By on May 12, 2020

Uber Technologies has reportedly made an offer to buy Grubhub — a food delivery service that links local restaurants directly to customers via a convenient app. Considering Uber Eats is as unprofitable as the company’s core ride-haling business, dropping a bunch of money to acquire a similar business seems silly… until you realize Grubhub is pretty much the only food-delivery outlet to occasionally turn a profit.

Buying up the only legitimate threat to your side business could be wise, even if it’s also somewhat monopolistic, but large, unprofitable tech entities with slick-sounding business plans and massive stock valuation seem bulletproof right now. They can buy up whatever outfits they want and nobody bats an eyelash until an isolated incident pops up that the media can temporarily harp on.

Even with the coronavirus rattling Uber’s share price in March, with ride frequencies more than halved in major metropolitan areas around the globe, its value crept back up in subsequent months. The company also enacted cost-cutting measures, eliminating 3,700 jobs and shuttering 180 driver service centers, with more cuts presumed to follow later this year. While dropping a few billion on Grubhub seems at odds with corporate thriftiness, it may prove beneficial in the long term — especially with investors heaping pressure on Uber to provide evidence it can someday become routinely profitable. 

According to Bloomberg, inside sources say discussions are ongoing, with no deal in place. A possible agreement could be finalized by the end of May if everything goes smoothly.

Grubhub, which has done okay during the pandemic as hungry people stay indoors (or can’t go to restaurants due to government mandates), witnessed its shares rise by as much as 37 percent after the New York Stock Exchange was temporarily halted over a “technical issue” last week. It took a hit last March, but the coronavirus ultimately worked in its favor, driving its share price beyond pre-COVID levels. Grubhub is currently valued at around $5 billion.

Uber’s market recovery has been less impressive, though it’s still interesting when you consider it lost $8.5 billion in 2019 and sees little chance of changing that in 2020. It’s still worth a whopping $57 billion.

From Bloomberg:

Uber is shuttering its own food-delivery unit, Uber Eats, in seven countries where the service has proven unpopular, it said last week. Those markets represented 1 percent of Uber Eats gross bookings and 4 percent of the business’s adjusted losses before interest, taxes and depreciation for the first quarter of 2020, the company said.

The Wall Street Journal also reported Tuesday on Uber’s approach to Grubhub.

Uber’s ride-hailing business has been hammered by the global pandemic, but delivering meals has helped the San Francisco-based company drive sales as people shelter in place. Still, the food delivery industry remains widely unprofitable, even as people rely on delivery to stay in their homes.

Uber also faces increasing pressure from regulators. The company’s business model is basically incompatible with California’s new gig-worker law (Assembly Bill 5) that makes it harder for the company to classify drivers as independent contractors. The Golden State had hoped to protect the workforce by not allowing companies to abuse independent contractors (a widespread issue warranting legitimate concern), but, as is often the case with regulations, complications cropped up after it was enacted in January. The law effectively forces companies to classify gig workers as fully fledged employees — entitled to a minimum wage, overtime, and benefits. Unfortunately, the shift resulted in fewer overall jobs while making some freelance professions technically illegal.

Uber was also kicked out of London after the city freaked out over isolated violent crimes relating to drivers. Other cities have banned the service for contributing to urban traffic congestion and presumed privacy vulnerabilities within the app.

These are severe headwinds, and yet Uber’s current plan is to have its first profitable year in 2021. Seeing the mounting pressure to do better, CEO Dara Khosrowshahi pushed that timeline up a bit in February by saying he was challenging staff to finally earn some money in Q4 of 2020.

[Image: Jonathan Weiss/Shutterstock]

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7 Comments on “Uber Reportedly Wants to Acquire Grubhub...”

  • avatar

    As much as I think spending money to acquire grubhub while they themselves are both unprofitable is fundamentally unwise choice, I think it’s one of the few long term investments that could pay off. That being said, I started to learn that stock valuation and profitability of a business are not longer correlated. It about the long term potential with many of the new kids on the block. That being said, I don’t see a scenario anywhere in the immediate future where they become profitable. If anything, I think they will see a decline in business as all the articles (many posted on this site no less) as of late having been indicating how much people want to abandon shared/mass transit and instead have there own vehicle. I don’t doubt it but the truth is a good portion of the car buying market won’t have a job or the disposable income to purchase one anytime soon. Most interviews are being done remotely so the new reality is until you actually get a job, there are very few places one has to drive to anymore. My local grocery store was offering free delivery of food on orders over $120. At that point, you really don’t need a vehicle for much at all.

    • 0 avatar

      At some point, every company has to make a profit, however small, Otherwise the SEC would investigate the company as a shell stock game.

      Uber might actually turn into a home delivery business. Why stop at food, when people can order stuff from Staples, or Target, or any other store that has a buy online and pick up at the store, and have Uber pick it up and deliver it?

  • avatar

    There is a significant backlash against delivery services – especially Uber Eats – in both Toronto and Washington, and I would expect elsewhere. Pay delivery services a 20-30% commission was a nuisance when delivery was a niche business and restaurants could look at it as a way attract dine-inn trade, but not any more. Restaurants are now screaming that they can’t afford these fees, and local politicians are at least listening. Consumers claim to be sympathetic, but who knows if that will lead to action.

    In both cities, people are publishing the rates charged by the various delivery services, and Uber Eats comes across as significantly the most expensive, which draws the obvious public opprobrium.

    I have seen/read of a number of restaurants that are organizing their own delivery, albeit within a limited area and/or encouraging consumers to use lower-cost services and especially to avoid Uber Eats.

    All of which suggests that the higher profile of food delivery services may not do them any good, at least in the near term.

    • 0 avatar

      These delivery apps are bad for everyone. The drivers make crap, and both the customer and the restaurant have to pay for the service. Yes, the apps get paid TWICE for every delivery, yet still somehow don’t make any money.

      • 0 avatar
        Arthur Dailey

        In addition at least one Toronto restaurant has gone public with its claims that Uber has not paid it for weeks and keeps giving it a run around.

        And Foodora is closing down/selling off rather than accepting the legal ruling that its delivery staff are indeed employees.

  • avatar

    This is like a meth addict moving in with a heroin junky because both are three months behind on the rent.

    • 0 avatar

      @ RHD – I like your postmodern spin on “two drunks trying to hold one another up.” I think I first heard that one used to describe the Packard-Studebaker merger (Studebaker being in far worse shape than Packard realized).

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