By Tim Higgins
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 3, 2020).
Uber Technologies Inc. needs a win.
After a failed bid for Grubhub Inc., the ride-hailing giant is
trying to buy much smaller food-delivery company Postmates Inc. as
it seeks surer footing in the era of Covid-19.
The San Francisco-based company needs to get stronger in the
competitive world of food delivery as the pandemic has crushed its
rides business and surging infections have subsumed early hopes for
an economic recovery and people returning to offices.
The food-delivery industry was ripe for consolidation even
before the pandemic hit, as the biggest companies turned their
sights toward making profits on the heels of fast and expensive
growth and amid increasingly overlapping markets. As consumers
stayed home to stop the spread of the virus, food-delivery became a
lifeline for restaurants battered by lockdowns and a relative area
of activity in a deteriorating economy.
"Uber's back is against the wall to do a deal in food delivery
given the consolidation phase has kicked off," said Dan Ives, an
analyst for Wedbush Securities. "They're at the prom looking for a
dance partner and there's really only one in the room: It's
Mr. Ives estimates that Uber Eats could save itself seven to 10
years of trying to grow its business with a Postmates
In May, Uber cut roughly a quarter of its workforce and Chief
Executive Dara Khosrowshahi said the company planned to trim $1
billion in fixed costs after stay-at-home orders to halt the spread
of the coronavirus ravaged the company's core business. Rides,
which accounted for three-quarters of Uber's revenue before the
pandemic, plunged as much as 80% in April. Last month Mr.
Khosrowshahi said that had improved somewhat to a 70% decline.
He said in May that Uber Eats, the company's delivery arm, was a
bright spot. In the first quarter, Eats gross bookings surged 52%
from the year-earlier period to $4.68 billion. Analysts surveyed by
FactSet, on average, expect the category's second-quarter gross
bookings to jump 65% from last year to $5.6 billion.
Shares of the ride-hailing giant soared after reports this week
that it's in talks to acquire San Francisco-based Postmates for
$2.6 billion, as investors bet a tie-up would allow the company to
find savings amid the costly work of building out a delivery
operation. When news emerged June 10 that Grubhub had spurned Uber
for another suitor, Uber's shares had one of their worst days of
the year, underscoring the importance of some kind of deal.
The ride-hailing giant's shares have recovered from lows hit in
March as Uber cut jobs and costs and made clear efforts to
reposition itself amid the pandemic, but they haven't returned to
levels preceding news of GrubHub's sale.
Food delivery is an expensive undertaking, and companies have
offered steep discounts to get consumers to try out their services.
Morgan Stanley projects that Eats will lose $340 million next year
Uber didn't respond to a request for comment.
A deal would boost the ride-hailing company's food footprint in
Los Angeles and Phoenix, where Postmates has 35% and 19% of those
markets, respectively, according to research firm Second
Brian Nowak, an analyst at Morgan Stanley, estimates U.S.
food-delivery sales will grow to about $45 billion this year from
$31 billion in 2019. Mr. Nowak raised his estimate for 2020 based
on an expected shift to online ordering amid shelter-at-home
orders. He sees the industry growing to $86 billion in sales in
With about 23% of the U.S. market, Uber Eats slightly edged out
Grubhub in meal delivery sales in May, to be ranked No. 2 behind
DoorDash's 45%, according to Second Measure. Postmates had 8% of
the U.S. sales that month, the most recent full-month data
available from the researcher.
Uber's attempt to acquire Grubhub fell apart in June, in part
because of regulatory concerns that it would create a monopoly in
New York City. Instead, Grubhub turned to Dutch food-delivery giant
Just Eat Takeaway.com in a deal valued at $7 billion.
After that, Postmates, the smallest among the major U.S.
players, was seen as the next likely target for Uber. Should a deal
come together, it could be announced next week if not sooner,
according to a person familiar with the matter. There's no
guarantee a deal will be reached and Postmates, which has held
discussions with other possible buyers since at least last year,
has been simultaneously planning an initial public offering.
When Uber reported results for the first quarter in May, Mr.
Khosrowshahi said that along with growth in food delivery, he was
encouraged by early signs from markets that were beginning to open
But a return to normal is unlikely soon, as a recent surge in
Covid-19 cases and hospitalizations in states such as Florida,
Texas and California force or extend shutdown measures
California's turn from bright spot to hot spot is especially
troublesome for Uber, as two of its largest markets -- Los Angeles
and San Francisco -- are located in the state. Those cities along
with New York City, Chicago and London made up almost a quarter of
the company's gross ride bookings last year. Analysts surveyed by
FactSet, on average, expect Uber's ride-hailing gross bookings to
decline 62% in the second quarter compared with the first three
months of the year.
Gov. Gavin Newsom on Wednesday rolled back some reopening plans
as cases explode across America's most populous state. Among the
latest directives: mandatory closure of many indoor
Write to Tim Higgins at Tim.Higgins@WSJ.com
(END) Dow Jones Newswires
July 03, 2020 02:47 ET (06:47 GMT)
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