#Mobility #Delivery #Logistics
It’s a bird, it’s a plane, it’s an Uber. Is this the future? On the back of Uber’s autonomous vehicle tech, the current Business Model split between ridesharing and food delivery paves the way for a company that recreates how we think about movement of goods and services. This is the Uber Business Model Canvas.
How does Uber make money?
Uber’s rise to notoriety was on the back of their ridesharing (Mobility) business. The Mobility business makes money by connecting consumers with local drivers, effectively intermediating the taxi business model and charging drivers a % of their fare earned.
They earn ~20% Margin from their Mobility business (ie. on $100 rideshare Booking, Uber would take back ~$20 net of the fare paid to the driver).
Subject to an array of factors, Uber’s advertised Take Rate of 25% (Uber’s net revenue from Bookings minus Driver fees) for Drivers ends up becoming closer to ~35% in aggregate, factoring in short rides against the backdrop of ‘booking fees.’ The Unit Economics of a short drive with a small fee, combined with the fact that many more consumers use Uber for short trips, means drivers see less than 75% of the revenue per booking, hence an ‘Effective Take Rate’ of closer to 35% or more based on 3rd party research. Whatever the Take Rate ends up being, the Net Margin for Uber is ~20% on Gross Bookings.
We have to remember that a few years ago, Uber’s Mobility business was losing money at a ridiculous rate. While their ridesharing business was growing, the narrative surrounding ‘autonomous vehicles’ was seeded to help paint the picture of a more profitable future for investors. When it IPO’d in Q2 2019 at a valuation of ~$80 Billion, the bet was that this company was effectively an automotive company!
At that moment in time, their business model was basically all ridesharing and their future as a profitable company essentially hinged on autonomous vehicles driving their cost structure down in order to make the ridesharing business profitable. Looking back at their Q2 2019 Earnings for context, we can see the beginning of a shift:
>the company announced a staggering loss of $5.2B in the Quarter
>the lone bright spot was Uber Eats (Delivery), which had grown 53% YoY (Year over Year) to revenue of $373 Million. This represented approximately 12% of Uber’s revenue
Fast forward to their Q4 2020 Earnings report – following a year of upheaval and transformation resulting from the pandemic – and we can see that their revenue from Delivery was nearly equal to their Mobility revenue.
We can see Delivery revenue increasing from $418M in the 4th Q of 2019 to $1,356B in the 4th Q of 2020, a 224% increase! Mobility revenue on the other hand decreased 52% over the same time period from $3.05B to $1.471B.
We can see that Delivery was NOT profitable, while Mobility was (based on segment EBITDA breakdown); but the change in trend nevertheless is still staggering.
The trend is in motion for Uber to run the world of transportation for both people and groceries in cities in the future. The Delivery business remains the subject of much debate in terms of expected profitability, which we discussed in our Business Model Canvas on Food Delivery.
Whether they use human drivers, autonomous vehicles, helicopters, or flying cars to drive Mobility and Delivery, it will only affect the margins in the end. The core Business Model for Uber is derived from a decade of technological development of their transportation platform (software) where they run the logistics of local delivery and urban transport in major cities worldwide.
Community-Centric or Commercial Partner Strategy?
Historically, Uber’s ridesharing business was all about creating a product that completely wowed consumers. As a company, under the leadership of founder and CEO Travis Kalanick, the company effectively deployed the world-domination strategy that put them at odds with governments and regulators worldwide. In that sense, Uber was sort of a community in its early days.
They were by far the dominant player in the ridesharing market in the mid 2010s, and they continue to maintain that dominance today, despite the cliff-drop in demand amid the pandemic.
They objectively* throttled market share away from competition in both the Taxi and Rental Car segments and forever altered the landscape of inner-city transportation.
*the ethical debate around Uber and their business practices is not part of this analysis. This is strictly focused on the Business Model and strategy applied to become dominant, not the Ethics of it
Part of what made Uber into what it was is that people in cities loved the convenience. Coupled with the rise of Airbnb, this new ‘sharing economy’ gave people the ability to travel and experience cities in ways that had never done before. Airbnb created Hosts as a new profession, while Uber helped create Drivers who rolled in Teslas and Black luxury vehicles rather than beat-up, yellow taxi cabs. The rise of the ‘private driver for everyone‘ vibe helped propel Uber into a company that felt community-centric, even though the reality was somewhat harsher than that.
Uber Eats rise, however, was under the leadership of Dara Khosrowshahi who came over from Expedia Group and succeeded the founder Kalanick as CEO in August 2017. The focus at that point was about reinventing Uber’s brazen image and moving beyond the slew of controversies of that era in preparation for its eventual IPO. At this point, Uber became more corporate and focused more on a commercial-partnership strategy.
Uber Eats was officially launched as a standalone product in Q2 2016. It had started out as ‘UberFresh’ and was used to experiment with delivery of groceries, convenience store items, etc. But the rapid growth of Food Delivery Apps in 2016/17 (Grubhub in the US and Deliveroo/Just Eat/etc in the UK) pushed the focus to food delivery.
By 2018, with the new CEO settled in and the narrative developing in preparation for the IPO, the company’s strategy shifted. Kalanick sold all of his stock, and with that, the company lost a lot of the charisma that made it dominant worldwide. If you take Uber’s market cap from its IPO to today (~$80B to ~$100B today), it is by no means spectacular, nor is it abysmal.
A more traditional corporate strategy – and shift away from helicopters and flying cars – may have, however, helped propel Uber Eats into its current position. Delivery has become a fortunate ‘hedge’ against the losses from the Mobility business, at least in terms of growth. How the Delivery business performs from here is the subject of much debate, but it has become a huge part of Uber’s strategy going forward given the events of the last year.
Uber has two key line items on its Financials:
>’ATG and Other Technology Programs‘ (Advanced Technology Group)
>’Platform R&D‘ (contained within ‘Corporate G&A and Platform R&D’)
The company sold-off its self-driving car business in Q4 2020 to Aurora, but Uber maintains an equity stake and board seat.
“Uber ATG lost $303 million between January and September of this year, according to financial filings, and the company has spent more than $1 billion in its five years of existence.”
We can see that the declining losses from ‘ATG’ on a quarterly basis, combined with the sale of its self-driving car business and rumoured sale of the air-taxi business, show the continuation of a long-term strategy focused on profitability by cutting non-core cost items.
Corporate G&A also includes certain shared costs such as finance, accounting, tax, human resources, information technology and legal costs. Platform R&D also includes mapping and payment technologies and support and development of the internal technology infrastructure.
Assuming that ATG is representative of more ‘moonshot’ technologies and Platform R&D is more representative in platform investments around logistics, delivery, and probably AI, we can see how this shift in the business model is being set in motion for 2021 and beyond.
The narrative of a business only becoming profitable because of ‘autonomous vehicles and self-driving cars’ shifts to a more sophisticated software business that can potentially dominate two huge markets: Mobility and Delivery (Freight growth it TBD).
Today’s stock market is rewarding Growth-at-all-Costs and seems to care little about profitability. But that could all change. Uber has shifted its business model from ridesharing, autonomous vehicles & self-driving cars, to logistics, delivery, and urban mobility. How this plays out in the long run all TBD (to be determined) at this point, as the company continues to lose A LOT of money each quarter.
Fundraising and Valuation
UBER raised $8.1B in its 2019 IPO. As of Q4 2020, the company had about $6.8B in cash/equivalents and another $9.8B in equity stakes in companies such as China-based Didi (valued at $6.8B), which it received when it exited the market in 2016.
As we have seen above, the company still loses in the neighborhood of at least $1 Billion every quarter. In 2019, they lost $8.51 Billion, while in 2020 they lost $6.77 Billion net.
Nonetheless, they continue to make acquisitions. The $2.65 Billion Postmates deal in 2020 was an all-stock deal. Their most recent acquisition of alcohol delivery service Drizly for $1.1 Billion was a mix of cash and stock.
Uber Business Model Canvas
A business model is defined as:
Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.
On-demand urban mobility (ridesharing) and delivery platform for consumers
Ridesharing – Quick pick-up, transparent pricing, multiple options for different consumer segments
Food and Grocery Delivery from local restaurants and merchants delivered door-to-door
Business Model Analytics
We covered some of the Business Model Analytics that could be used to assess Uber Eats success/shortcomings in our Canvas on Food Delivery.
As Uber Eats was losing $3.36 per order in mid 2020, we talked about assessing metrics around:
>Average Order Value (AOV), Customer Loyalty, and Average Spend per Year per Customer (~$220 in 2018)
Uber highlights its Subscription/Membership model in its most recent Investor Presentation.
Uber’s strategic advantage here is the ability to bundle the Mobility and Delivery product seamlessly. Lyft has a competitive product via partnership with Grubhub (via LyftPink), but Uber obviously has a lot more control. For now, they break it into separate products:
>Uber Pass ($24.99 per month): includes Mobility and Delivery
>Uber Eats Pass ($9.99 per month): Delivery only
We have discussed almost all major components of their business model throughout the post:
>margins on Delivery and Mobility
> segment EBITDA
> ATG (Advanced Technologies Group) expense profile, Platform R&D, Acquisitions, etc
The bottom line is that there is only so much further they can maneuver each segment of the business. Membership/Subscription seems to the main metric driving the profitability narrative at this point. The question is, can an increase in loyalty – combined with shifts in consumer behavior away from pay-per-use towards subscription-based models in the on-demand economy – lead towards profitability in the future?
Even though the number of users on Uber’s platform dropped by 16% in Q4 2020 from the previous-year quarter, it’s making more money from each of them, and Khosrowshahi repeatedly touted Uber’s membership growth to five million members worldwide.
There are times when technological innovation is optimal, and times when business model innovation is optimal. Given the blistering pace of technological innovation worldwide over the last decade, we may be entering an era where business model innovation becomes paramount. Uber will be a good case study in this regard given the shift in their business model to focus on profitability.