Uber Eats’ Hungry New Strategy: Dominate or Exit

Uber Eats will now focus on becoming one of the top two players in individual markets and consider exiting those in which it's not, executives said on Monday.

Uber unveiled an aggressive strategy for its food delivery business: Become one of the top two players in cities where it operates or retreat from those areas within the next year and a half.

During the third quarter, Uber Eats missed Wall Street’s expectations for its gross bookings, or the money collected on the service before paying drivers or accounting for discounts.

Uber reported $3.66 billion in quarterly gross bookings for Eats versus the $3.96 billion that analysts had expected. Meanwhile, the loss for the unit, excluding certain expenses, grew 67% to $316 million from the third quarter of last year.

Overall, Uber lost $1.16 billion for the quarter on $3.8 billion in revenue, exceeding Wall Street’s already low expectations for the company. However, the miss on gross bookings for Eats coupled with smaller-than-expected growth in overall monthly active users spooked investors, sending Uber’s stock down more than 5% to $29.49 in after-hours trading.

But on Monday’s earnings call, Uber executives assured investors that they have a plan for Uber Eats. That plan, couched in financial speak, is to selectively retreat if the company can’t be among the top two in food delivery.

“Our commitment is to lean in if we think we can win … and if we think we can’t, be good stewards of capital,” said Nelson Chai, Uber’s chief financial officer.

Uber Eats has been one of the company’s fastest growing business units, bringing in $645 million in third quarter revenue, an 64% increase from the same quarter last year. For comparison, revenue from the company’s core ride-hailing business grew 21% over the same period to $2.9 billion. 

But the Eats business has faced increasing headwinds as competition from rivals like DoorDash and Grubhub intensifies and food delivery services ramp up customer discounts and driver incentives. And now the entire on-demand food delivery industry is being challenged by economic realities.

Last week, after reporting a quarter that fell short of analysts’ expectations, Grubhub’s stock dropped more than 40% in after-hours trading. By Monday, the company’s share price had recovered slightly to $35.01, but was still down considerably.

“There is a clear change going on the market as seen by the Grubhub debacle last week,” said Dan Ives, analyst at Wedbush Securities. “Uber is being more strategic about this business going forward.”

Meanwhile, privately-owned DoorDash has yet to publicly disclose its financial results. The company is one of the best-funded players in the business, having raised more than $1.97 billion since its inception in 2013, according to PitchBook. The funding has allowed it to branch out into renting shared kitchen space for restaurant delivery and to scoop up smaller food delivery services like Caviar.

On Monday’s earnings call, Uber CEO Dara Khosrowshahi advised investors against being distracted by heavily funded startups in food delivery and to focus more on players that can operate more efficiently.

“Many of the startups in the food category have been trying to use cheap capital to buy their way to growth,” he said. “But we’re seeing capital is getting expensive and can run dry.”

Uber executives bragged about Uber’s ability to cross promote its rides and Eats services to users across a big part of the globe—something that competitors can’t do because many of them have no ride-hailing business. It also thinks it can operate more efficiently because its drivers can shift between shuttling passengers and food with the click of a button.

This could translate into faster delivery times, said Tom White, analyst at D.A. Davidson. And Uber’s renewed focus on retreating from offering Eats in cities where it can’t win is a similar strategy to what the company has done before, White added.

“We’ve seen them do this in ridesharing,” White said. “They exited China, Russia … those were acknowledgements that they had doubts about their abilities to succeed there long term. They’re probably coming to those same realization in Eats.”

Uber also gave a loose goal of achieving a profit excluding certain expenses by 2021—following a similar statement from Lyft two weeks ago. But that doesn’t necessarily mean Uber Eats’ business will be profitable on an adjusted basis or even break even by then, executives said. 

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