Why Uber is so hungry to double down on the unprofitable business of food delivery

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Uber Technologies is reportedly in talks to buy Postmates for $2.6 billion, just a month after a proposed takeover of Grubhub fell through.

If combined, Uber Eats (22%) and Postmates (8%) would have a meal delivery market share of 30%, according to Second Measure data. That would be greater than Grubhub (23%), but still behind DoorDash (45%).

Food delivery apps like Uber Eats, Postmates, and Grubhub are all unprofitable. So why then is Uber Technologies—which is unprofitable and quickly burning up its billions in cash reserves—so hungry to add another unprofitable food delivery platform?

As Uber’s ride-hailing business sinks during the pandemic, it has been forced to lay off thousands of employees. But food delivery is actually benefiting from stay-at-home orders and the closure of most dine-in options. So it has no choice but to double down on meal delivery.

Since the onset of the pandemic, 23% of U.S. adults are ordering more from these platforms, according to a Fortune and Civis Analytics survey of 2,045 U.S. adults from May 22 to 27*. That’s a 39% uptick among people who already use the platforms. But the upswing varies greatly by age, with around 1 in 3 of U.S. adults under age 44 increasing online delivery orders, compared to 1 in 10 for Americans over 45.     

The Fortune and Civis Analytics survey found that 58% of U.S. adults say they now use food delivery services, and analysts project many will continue once the pandemic recedes.

If Uber Eats and Postmates combine, it’s likely Uber could cut 20% to 25% of the combined company’s costs due to eliminating overlap, says Daniel Ives, managing director of equity research at Wedbush Securities.

“I think if Uber does the Postmates deal, it could speed up profitability for Uber Eats by six to 12 months,” Ives told Fortune on Tuesday. And acquiring a bigger chunk of market share would help to make Uber Eats more competitive with industry leader DoorDash.

Ideally, Uber Eats would have combined with a bigger player, like Grubhub, which would have created even more scale and a faster route to profitability, Ives says. But after that fell through, Postmates became its last opportunity to make a deal.

“Uber is at the dance and looking for a partner. Postmates is the last available partner. Otherwise they’re going on the dance floor solo,” Ives says.

*Methodology: The Fortune-Civis Analytics survey was conducted among a national sample of 2,045 adults in the U.S. between May 22-27. The findings have been weighted for age, race, sex, education, and geography.

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Wed Jul 1 , 2020
After dropping its bid for Grubhub, Uber is now reportedly seeking to acquire food delivery company Postmates. But Postmates is not making the process straightforward. A blank check company led by investment banker Michael Klein has reportedly made an acquisition offer to the company — and Postmates has very much […]