Wednesday, November 6, 2019
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Only two can win this game
The American business climate right now is defined by its duopolies.
Amazon (AMZN) and... oh wait.
So but as we near the end of the decade and reflect on what new companies reshaped our expectations and experiences as consumers, the rise of ride-sharing apps and food delivery appear to be most enduring.
In ride-sharing, the 2019 public debuts of Lyft (LYFT) and Uber (UBER) confirmed their primacy as the two players U.S. consumers can count on to find in almost every city. And their quarterly results have started to show investors that a path to profits is possible where only two dominant players exist.
Last week, Lyft reported that its adjusted EBITDA loss in the third quarter was cut in half from the prior year and the company expects to be profitable on an adjusted EBITDA basis by the end of 2021. Meanwhile, Uber reported Monday that its rides business is seeing slowing growth but accelerating profits, with adjusted EBITDA rising 52% to $631 million for that segment in the third quarter.
Uber's overall profitability, however, is held back by its more diverse business with one area in particular dragging down results in the third quarter: food delivery.
Uber Eats saw its adjusted EBITDA loss widen to $316 million in the third quarter, a 67% increase from the same quarter last year. These results follow GrubHub's (GRUB) 42% decline last week following results that were weaker than expected. And while the food delivery space faces a number of fundamental challenges — consumer behavior, labor costs, the transportability of certain foods — the industry at this point also simply has a few too many competitors for any one player to grow profits right now.
Data from Edison Trends published in early October showed that the food delivery space right now has three dominant players — Uber Eats, GrubHub, and the customer spend leader right now, DoorDash. Competition for customers and promotions have lead to ballooning losses at Uber Eats, eroding profits at GrubHub, while DoorDash — which isn’t profitable — just raised $600 million and is valued at $12.6 billion. GrubHub’s market cap is around $3.2 billion.
The companies in this space know that the industry must be “rationalized,” that this acquire-consumers-at-all costs dynamic can’t continue indefinitely. So when does it end? When a duopoly emerges.
“Our strategy for Eats is simple,” Uber CEO Dara Khosrowshahi told investors on the company’s earnings conference call Monday evening. “Invest aggressively into markets where we’re confident we can establish or defend a number one or number two position over the next 18 months.”
And just how fierce is the competition right now? Uber CFO Nelson Chai said on the call that the company has 100 Eats cities that are adjusted EBITDA positive. But because of competition from DoorDash, Postmates, GrubHub, etc., the company is recognizing half of its adjusted EBITDA margin loss on just 15% of gross bookings. This indicates that the customers deemed most valuable by the food delivery industry are being fought over with almost reckless abandon.
In a letter to its investors last week, GrubHub management spelled how the competition for new customers has weighed on its business, saying that “online diners are becoming more promiscuous.”
“We are confident we will be a major participant in future industry growth,” the company added, “which we believe still has a long way to go. That said, we have to balance our view of the long-term with the realities of the current environment we are operating in.”
It’s an environment full of companies subsidizing customer orders to create loyalty in an industry where customers and merchants have been so far trained not to have any. Because the next big incentive to order from another delivery platform is just an email or a push notification away. At least for now.
What to watch today
7 a.m. ET: MBA Mortgage Applications, week ended November 1 (0.6% prior)
8:30 a.m. ET: Nonfarm Productivity, Q3 preliminary (0.9% expected, 2.3% prior)
6:55 a.m. ET: CVS (CVS) is expected to report adjusted earnings of $1.77 per share on $$63.04 billion in revenue
7 a.m. ET: Wendy’s (WEN) is expected to report adjusted earnings of 15 cents per share on $434.38 million in revenue
Papa John’s (PZZA) is expected to report adjusted earnings of 22 cents per share on $384.60 million in revenue
4 p.m. ET: Roku (ROKU) is expected to report an adjusted earnings loss of 26 cents per share on $257 million in revenue
4:05 p.m. ET: Square (SQ) is expected to report adjusted earnings of 20 cents per share on $597.07 million in revenue
4:05 p.m. ET: Qualcomm (QCOM) is expected to report adjusted earnings of 71 cents per share on $4.71 billion in revenue
From Yahoo Finance
Reporter Brian Cheung will interview Charles Evans, president and CEO of the Federal Reserve Bank of Chicago, on The First Trade, which starts at 9 a.m. ET.
German factories show glimmer of recovery [Yahoo Finance UK]