Since its establishment in 2009, Uber has been a pioneer in transforming the transportation industry, its inventive business model affecting a multitude of sectors and making it one of the globally leading private tech companies. However, its major stumbling block was its inability to consistently make a profit.
This changed seven months ago. Listed on the stock exchange, Uber disclosed an annual operating profit of $1.1 billion – the first of its kind. The achievement was greatly anticipated by investors and marked a shift in the company’s history. Dara Khosrowshahi, the CEO, regarded it as a turning point. Despite previous issues with regulatory bodies, toxic cultural allegations, and even claims of trade secret theft, Uber had made a significant stride. Khosrowshahi declared it as evidence of Uber’s potential for “robust profitable growth on a large scale”.
The challenge moving forward, now 15 years since its founding, is for Uber to maintain this. Khosrowshahi, who assumed leadership in 2017, led the company to profitability through a strategy focusing on its core business, reducing costs and selling off certain ventures including their driverless vehicles division. However, for continuous expansion, Uber must consistently add customers and improve its growing list of services.
In addition to car rides, customers can arrange flights, trains, scooters, tricycles, and even yacht travel. Through its additional customer application, Uber Eats, launched in 2015, individuals can easily order meals, groceries, or drinks at late hours. Furthermore, Uber Direct, the business-focused subsidiary, although small, is on the rise.
Deliveries for well-known brands such as Sephora, Walmart, Apple, and McDonald’s in the U.S., and supermarket giant Tesco in the U.K., are now carried out by Uber couriers.
Some supporters anticipate that this diversification of services could lead to the creation of a “universal app”, comparable to WeChat in China. This app allows users not only to send messages and play games but also to make payments. As one early investor in Uber, Bill Gurley, noted, this kind of ‘super-app’ has primarily been a Chinese achievement for which investors in the West have been eagerly searching.
Despite Uber’s pervasive presence to the point of becoming a verb in many places, only fewer than 10 per cent of American adults use the ride-booking services each month.
Khosrowshahi has affirmed his 2019 statement, advocating for Uber to be the “everyday life operating system”. He emphasises that Uber should be people’s first choice for travel and transportation. However, rather than constructing one unifying app, he confirms the company is instead developing three discrete applications: Uber for transportation; Uber Eats for food delivery; and a dedicated platform for drivers and delivery personnel.
Nevertheless, the competition is cut-throat. Competitors like Lyft, Bolt, and DoorDash are progressively introducing membership programmes to win customers. This focus on delivery has also plunged Uber into a more explicit rivalry with ecommerce behemoth Amazon. Youssef Squali, Truist Securities’ chief internet analyst, says the companies are emphatically on a clash trajectory.
Unfazed by the comparisons, Khosrowshahi states, “Uber’s technology can let all scale retailers challenge Amazon”. He posits that even though Amazon currently leads in ecommerce, Uber can still become the local commerce world champion. Predictably, Amazon has not remarked on this statement.
However, there are those who view Uber’s wide-ranging ambitions with scepticism, questioning whether the brand will be diluted or if their execution capabilities will be overwhelmed. This statement has come from an adviser to a competitive gig-economy business.
Uber’s annual operating profitability last year was achieved with an aggressive cost-cutting strategy, which caused one-fourth of its employees to lose their jobs during the pandemic and non-essential businesses to be sold off. However, the growing number of Uber service end-users stands as a testament to its continuing demand. It witnessed a surge in its active monthly users from 45 million at the end of 2016 to over 150 million in mid-2024.
Analyst Naveen Jayasundaram from ClearBridge Investments commented that Uber had withdrawn from markets where they didn’t foresee achieving the top spot. In comparison, rivals such as Deliveroo, Just Eat Takeaway and Delivery Hero are yet to announce any complete fiscal year of operating profitability.
At present, Uber seems to be back to its growth ambitions. The company has launched new products, including an Uber membership discounted for college students and a dedicated account for teenagers that allows adults to monitor their rides in real-time.
Uber, the popular ride-hailing service, is pushing to provide more cost-effective options, for instance, the advance-booking option of its Uber Shuttle shared service. The company has aggressive expansion plans with sights set on large untapped markets like Argentina and Japan, as announced in February.
Recently, Uber announced a multitude of collaborations with various companies like Instacart, a US-based online grocery delivery service, BYD, an electric vehicle manufacturer, and several autonomous vehicle companies. Although the company has relinquished its goal to develop its own autonomous vehicles, it still aims to be the favoured platform for those keen on utilising driverless rides. This year, partnerships were unveiled with troubled autonomous vehicle firm Cruise and Wayve, a self-autonomous software group. The company anticipates launching autonomous ride-hailing services in Austin and Atlanta in the US by early 2025, in collaboration with another partner, Waymo.
Uber is optimistic that driverless vehicles will bring in profits as there are no drivers to pay. However, this is a long-haul gamble. As stated by TD Cowen analyst John Blackledge, while autonomous vehicles might significantly boost Uber’s profit margins, it may take about 15 years. Additionally, such technology might benefit its competitors as well.
Furthermore, Uber is displaying keen interest in broadening its delivery service scope. As part of this effort, it’s now offering Uber Direct, a service lesser known yet rapidly growing, wherein purchases from retailers are directly delivered to consumers instead of orders placed through the Uber App.
The Uber app is increasingly gaining traction among merchants for advertising purposes, promoting their restaurants and offers. The advertising business of Uber has reported an impressive annual revenue run rate exceeding $1 billion this year, a testament to the strategic execution according to Gurley.
Uber One, the membership scheme, underlines Uber’s strategy and spans across both delivery and mobility. These 19-million strong members spend an approximate $10 monthly for benefits such as complimentary delivery and discounts on rides and deliveries. The company notes that these members spend 3.4 times more than non-members each month.
Uber’s platform advantage or power has been a frequent topic of discussion. Analysts from Deutsche Bank opined in February that this sets Uber apart from firms offering only one product. The argument suggests a constant increase in consumer usage could lead to larger profit margins for drivers and couriers, coupled with more availability and competitive pricing, all while expanding services.
Uber’s ceo, Khosrowshahi, asserts that the platform allows Uber to secure customers at a more economical rate, providing higher retained earnings over a customer’s lifetime compared to rivals while also able to launch new products in shorter time frames.
Uber’s CFO, Prashanth Mahendra-Rajah, affirmed in February that, despite skepticism, there is a rigorous criteria by which new product ideas are evaluated.
In terms of growth potential, although Uber has become a global household name (even turning into a common verb in many nations), under 10% of US adults over 18 use its ride-hailing service monthly. Despite Uber claiming to facilitate over a million trips globally per hour, usage in other significant markets remains equally low. According to Jayasundaram, “both ride sharing and delivery are still vastly under-utilised.”
The total value of bookings made on Uber’s platform increased by 19% in the recent quarter compared to last year. This represents a slight dip in growth compared to the past three quarters and considerably lower than the surge experienced in 2021 and 2022 which peaked at 114%.
Uber’s prediction in February was that there would be an increase in the value of bookings on its platform in the “mid to high teens” over the coming three years.
Despite these prospects, there are nagging concerns about workers’ compensation. Campaigners have advocated for improved pay and working conditions for some time now. The ways in which drivers and couriers are treated, and their employment status, has faced challenges from authorities and legal courts.
The UK Supreme court made a landmark judgement in 2021 declaring Uber drivers as workers, thus granting them entitlements like minimum wage. However, they are not yet categorised as employees. Notably, this ruling led to them being reclassified by Uber, marking one of the company’s most considerable acknowledgements to date. In contrast, in the US, California’s top court sustained a significant judgement in July, which allowed sectors to view workers as freelance contractors. Nations such as France, the Netherlands, Switzerland, and New Zealand have held similar discussions.
Uber has been appealing to drivers in a bid to increase the consumer demand which has grown due to reduced wait times and lower fees, an effect of a larger driver supply post-pandemic. However, according to Sergio Avedian, a consultant and driver, all drivers are feeling the pinch due to market oversupply. “Despit Uber’s lower pricing strategy is not yielding more money,” he says. “Currently, I can’t earn more than 20-21 dollars an hour before outgoings in LA.” However, Uber maintains that Californian drivers are assured to earn at least 120% of the minimum wage when on the job, a result of the ruling upheld by the state’s supreme court.
Despite legislative shifts in the UK, the surge of ride-sharing applications is placing significant strain on drivers, says Gavin, an Uber driver grappling with long-term Covid and unable to work on a full-time basis. “It now demands double the effort to make what I previously used to make,” he notes. Although Uber maintains that UK drivers are assured the national living wage when on duty with the potential for higher earnings, Gavin struggles to cover his vehicle costs and afford meals each week.
Uber’s CEO, Khosrowshahi, declared last year he was eager to evolve Uber Direct from a collaborator with 3,500 businesses to a partner with “every local retailer.” This not only challenges immediate opponents like DoorDash’s Drive service but also places Uber in direct competition with Amazon, the predominant operator in western online retailing.
Though Uber Direct remains a small segment compared to Amazon (company-specific sales are undisclosed, but aggregate revenue from Uber can’t hold a candle to Amazon’s net sales), Khosrowshahi remains optimistic. He insists that Uber’s technology enables local businesses, lacking in Amazon’s extensive logistics and delivery services, to be competitive with the e-commerce giant.
While Uber may not possess the extensive global network of warehouses and distribution centres that Amazon boasts of, its advantage lies in its relatively asset-light model. The company’s couriers typically service urban areas, delivering products ranging from groceries, clothing, electronics, and home essentials within a few hours of placing an order. This positions Uber favorably to cater to consumers’ increasing demand for speed and convenience.
Meanwhile, Amazon is pushing boundaries by expanding its delivery services to include same-day and next-day deliveries. It has also introduced new logistics services that involve enabling third-party sellers to utilise its network for deliveries, irrespective of whether they sell on Amazon’s platform.
Despite these developments, industry experts caution that the delivery sector is not as lucrative as ride-hailing, with profits being much thinner. They cite the example of The UPS-owned delivery service, Roadie, which has admitted that the race to deliver at the fastest speed sometimes results in loss-making deliveries.
There is speculation about whether these developments might transform Uber into a super app akin to China’s WeChat, which have become vital tools encompassing numerous aspects of consumers’ lives. However, given the abundance of specialised apps for various services from communication, navigation, to finance in the West, Uber seems to be pursuing a different strategy. Rather than a single app, the company operates three separate applications – for ride-hailing, delivery, and drivers.
While China’s WeChat is successful, other Asian super apps have faced challenges. For instance, both Singapore’s Grab (where Uber holds investments) and Indonesia’s GoTo were forced to downsize and cut unnecessary businesses in the face of mounting pressure from investors for profitability.
Much like Amazon, Uber hopes that its scale and technological capabilities, like mapping optimal routes for couriers, will enable it to keep costs low and integrate more services into its platform. This approach aligns with the Western strategy of having a collection of dedicated apps, as Dara Khosrowshahi, Uber CEO, highlighted in 2021 using the separate Gmail and Maps apps by Google as an example.
This model, however, may only succeed if the quick delivery of non-perishable items aligns with consumers’ needs and desires. After all, the delivery business model relies on consumer demand for speed and convenience.
A prominent international investor previously expressed uncertainty about the sustainability of the super-app model, arguing it has yet to fully mature and presents a constant dilemma between growth and profitability. Uber, renowned for thousands of established brand collaborations, has potential to divert some consumer traffic from Amazon. However, experts are sceptical about consumers’ willingness to routinely pay for speedy delivery, especially considering the economic uncertainties and the free rapid delivery service offered by Amazon Prime to its over 200 million users worldwide.
Bernstein analyst Nikhil Devnani questioned the size of this potential audience. His point being, widespread demand for quick delivery becomes questionable when moving beyond perishable goods. The primary focus remains on how many customers truly require or desire such swift service.
Uber, akin to Amazon, is relying on its extensive reach and cutting-edge technology to restrain cost escalation, even as it integrates more services. Owuraka Koney of Jennison Associates noted that the primary goal is to broaden delivery-related services on the platform.
However, despite its current status as a ‘super app’ within the US, becoming a global player along the lines of WeChat may prove to be a daunting challenge, according to analyst Youssef Squali.
Copyright The Financial Times Limited 2024.