivery people,” Khosrowshahi said during a conference call.

However, Lunchbox CEO Nabeel Alamgir says he doesn’t see how the merger will benefit drivers, customers, or restaurants because of the reduced competition.

He views the consolidation as survival mode.

“None of those companies are profitable,” Alamgir says. “… Not only are they not running a sustainable business, I don’t think it’s their plan to run a sustainable business. Their plan is to get to the top of the mountain, and hopefully only two groups are left so they can hash it out then.”

Alamgir explains that the newly merged Uber/Postmates and DoorDash—now the top two players in the market—have different strategies to succeed once they reach said apex.

DoorDash quietly launched its own online ordering system in which it can build native websites and apps for restaurants, which Lunchbox does exclusively.

“DoorDash’s plan is to go not only to third-party ordering, but first-party ordering, as well,” Alamgir says. “ … It’s another signal to the industry that we need to invest in this because consumer sentiment is changing.”

On the other hand, he notes Uber will leverage Postmates’ model in which it delivers not only food, but groceries, electronics, and essentials—an area where Uber is looking to grow.

Khosrowshahi confirmed that strategy.

“So Postmates, we think, is a great step along that vision,” Khosrowshahi said. “Any place you want to go, anything you want to deliver to your home, Uber is going to be there with you. And we think these everyday frequent interactions create habit, create a connection with customers.”

Fees have been a contentious issue for restaurant operators, especially during the pandemic. Restaurants sometimes face fees as high as 30 to 40 percent. In response, several cities—Los Angeles, Chicago, New York City, Washington, D.C., San Francisco, and Seattle—have instituted emergency caps to assist restaurants

“When the delivery becomes everything, you now start thinking as a restaurant owner, maybe I need to start taking the delivery business more seriously and start taking ownership over it,” says Dragontail Systems CEO Ido Levano.

A growing number of restaurants have moved to circumvent fees by establishing direct delivery, which provides valuable customer data. For example, New York-based brand Bareburger said it now owns more than 50 percent of digital orders, up from 14 percent in 2018 and 34 percent in 2019. Others are just getting started—Panda Express announced that it will roll out direct delivery to 2,000 locations by the end of July.

Dragontail Systems CEO Ido Levanon says consumers would rather order from a local restaurant directly as opposed to a third party. The pandemic—which pushed numerous restaurants to add delivery—is accelerating the process.

“When the delivery becomes everything, you now start thinking as a restaurant owner, maybe I need to start taking the delivery business more seriously and start taking ownership over it,” Levanon says. “So I should have my own website, and now with the technology, it’s so much easier.”

Restaurants controlling their digital ordering means avoiding high fees, which in turn hurts the profitability of third-party companies.

In order to combat this loss in revenue, Alamgir says the best thing for delivery brands to do is be more transparent with customer data.

“They all have a deal that they have set up internally—we will not share customer data,” Alamgir says. “They all are friends when it comes to that agreement. So that’s the only thing holding them back. If one partner decides to go ahead and be a little more honest with their customers, I think we’ll see a company that will rise. It could be Uber Eats, it could be either of them, but they’re not showing any sign of being restaurant-friendly.”

With Uber and Postmates merging, another significant consolidation in the U.S. food delivery market is unlikely. Any additional merger would result in two companies controlling substantially all of the share. It’s reportedly a major reason why the Uber/Grubhub deal fell through, although Grubhub CEO Matt Maloney told CNBC it was because Just Eat Takeaway’s $7.3 billion deal was “dramatically better.”

Uber/Grubhub and DoorDash would’ve owned roughly 90 percent, which drew the ire of several members of Congress. A group of Democratic senators sent a letter to Assistant Attorney General Makan Delrahim and Federal Trade Commission Chairman Joseph Simons urging them to monitor negotiations and initiate an investigation if an agreement was reached.

Khosrowshahi said he doesn’t expect another big merger in the U.S., saying there’s enough room for three players to be profitable in food delivery.

“We like our position,” he said. “We’re never satisfied, but we think that this Postmates deal gets us stronger in the U.S. I think it brings a terrific brand, a really strong management team, and the opportunity to increase efficiencies. And we think that it puts us in a very strong position going forward in what is our largest market.”

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Waitr Pre-Announces Strong Second Quarter

Waitr, the Louisiana-based company that acquired Bite Squad and went public in 2018, shared some strong results ahead of its quarterly release after several difficult, money-losing quarters.

According to Carl Grimstad, Waitr’s chairman and CEO, the strong performance is part COVID-19 and part sweeping changes the company undertook in late 2019 and early 2020. Those changes included a new CEO and numerous layoffs.

“We are pleased to present a preliminary look at our second quarter results and we are excited to deliver strong revenue growth and profitability, driven, in part, by an uptick in new diners and orders. While the events of the last several months have accelerated the adoption of our platform by consumers, we believe the important steps we adopted early this year, pre-pandemic, to supercharge our business are starting to be recognized in our financial results,” Grimstad said.

The company reported revenue of $60 million, up from $51.3 million year-over-year. The big news is the company’s income is moving into positive territory after years of major losses. Waitr reported net income at $8 million, an incredible swing from a loss of $24.9 million in the second quarter of 2019. The surge in earnings was on par, too, as the company reported second quarter earnings (EBITDA) of $15 million compared to negative $14.9 million last year.

The company also paid down $12.5 million in debt.

“Over the course of the last six months, we have reinforced our presence in our most important markets by increasing delivery areas, adding grocery and alcohol delivery services, and expanding our customer service and dispatch teams. All these growth initiatives are being supported by a leaner cost structure and with an eye on efficiencies and appropriate returns on deployed capital,” said Grimstad.

He added that the pandemic served as a flywheel where increased delivery demand in the smaller communities in which Waitr operates brought in more drivers, which ultimately increased delivery capacity for restaurants.

Full results are planned for an August 6 disclosure, but this is certainly good news for a company that was looking rough at the end of 2019. Shares of Waitr Holdings Inc. (NASDAQ: WTRH) surged from the $2.60 range to about $3.39 where it has settled—a 30 percent jump compared to the previous several months.

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Uber buys Postmates in deal where restaurants, delivery people and customers all lose

On Monday, Uber announced it was acquiring the food-delivery service Postmates for $2.65 billion in stock. While Uber says it will keep the Postmates app running as its own separate brand, the move effectively reduces the food-delivery industry from four major players — DoorDash, GrubHub (which owns Seamless), Postmates and Uber Eats — to three, and that could have consequences for the drivers and couriers who are already feeling squeezed by high commissions and low pay.

The acquisition is already questionable because arguably, neither company is in a healthy financial state.

The acquisition is already questionable because arguably, neither company is in a healthy financial state. Uber continues to lose billions of dollars a year, reporting a $2.9 billion loss in the first quarter of 2020, while the food-delivery companies are similarly struggling to turn a profit. Only GrubHub has tipped into profitability in some quarters by serving online ads. (Although GrubHub’s “success” might also come from its shady practice of tricking customers into calling GrubHub-generated phone numbers that charge restaurants additional fees.)

And yet, despite their financial struggles, new food-delivery apps act as middlemen and take a cut from both ends. They usually charge customers a delivery fee (some have been waived during the pandemic) and take a commission on the total amount of the order from restaurants. Those commissions can range from 15 percent to as high as 40 to 60 percent, depending on many factors — and restaurants say those fees eat up thin margins and then some. McDonalds even ended its exclusive arrangement with Uber Eats because its fees were too high.

The services also rely on delivery couriers. These essential but low-paid workers don’t have good things to say about the apps either. Couriers work as independent contractors, meaning they don’t have to get paid a minimum wage or get health benefits, and the companies take full advantage of that. While New York City passed regulations ensuring Uber and Lyft drivers get paid at least $17.22 an hour, delivery couriers are not covered and can make less than the city’s minimum wage.

During the pandemic, orders on delivery apps have soared. Uber Eats, for example, was up 54 percent in the first quarter over the previous year, but the service still lost over $300 million. However, couriers, who already face high injury rates say that despite being deemed “essential,” have said they received no additional pay, very little protective equipment or sanitizer. Some restaurants wouldn’t even let them wash their hands, according to part-time courier Wilfred Chan.

And the customer isn’t spared. A proposed class-action lawsuit filed in April against the big four food-delivery services claims customers are paying artificially inflated prices for food. Since the high commissions are cutting so deeply into restaurants’ bottom lines, that means prices have to go up for everyone, not just those using the delivery services.

In short, the food-delivery app business right now seems like a long-term loser for everyone involved. The customer may get a bit more convenience, but it’s unclear how Uber’s acquisition of Postmates will make anything significantly better for anyone. The deal will allow the companies to dominate the Los Angeles and Miami markets — where the companies have significant combined market share — which could attract antitrust scrutiny, but its business is premised on minimizing courier costs, which it might not be able to maintain much longer. California is already taking Uber to court for flaunting labor rights and filed an injunction in June to force it to reclassify its contract workers as employees. And workers themselves are beginning to organize to demand better treatment by the app companies and for governments to hold them accountable.

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Restaurant Cooperative Chomps Back at High Delivery Commissions

We’ve written extensively about the local food scene in this space. Late last week we covered the acquisition of GrubHub by JustEat Takeaway and the recent rounds of cash DoorDash and InstaCart raised. One of the great things about our interconnected world is that sometimes a post like last week’s will be read by someone doing something very interesting in the space. 

That GrubHub post last week prompted Jon Sewell to reach out to me on LinkedIn. More often than not these outreaches are thinly (or not so thinly) veiled sales pitches. Jon’s wasn’t one of these.  

From Healthcare to Cheesy Dough

A bit about Jon. He’s had a career in the health care industry. Moving from one great city to another e.g., Denver to New Orleans and many others to run non-profit hospitals. His last stop was as CEO of Health Enterprises of Iowa, yet another no-profit health care operator. 

As he tells me his daughter pushed him to open a D.P. Dough franchise in Iowa City, Iowa. D.P. Dough is a growing operation targeting college and university towns.  

After a couple of years of learning the tricks of the food industry, he became increasingly aware of the importance of local food delivery on the health of the overall food scene. At the time he was using OrderUp, an online ordering and delivery service that had started in State College, PA (home of the Nitty Lions), the heart of the American college scene.

Subsequently, it moved to Baltimore and was branded initially as LocalUp and then rebranded to OrderUp. The company went through two acquisitions first by Groupon in 2015 and then by Grubhub in 2017.

D.P. Dough is the number one delivery food provider in Iowa City. After all, its core customer base is super hungry college students who’ve had a little too much fun and need a cheesy, doughy late-night snack. As OrderUp was opening in Iowa City, Jon quickly realized he needed to be part of the OrderUp marketplace. His chief constituency had a strong propensity to turn to their smartphones late at night to order up quick nourishment. Jon forged a solid working relationship with OrderUp. He leveraged its delivery service and marketplace to expand his business with good unit economics.

Enter the New Regime

The good times didn’t last long, however. Groupon sold OrderUp to Grubhub in 2017. Then everything changed. Grubhub offered local restaurants what Jon labeled a “take it or leave it” offer with a very short window to decide. The “offer” was, pay Grubhub twice the commission they had been paying OrderUp (from 15% to 30%) and accept a centralized customer support and service team.

Jon wasn’t going to bite. He was fortunate that he had his proprietary delivery service and relied on Grubhub only for expansion. Other restaurants in the area were not as well-positioned. Many had upwards of 40% to 50% of the topline flowing through OrderUp. Along comes Grubhub with its double commission “offer” and local operators suddenly faced a difficult decision. Restaurant margins are razor-thin in the best of times. Paying a 30% commission would make every Grubhub order break even at best. In reality, most would be loss leaders. And leading to what, exactly? 

Jon Sewell Shared the CHOMP Story Last December on the Barron Report Podcast
Finding Strength in Numbers

Jon reached back to his years of experience in the non-profit hospital industry. As a regional hospital operator, Jon faced many tough business challenges. For example, how to afford a multi-million dollar MRI machine without adequate scale at his hospital. That’s when he discovered the magic of building business cooperatives. Instead of five regional hospitals each buying a multimillion-dollar machine, he got them together to buy one machine. The machine would rotate from hospital to hospital, with each having a guaranteed day of the week to perform life-saving diagnostic procedures. 

Using the same logic, Jon rounded up a group of 17 local restaurant operators to create a new food delivery cooperative. Each owner put in some scratch and became a part-owner of the cooperative called CHOMP. It launched in January 2018.

During its first year of operation, CHOMP delivered 108,000 meals to 16,000 unique homes, tallying more than $4 million in gross revenue. For this, CHOMP took a 15% commission, about $600,000, to run the delivery operation. This may sound like a lot, but it’s not. The same delivery via Grubhub or DoorDash would have taken another $600,000 from the owners’ pockets. That’s the difference between a 15% commission and a 30% commission.

CHOMP was able to keep more money in the cash registers of the local restaurants and in the community since the operations were 100% local. When it was all said and done the cooperative netted $8,000 in its first year. By the end of the second year, platform revenue grew 6% and the 17 original owners were $40,000 in the black and received a dividend. CHOMP’s drivers were independent contractors earning upwards of $25 per hour. Jon said he currently has a list of 400 applicants waiting for driving openings. 

A Sustainable Alternative

Pre COVID-19 CHOMP averaged about 300 deliveries per day. Now it’s doing close to 900 per day. Jon thinks the new steady-state will be around 600 deliveries per day. That volume would drive something like $10 million in gross orders, yielding $1.5 million in commissions. And, of course, it will save the local community from handing over another $1.5 million to the likes of Grubhub, Uber Eats, and DoorDash. 

Jon thinks he’s on to something. And I agree. He’s setting out to build a franchise platform for other entrepreneurs to build cooperative food delivery services in other markets. He’s expecting three markets to come online in the coming months — Flagstaff, AZ, Omaha, NE, and Atlanta, GA. He also believes there is zero chance that UberEats, DoorDash, Postmates, and their ilk will survive over the long haul. Their operations just extract money from local markets and, as Jon said, “Most restaurant owners can’t sleep at night with DoorDash and UberEats in their lives.”

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How Postmates Will Help Uber Eats Turn Profitable

[Updated 7/8/2020] Uber Confirms Postmates Deal. How Will It Drive Profitability?

On Monday, Uber confirmed that it will be acquiring food delivery service Postmates for approximately $2.65 billion in an all-stock transaction, as it looks for a path to profitability for the Uber Eats business that remains significantly loss-making, despite witnessing strong demand through the Covid-19 pandemic. [1] So how exactly does Postmates help Uber’s cause? We spell out a couple of reasons below.

For a deep dive on the numbers for the Uber Eats business, view our dashboard analysis How Uber Eats Is Helping Uber’s Stock

As delivery apps offer similar services, with limited product differentiation, this has translated into significant competition and low fees. However, by buying-out Postmates, Uber Eats will effectively eliminate a competitor and become the second-largest delivery service in the U.S. behind DoorDash. This could potentially make pricing in the food delivery market a little more rational, helping Uber’s revenues and margins.Most Popular In: Markets

While Uber intends to continue operating the Postmates brand and app, there should be cost savings as the company could cut down on duplicate technology-related spending, while reducing backend and administrative costs. For example, Postmates could see efficiency gains by using Uber’s routing technology. Uber said that it should see about $200 million in cost synergies within about two years.

The deal should also bring about some revenue synergies. Uber could expand its geographic reach, given that Postmates is particularly strong in U.S. geographies such as Los Angeles and the Southwest. Postmates’ relationships with more small and medium-sized restaurants, including local favorites, could also help Uber expand its addressable market.

Interested in investing in the ride-sharing space? We think Lyft might offer a higher upside compared to Uber, as we detain in our analysis Is Uber Expensive Or Cheap vs. Lyft?

[Updated 7/1/2020] Is Uber Buying Postmates?

Uber has reportedly made an offer to acquire Postmates, a smaller rival to its food delivery service, Uber Eats, for about $2.6 billion. [2] While the delivery space has been a bright spot for Uber through the current Covid-19 pandemic, as people have embraced online ordering and food delivery apps, the Eats business remains deeply loss-making posting an EBITDA of -$313 million, on revenues of about $819 million in Q1 2020. By acquiring Postmates, Uber could cut its losses and gain pricing power in an intensely competitive delivery market.

Although Postmates is the smallest among the major U.S. food delivery players, with a market share of about 8% of the U.S. meal delivery market as of May 2020 versus about 23% for Uber Eats, consolidating the businesses should help to cut administrative and technology-related costs. Uber could also have better pricing power (lower discounts, incentives) by effectively eliminating a competitor. However, even with a potential deal Uber would still remain second to DoorDash and its subsidiaries which held about 44% of U.S. meal delivery sales as of May. [3]

[Updated 8/29/2019]

Uber’s food delivery service, Uber Eats, is the company’s fastest-growing business. In this analysis, we take a look at how Uber Eats has grown and whether it could emerge a key driver of Uber’s valuation.

View our interactive dashboard analysis on How Uber Eats is Helping Uber’s Stock.

#1 Uber’s Fastest-Growing Business

#1.1 Uber Eats Accounted For 13% Of Uber’s Revenues In 2018, Up From 3% In 2016

  • Uber Eats’ reported revenues grew by 148% in 2018 to about $1.5 billion.
  • In comparison, the company’s bread-and-butter ride-sharing revenues grew by about 33% over the same period.
  • Uber Eats revenues as % of Uber’s total revenues have expanded from 2.7% in 2016 to 13% in 2018.
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#1.2 Eats Net Revenues Grew By ~150% Over 2018, Versus 33% For Ride Sharing 

#2. However, Growth In Some Core Metrics Is Slowing Down

#2.1 Net Adjusted Revenues Growth Is Slower, Due To Higher Incentives

  • Gross bookings – which represents the total dollar value of meal deliveries to customers – has been growing fast, rising to $3.4 billion in Q4 2018.
  • However, Net adjusted revenues have grown at a slower pace, up 43% YoY over H1 2019, vs. Gross Revenues, which almost doubled.
  • Net adjusted revenues are calculated adjusting for Driver and restaurant earnings, Driver incentives, and Driver referrals.

#2.2 Take Rates Have Also Trended Lower

  • Take Rates, which are defined as Adjusted Net Revenue as a percentage of Gross Bookings have also generally trended lower, likely due to higher incentives.

Uber Eats May Not Be A Big Driver Of Uber’s Valuation

  • While Uber doesn’t break down the expenses or margins of its Eats business to enable us to estimate its valuation, we believe that the division will not be a major driver of Uber’s valuation in the long-run.
  • For instance, Grubhub which held about 33% of the U.S. food delivery market in June 2019 had a market cap of under $6 billion. In comparison, Uber held less than 17% of the U.S. market.
  • While Uber also operates its Eats business overseas, unlike Grubhub, which is U.S. only, it’s probably safe to assume that Uber Eats won’t have a much higher valuation.
  • Uber also indicated in its Form S-1 that its addressable market in its core-ride sharing business was over 3x the food delivery space, meaning the long-term potential may also be less.

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Uber Eats + Postmates = Amazon-sized opportunity

Consolidation in food delivery is the most obvious rationale for the deal. But the chance to compete with e-commerce giants may pay even bigger dividends.

Uber Technologies Inc.’s deal to acquire Postmates Inc. isn’t just about the need for consolidation in the food-delivery industry. The company also has its eyes on a bigger prize: nabbing business from Amazon.com Inc. and Walmart Inc. in the local commerce market.

Early Monday, and following reports of a deal last week, Uber announced it was buying Postmates for $2.65 billion in an all-stock transaction. A combined Uber Eats-Postmates would vault the company to second place in the U.S. food-delivery market with total share of about 30%, versus DoorDash’s 45% share, according to the latest Second Measure data. I previously wrote about how Uber should acquire Postmates, even though the option wasn’t as ideal as its failed merger with Chicago-based Grubhub, as it would still move the needle for the company by rationalizing the overly promotional industry environment and generating significant cost synergies. And in fact, Uber confirmed Monday that the merger would result in more than $200 million annualized savings after the first year, primarily through cuts in marketing and administrative expenses. Uber shares rose 6% following the acquisition news.

But as important as the merger is in creating a bigger player with the chance of improving profitability and increasing scale, it also opens the door for an even more important longer-term opportunity to compete with big retailers for all categories in local commerce, Uber CEO Dara Khosrowshahi  told investors on a call Monday. He explicitly called out Amazon and Walmart.

Uber Eats has experimented with non-food deliveries. Earlier this year, the company expanded partnerships with supermarkets and local stores in a small number of markets to deliver groceries and certain essential items. But the merger will help to accelerate such efforts because of Postmates’ advanced technology platform, which offers better capabilities for batching orders together and increasing efficiencies. “The vision for us is to become an everyday service,” he said. Postmates is a “great step along that vision” of delivering anything to consumers homes within a couple hours.

The Postmates’ website offers more clues on this future. The upstart already delivers groceries, alcohol and drug-store items in some markets, so for the combined company, grocery may be the best area of focus to start. But Postmates’ platform also can be used for other retail products such as home goods as well. Investors should take note of this, especially given Uber management’s clear message that the deal has much deeper ramifications beyond food delivery. As the pandemic is structurally boosting the trends towards all things digital, the deal may pay bigger dividends for Uber —  and make Postmates less of a consolation prize.

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MyTown2Go is Joining the delivery.com Network

NEW YORK, July 7, 2020 /PRNewswire/ — delivery.com, a leading destination for local online food ordering and delivery that connects consumers and corporate clients to their favorite local businesses, today announced it is significantly expanding the reach and capabilities of its platform.  This expansion is due to nationwide food delivery service MyTown2Go. MyTown2Go brands Dinner Dart in Mississippi, Go Cravy in Florida and Gulf to Go in Alabama are also included. All four are now available exclusively through the delivery.com website and app. The current management and teams, located throughout the Midwest, will remain local to leverage their roots and take a local first approach to expanding online ordering and delivery services in their areas. Along with MyTown2Go’s markets, delivery.com now connects more than two and a half million customers and corporate clients with more than 19,000 restaurants, liquor stores, dry cleaners and other local businesses in 2,000 cities and growing.

Customers who live in the regions served can continue to order from their favorite local restaurants for delivery or pickup, and can now access the delivery.com suite of offerings:

  • Best-in-class technology and mobile apps: consumers can experience a frictionless, easy-to-use platform to order from their favorite neighborhood restaurants.
  • Order tracking: After placing their order, customers receive a link designed for tracking the progress of their order and stay up-to-date on its ETA.
  • Delivery Points: popular loyalty program from delivery.com that allows customers to earn free food and other rewards.
  • delivery.com Office: corporate clients can order catering, set up individual ordering for their offices, or use the Group Order feature.

“The broad reach of MyTown2Go and their brands will be a valuable addition to our team,” said Jed Kleckner, CEO of delivery.com. “They deeply value the neighborhoods they serve, and work closely with restaurants and local businesses. We’re excited to bring our technology and tools to their communities to provide a better ordering experience for everyone.

delivery.com and MyTown2Go share a “local first” approach to online ordering. delivery.com provides the exceptional ordering experience and delivery know-how that consumers have grown to expect from a national delivery brand. Together with deep local expertise, a network of drivers, and relationships with the best merchants that MyTown2Go supplies, delivery.com is poised to offer consumers end-to-end excellence while supporting the growth of local businesses.

“With everything going on in the world today, our customers were our top priority. They deserve the best experience possible, and we believe delivery.com provides that. We will have the backing of a large company, while keeping our hometown roots in place. That was very important to us. This was the perfect time to transition to a superior technology, which will improve overall efficiency and keep our existing customers happy. It will also help us gain more customers for the MyTown2Go family. Overall, we are very excited about the transition and look forward to serving our communities with this new platform,”  said Mike Hall, MyTown2Go CEO.

The announcement with MyTown2Go is part of a rapid series of acquisitions and partnerships and comes only weeks after delivery.com announced that California-based Doorbell Dining also joined their network. With the addition of 40,000 MyTown2Go customers, delivery.com expands its regional presence in 14 states and continues to grow nationwide.

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The Delayed DoorDash IPO Appears Imminent and Impressive

DoorDash, a leader in on-demand food delivery platforms, is currently ranked No. 12 on CNBC’s 2020 Disrupter’s 50 list. Earlier in the year, the company filed for an IPO (Initial Public Offering) but it was subsequently delayed due to the impact of the novel coronavirus. However it wouldn’t be surprising to see DoorDash stock hit the markets this year, especially given IPOs have been on the upswing.

Delayed IPOs: Doordash

Source: Sundry Photography / Shutterstock.com

So let’s take a look at the company backstory.  DoorDash came about in the same fashion as many great startups: the founders were frustrated! In this case, Stanford pals — Tony Xu, Andy Fang and Stanley Tang — didn’t have many restaurants that delivered to their dorm.

Why not build a platform to connect restaurants to customers via independent drivers, like Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT)? It was a pretty good idea and the founders wasted little time making this a reality.

While growth was strong, the founders had little trouble raising substantial amounts of venture capital, but there were still a lot of drama and controversy. In the early days, some food chains such as In-N-Out Burger filed lawsuits against DoorDash for trademark infringement and quality issues.

Then there was a class action suit from the company’s delivery drivers, alleging that they were misclassified as independent contractors when they were essentially employees (the question of worker classification follows Lyft and Uber to this day). DoorDash also came under fire for its tipping policy, when it was revealed that customers’ tips first went back to the company to be applied against the minimum order allocation, not directly to delivery workers.

But DoorDash has been able to manage through all this. The company has also been proactive in bolstering its management team and putting better systems in place.

The Platform

In a relatively short period of time, DoorDash stock has climbed dramatically in the private secondary markets. No doubt, the key has been its massive scale. This is critical since the margins are low in the food delivery market.

In fact, DoorDash is the leader in the US market, with a network that includes over 5,000 cities across all 50 states. There are also over 310,000 restaurants in the network, which include Mcdonald’s (NYSE:MCD), Chipotle Mexican Grill (NYSE:CMG) and Chick-Fil-A.

Another critical factor in the success of DoorDash has been its cutting-edge technology infrastructure. The company heavily utilizes AI and machine learning, which have allowed for solving extremely complicated logistical problems.

Will DoorDash Stock Be Public?

The food delivery market appears to be in the midst of a consolidation wave. The most notable merger came when GrubHub (NYSE:GRUB) and JustEatTakeaway.com, a top European operator, recently agreed to a $7.3 billion deal. This was after discussions between Uber and GrubHub fizzled.

But of course, Uber looked for a deal elsewhere — that is, the company entered discussions with rival Postmates. And the parties agreed to a $2.65 billion acquisition. Note that Uber Eats has been growing at a robust rate, with revenues up 52% in the latest quarter. By comparison, the revenues for the ride-sharing business were off a grueling 80% in April because of the pandemic.

In fact, the coronavirus has been yet another catalyst for dealmaking in the space. Under social distancing restrictions, restaurants have had little choice but to look at food delivery options.

So to gear up for the growth, DoorDash recently secured a round of funding of $400 million (the total funding will be about $2.5 billion). The valuation? It’s estimated at about $16 billion.

Again, as for the an IPO, this does look like an option for this year. As seen with a myriad of successful offerings like Lemonade (NYSE:LMND), Vroom (NASDAQ:VRM) and ZoomInfo Technologies (NASDAQ:ZI), there is intense interest for new offerings right now.

Besides, in DoorDash’s current round, T. Rowe Price and Fidelity Investments have expressed interest in participating. Of course, these are later-stage investors that usually come into rounds soon before an IPO.

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