THE NEUTRAL ZONE
On Monday, The New York Times broke the news that Uber Technologies Inc. made a takeover offer of approximately $2.6 billion to buy Postmates, who is also considering an offer from a special purpose acquisition company. The deal comes as Uber looks for avenues to increase profits following a financial hit to its ride-sharing business amid the coronavirus pandemic, partially contributing to a reduction in headcount in May in order to “help save $1 billion annually.” Postmates has held discussions with other possible buyers since at least 2019 and has been simultaneously planning an IPO filing.
According to Statista, revenue in the online food delivery industry is projected to reach $136,431 million in 2020 and is expected to grow annually by approximately 7.5%. Uber and Postmates currently make up 22 and 8 percent of the meal delivery market, respectively. The coronavirus pandemic has boosted demand for food delivery services such as Uber Eats, GrubHub, and others.
In the company’s Q1 earnings call on May 7, Uber CEO Dara Khosrowshahi said, “Improving Eats margin and cost structure over time, just as we did with Rides, remains a key priority and we’re seeing improvements due to larger order sizes, improved career efficiencies and more efficient marketing and customer acquisition.” Uber’s acquisition play for Postmates follows a failed acquisition attempt of GrubHub in May.
Though Uber’s stock rose 4.9% on Monday, some analysts expressed doubt regarding the benefit it could bring for the company. Evercore ISI analyst Benjamin Black stated that the deal shows sound industrial logic, “though with three scaled players left in the market, it is debatable as to how impactful this transaction will be in expediting the timeline to rational pricing.” In addition, Uber is facing potential labor market changes, as California plans to ask a state court judge to force Uber and Lyft to “classify their ride-hail drivers as employees rather than contractors.” Uber has stated that the driver reclassification could result in over 158,000 drivers in California losing their jobs.
Uber in talks to buy Postmates – Salon – 7/1/2020
The low margins, heavy competition and fast worker turnover are disadvantages for companies in the food delivery service industry; consolidation would reduce competition and thus help Uber profit. Earlier this year Uber reportedly considered purchasing GrubHub, but the deal is said to have fallen through after the two companies failed to come to an agreement on price. The European food delivery service JustEats eventually purchased GrubHub in June for $7.3 billion. Postmate is also reported to have talked with DoorDash and GrubHub about a possible sale last year.
Uber potentially purchasing Postmates for $2.4B feels ‘a little expensive’: Former Uber CBO – Fox Business – 7/1/2020
Former Uber chief business officer Emil Michael on Uber’s discussion to buy Postmates and giving NYC restaurants a break on delivery fees.
Uber’s New Strategy: Buy Unprofitable Companies Like Postmates, ???, Profit – Vice – 6/30/2020
Uber is now interested in Postmates, which only enjoys 8 percent of the US market share and will now have to decide between going public or risking an acquisition that could raise antitrust concerns. Uber’s play here probably isn’t big enough to stop the chickens from coming home to roost—especially since Postmates’ business is concentrated in California where Attorney General Xavier Becerra may force gig platforms to properly classify their drivers as employees.
Uber Is Said to Be in Talks to Buy Delivery Rival Postmates – Bloomberg – 6/29/2020
The effects of the virus have boosted food delivery, though it hasn’t resulted in profits. The market is highly competitive, and the margins are slim. A deal could help Uber Eats, Uber’s delivery arm, at a time when the pandemic has decimated Uber’s main business of ride hailing. In recent months, Uber has cut about a quarter of its staff and shed side businesses.
Restaurants face high fees from delivery apps. Uber buying Postmates will make it worse. – Mashable – 7/2/2020
ostmates and Uber Eats make up 8 and 22 percent of the food delivery market, respectively. Consolidation means less competition. An Uber-Postmates deal would “increase the market power of the food delivery industry over restaurants,” said PitchBook mobility analyst Asad Hussain. “[It] could hurt margins for smaller restaurants as their bargaining power over fees becomes more limited.”
Shara Ovide on Twitter, 6/30/2020: Look, let’s just say it out loud: The economics of food delivery suck.And the way to make it suck less — at least for the delivery companies — is to merge, and make the economics suck less for them and more for us.
Dan Primack on Twitter, 6/30/2020: If Uber ends up with Postmates, it’s very much a consolation prize. In the same vein as a toaster oven.
Edward Ongweso Jr on Twitter, 6/30/2020: Uber’s goal has been: monopolies -> profits.
❌ Ride-hail monopoly
❌ Food-delivery monopoly
❌ Any monopoly
❌ Autonomous vehicles to cut labor costs
✅ Reclassification laws to explode labor costs
✅. Pricing wars in every market
Greg Roumeliotis on Twitter, 6/30/2020: Investment banker Michael Klein is leading the SPAC that is taking on Uber in the race for Postmates. IPO preparations continue.
Beth Williams Liou on Twitter, 6/30/2020: If at first you don’t succeed (in buying Grubhub), try try again (and go for Postmates this time). The logic of either deal is the same for Uber Eats. Read more from @bopinion’s Tae Kim (@firstadopter)