Adam Schwab: Is the ride over for Uber?

Has Uber finally jumped the shark? Can CEO Dara Khosrowshahi manage another pivot, or has Uber’s questionable business model and increasing competition finally caught up with it?

While Uber has always had vocal critics, in particular surrounding its treatment of drivers, there was also genuine value created by its network. Uber essentially allowed both riders and drivers to create a reputation (essentially their personal brand) that itself was owned by Uber. Uber was then able to use its own customer relationships from its ubiquitous (but historically barely profitable) ride-share business into what many expected would be a more sustainable Uber Eats business.

Despite ride sharing largely returning to pre-pandemic levels and Uber Eats gaining hundreds of millions of users during the pandemic, Uber’s market value has slumped from US$117 billion ($164 billion) to US$42 billion ($59 billion); the world’s once largest unicorn’s market value is almost half of what it was when it was way back in June 2016 when Saudi Arabia’s Investment Fund provided US$3.5 billion ($4.93 billion) at a US$69 billion ($97 billion) valuation.

In its recent earnings announcement, the company noted that while revenue doubled in the March quarter to US$6.5 billion ($9.15 billion), the company is still generating negative cash flow of US$47 million ($66 million) and lost US$5.9 billion ($8.31 billion) (most of which related to disastrous equity investments).

The supply side

There has always been a genuine question over whether Uber’s original ride share business could ever be materially profitable. Uber’s controversial founder, Travis Kalanick, seemed to realise this way back in 2014 when he said “the reason Uber could be expensive is you’re paying for the other dude in the car…when there is no other dude in the car, the cost of taking an Uber anywhere is cheaper. Even on a road trip.”

Those comments didn’t do much to improve Uber’s relationship with its drivers and underlined a major problem with its business model. That is, Uber’s supply (its drivers) is fickle and expensive. Uber essentially was able to build its business exploiting a regulatory arbitrage that meant it could (and still does) treat drivers like independent contractors (who don’t get entitlements like annual or sick leave) and who need to provide (or lease) their own vehicles.

While courts have almost always erred on the side of the ride-sharing businesses (usually on the basis that drivers can work for multiple ride businesses and choose their work hours) it doesn’t change the underlying fact that being a driver isn’t a very lucrative endeavour.

This is not only bad for unskilled drivers, who often earn less than minimum wage, but for Uber itself, which has a huge cost in recruiting drivers to replace churn. Inexperienced drivers also create a terrible user experience for riders. Former AFL footballer and influencer, Dane Swan, put it best when he recently tweeted: “hey @Uber_Australia, Charge me $10 when I cancel what about the 35 Ubers than cancel me. Give me $10 credit every time they cancel you assholes. Absolute disgrace.”

Hey @Uber_Australia Charge me $10 when I cancel what about the 35 Ubers than cancel me. Give me $10 Credit every time they cancel you assholes. Absolute disgrace

— Dane Swan (@swandane) April 14, 2022

This is symptomatic of a platform that has such serious supply issues it has been forced to almost destroy its rider experience.

The demand side

Uber’s other problem is it operates in increasingly competitive markets. In its legacy ride business, it competes against Lyft in the US as well as bunch of local market leaders. Uber ended up withdrawing from key Asian markets after it wasn’t able to compete with the likes of Didi and Grab.

Uber’s bigger problem though is in the Eats space where it competes with DoorDash (which has also seen its market value also slump from US$88 billion ($123 billion) to only US$22 billion ($30 billion) and the Amazon-backed Deliveroo. Uber is also arguably contending with still-private Instacart and the rapid-delivery businesses like Gorillas and JOKR.

The competition is problematic in a few ways. Not only is Uber having to pay ever-increasing acquisition costs (Deliveroo for example has a subscription product to attract stickier customers), but also for restaurants which, understandably, will try to reduce commissions they pay to delivery companies.

This is reflected in slowing growth for the Uber Eats business. In the March quarter, Eats sales embarrassingly grew globally by only 12%. While the slow growth can be partially attributed to stay-at-home orders lifting in key markets, the Eats business was only able to generate EBITDA of US$30 million (compared to US$200 million for the rides business) during the quarter.

This is a business that is barely growing and makes almost no money — in short, it is almost valueless.

In trying to fix this, Uber is becoming increasingly desperate. To squeeze higher margins in a competitive environment, it is now imposing extra fees for customers. In addition to a compulsory service fee (which has been separated from the delivery fee) Uber is now charging customers an another fee to get their food delivered directly. If you don’t pay that blackmail, the driver will deliver another order first, meaning your food will almost certainly be cold. Essentially Uber is forcing customers to pay a fee to reduce the risk of making an already fairly ordinary experience even worse.

This writer, previously an avid Uber Eats user, now avoids it in almost all cases and instead, orders directly from restaurants, which have mostly built an online ordering systems. Going direct means your food isn’t ruined, it’s cheaper and a (usually family-owned) restaurant doesn’t need to pay a third of its revenue to a mendacious US-tech company.

Oh, and Uber was fined $26 million last month by the Australian Competition and Consumer Commission for essentially lying to 2 million customers about cancellation fees.

It appears Uber has switched its historical antipathy towards its riders to what it seems to think is a captive user base. This is unlikely to end well.