Uber Wants To Take The ‘Food Delivery’ Road. But Why?

Acquiring Postmates, planning to deliver groceries — Why is Uber changing its strategy and what role does the pandemic play in it?

Uber + Postmates

Uber Technologies on Monday announced that it has acquired Postmastes Inc in a $2.65 billion *all-stock deal. Uber is looking to run the business alongside its own food delivery business, Uber Eats. This acquisition gives around 30% of the market share in the food delivery industry to Uber.

[*An all-stock deal is when the shareholders of the target company receive shares in the acquiring company as payment, rather than cash]

A little backstory on Postmates…

Postmates is an on-demand delivery platform, which delivers a wider range of goods including groceries, pharmacy items, party supplies and more to customers right at their doorstep from their favourite stores for a small fee. Private investors valued Postmates at $2.4 billion in September. The company has raised $906 million from investors.

You might wonder, why is Uber suddenly into food delivery..

Well, Uber didn’t decide to acquire Postmates yesterday. It has been having discussions with the company on and off for around four years but the talks accelerated around a week ago after Uber approached Postmates.

You may ask, “Why now”, “Why all of a sudden?”. Because it failed to acquire Grubhub. Uber Eats lost Grubhub to Just Eat Takeaway, a European delivery app, which came in and acquired the company for $7.3 billion. If Uber would have acquired Grubhub, it would have owned 55% of the food delivery market in the U.S and that’s a lion’s share.

Betting Big On Other Businesses

Uber’s decision to acquire Postmates and expand its food delivery segment makes a lot of sense, as its ride-hailing business was down by around 80% in April and in May, Uber said that its quarterly bookings plunged for the first time ever because of the effects of the coronavirus.

When the ride-hailing business was plunging, Uber Eats recorded a 52% surge in food delivery gross bookings to $4.68 billion in the first quarter and the Q2 bookings on Uber Eats are up by more than 100% year on year.

So, Uber, which once wanted to focus on its core business, is now shifting its focus towards its other businesses, such as food and grocery delivery. The company is also looking to buy a majority stake in the Chilean startup, Cornershop and Uber Eats’ director told Bloomberg , that “Delivering groceries is what’s next for us“.

Even though Uber Eats lost over $300 million in adjusted Ebitda, a measure of profitability, in its latest reported quarter, we can expect this acquisition of Postmates to help the company reduce the losses.

In conclusion, this might become a long fight for Uber as the food delivery industry has intense competition. In the U.S, DoorDash is the market leader with 45% of market share, followed by Grubhub with 23%. So, Uber has to compete with these two giants and this battle is not going to be easy.

People will continue to order food and groceries for a while due to fears around the pandemic and companies will try to capitalise this opportunity. And we believe that Uber is going to put its best foot forward and make a name in this industry and one day, Uber Eats might become more profitable than Uber.

Head to moneyguru’s Insight section to stay updated on all major financial news updates of the day!