Uber Everything: Uber’s new billion dollar business
Nearly one month ago, TechCrunch published a story on Uber’s plan for a “massive merchant delivery program”. The article shared some leaked product screenshots of the new workflow for the Uber courier and driver app; however, it missed that Uber has been testing a delivery program for retailers since June of 2014. A few weeks ago, rumors started circulating that Uber is back raising more funds at a $50b valuation. In a similar light to Bill Gurley’s detailed analysis on Uber’s potential TAM, the objective of this post is to determine what kind of impact would a “shipping API” make on Uber’s revenue potential, not prove it’s current (or proposed) valuation.
I believe Uber can add another $1b to it’s annual revenue targeting the US market alone. Let’s begin by trying to layout the market.
Landscape / Challenges
- eCommerce is growing rapidly, faster than most expected
- Consumer expectations are changing: they increasingly want speed and convenience
- Only a few merchants have the capabilities to deliver quickly (mostly overnight as fastest option)
- Delivery services (e.g., Postmates, Instacart, etc.) tend to struggle with costs and efficiency, especially at scale
Now, what does a shipping API entail?
Solution
Uber is uniquely positioned to connect consumers to local inventory by enabling a retailer’s website or mobile application to offer “Uber Delivery” as a shipping option. It can develop and market a shipping API that will allow online retailers to introduce nearly instantaneous, “last-mile” delivery of goods to their customers at the point of checkout through the Uber platform. This solution has benefit for consumers, merchants, drivers and obviously Uber:
- Consumers: Allows immediate delivery of local inventory — ultimate convenience
- Merchants: Increases merchant potential revenue for immediate delivery of local goods
- Drivers: Further optimizes driver utilization and profit potential
- Uber: Increase revenue by expanding into shipping as a platform while leveraging existing driver base
Is this even a large enough market to go after? Do trends support 10 minute delivery windows?
Market Overview
eCommerce is growing, and omni-channel customers are more valuable:
- eCommerce is big (estimated at $350b), getting bigger (14.3% CAGR), growing faster (online sales grew 16% versus 2.4% for in store sales), and still early (makes up roughly 7% of total retail purchases)
- Omni-channel customers (those who shop online & in-store) have 30% higher LTV
A small number of merchants drive a majority of sales:
- 154 merchants out of the IR500 are retail chains and make up over 33% of total eCommerce sales
However, there are challenges for retailers:
- Shipping and handling fees are the number one factor driving shopping cart abandonment
- 30% of consumers make purchases offline because they want their items right away
We can estimate the potential market opportunity using the following key assumptions:
- US eCommerce sales = $350b (average order value in the US = $72)
- Total number of eCommerce orders in US = 4.8b
If average shipping costs typically range from $6 — $8 (on-demand or overnight costs tend to be significantly higher), this equates to a potential market opportunity of $27b to $44b. [See Appendix A: eCommerce Shipping Costs]
Competitive Landscape
I’m going to keep this section brief. The competitive landscape includes traditional logistics networks to startups focusing on B2B shipping. For same city, same day delivery, prices can vary from $5 to $60 with many time and supply restrictions. [See Appendix B: Competitive Landscape]
Given the existing players and growing number of startups in this space, is Uber’s offering really unique?
The Value Prop
A key component of Uber’s approach will be defining the value proposition for retailers. Nearly instantaneous delivery through Uber can help merchants keep up with competition (Amazon), retain the relationship with their customer (more than another entry in a competitive marketplace), and provide users with a better shopping experience (the popularity of on demand “apps” helps prove this trend).
But, same day delivery (let alone instantaneous delivery) is hard. Uber’s consumer facing application has limited screen real-estate which makes supporting certain verticals a problem. Most grocery stores have awful websites which don’t support online ordering, so Uber would have to build an entirely new app. Will the typical Uber black car or SUV fit a sofa? No. Uber will need a new inventory of vehicles to support those retailers. Do all apparel companies support in-store pick up or shipping from local stores? Some, but not all, which means those that don’t will have to change their in-store operations. This is massive training overhead.
So, let’s assume Uber doesn’t go after those particular verticals to start. We can start to prioritize their pipeline based on the top verticals by revenue and top products sold online, such as general department stores, clothing and apparel, consumer electronics, and household goods. We can deprioritize verticals, which require special vehicles (furniture) or consumer facing marketplaces (groceries). [See Appendix C: Potential Retail Verticals]
The following criteria should be used to define the pipeline
- Filter out retailers that don’t match target verticals
- Prioritize retailers which don’t require changes to Uber’s consumer product
- Focus on retailers which don’t require changes to the vehicle fleet
The supply and index of retailers will consist of:
- 154 Retail Chains from IR500 (33% of total eCommerce sales)
- 193 non-store retailers from IR500 (40% of total eCommerce sales)
- Plus others…(Etsy, eBay sellers, etc)
Financial Snapshot
Within the $27–44b total eCommerce shipping spend, we can estimate Uber’s addressable market using a filter of target verticals. We can take similar steps from our market sizing exercise to paint a more accurate picture of Uber’s potential revenue from a Shipping API product with the following assumptions:
- Estimated 2015 sales from target verticals — $125b (assuming $72 average order size for simplicity)
- Implies total orders of 1.7b
- $8–10 per order delivered (assumed similar to current eCommerce shipping rates, although Uber might want to charge less to grow demand and adoption)
- 50% share of revenue with drivers
Assuming 5–15% share of orders in the near-term, Uber can generate revenue of ~$350m to ~$1.3B. This is just in the US. That’s big. [See Appendix D: Revenue Opportunity Sizing]
In summary, Uber has some incredible upside, not even considering their existing restaurant delivery service, courier (UberRush) business, and the potential to eat into the current car ownership market.
The battle for last mile delivery is in the early stages and as consumers — we win.
