May 9, 2019 / 3:09 AM / 3 months ago

Breakingviews - Uber has recipes to avoid delivery indigestion

UberEats' application on a tablet and its food delivery box are pictured during the launching event of food-delivery service UberEats in Tokyo, Japan, September 28, 2016. REUTERS/Kim Kyung-Hoon

HONG KONG (Reuters Breakingviews) - Uber Technologies has recipes to avoid food delivery indigestion. The U.S. ride-hailing giant hopes a $795 billion global takeout market can offset slowing growth in its core business. Established rivals like Europe’s Takeaway.com suggest there are ingredients to aid success.

Uber Eats is a tantalising pitch to investors ahead of the parent’s blockbuster initial public offering later this week. The three-year-old service, which counts McDonald’s and Starbucks as partners, delivered an eye-popping $8 billion of meals last year, up from $3 billion in 2017. It already claims to be the world’s largest takeout service outside China.

Delivering Big Macs is a sideline for now, accounting for just 13 percent of Uber’s $11.3 billion of revenue last year. But Chief Executive Dara Khosrowshahi is expanding aggressively. So-called excess driver incentives – sweeteners from the company paid on top of regular delivery fees – more than tripled last year to $687 million. To attract restaurants, he charges lower commissions from major chains.

The company offers little detail, but those costs alone suggest Uber Eats is racking up stomach-churning losses. After paying out driver inducements, it effectively keeps less than 10 cents for every dollar of food delivered, 2018 numbers show. That’s before other costs like marketing and customer discounts. As a rough comparison, $6 billion GrubHub, a profitable U.S. rival, says it rakes in close to 20 cents.

Less-developed markets are one answer to pad revenue: populations are large and deliveries frequent. Unfortunately, meals are also cheaper, putting profitability even more distant. That may be the reason behind Uber’s mooted plans to swap Indian takeaways, its fastest-growing Eats business, for a stake in a local rival’s, according to the Economic Times.

A better option is to increase the so-called take rate, what it gets with each delivery, by becoming a price setter – even in just some markets. Dutch outfit Takeaway.com, which already has more than a 90-percent market share in Holland, acquired a rival’s German business after years of losses there, taking its share from 50 percent to 90 percent. The company is now set to deliver its first annual operating profit in 2019.

It’s picky eating, then, that can help Uber succeed in feeding hungry diners profitably. Absent that, expect hefty losses to add to those on ride-hailing – and give investors more heartburn.

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