There are many reasons why companies go broke from unworkable business models, no product market fit, changes in consumer tastes, to competing in hypercompetitive markets where all the profits are competed away and Uber, for all its popularity and cultural relevance, look like a company that has bankruptcy written all over it.
There are a number of ways uber can go broke but the number one reason Uber can hit the wall is its bad unit economics. Uber from its inception has been subsiding rides in order to aid its impressive growth with the goal of dominating rideshare market which it has largely achieved but in pursuing this goal, Uber has become a bigger company with unit economics that sees them lose money on every ride .
It wasn’t that long ago when Uber thought it could innovate its way out its poor cost structure by replacing drivers with driverless cars but with time horizons for self-driving cars being kicked down the road, Uber have been forced to look for options to ease weaknesses in its business model.
However, looking closely, Uber hasn’t really addressed it’s poor unit economics which has led to historic quarterly losses.
While its poor unit economics have slightly eased in light of its dominant position in the marketplace and easing price-based competition from main US rival Lyft, Uber has hasn’t really done enough improve it and has in fact made it worse entering the food delivery business where unit economics are arguably worse and is extremely competitive.
Uber Eats is seen as potential pathway for Uber to reach profitability but the rapidly growing food delivery business is a money losing and highly competitive enterprise with shaky unit economics. With the onset of the COVID-19 pandemic, Uber Eats has become larger than main rideshare business thanks to food delivery becoming an essential service and social distancing measures which sounds positive on the face but with a closer look, food delivery becoming main business could be its downfall.
Unlike its rise to dominance in ridesharing where it was competing with taxi drivers, Uber Eats is doing battle with highly capitalized and competitive players which means it can’t simply use its superior funding to undercut them or offer better rates to steal couriers. Add to that crummy unit economics, Uber finds itself in another winner take all market but this time isn’t as well positioned to dominate (Uber Eats is currently the third largest player).
However, Uber hasn’t missed a step and acquired rival Postmates in a spate acquisition in the space which indicates that players are starting to realize whoever still standing isn’t going away. As the competition eases in the space, we could see the crummy economics improve but having said that, Uber Eats becoming Uber’s number one business isn’t as much of a step in the right direction as it looks.
Once again, Uber cannot innovate its way out of Uber Eats crummy cost structure and even it could through a breakthrough in driverless cars or drones, it wouldn’t be long before its competitors leverage these advancements unless Uber itself develops them which is unlikely. Uber has been down this road before only to seriously rollback its ambitions in lieu of the slow rate of advancement of driverless car technology and a damaging high-profile court battle with Google over stolen IP.
Add to that a death while testing its car, it's no wonder Uber has only recently started running trials after a sustained pause. Without the ability to innovate to drive down costs or address its long-term issue with unit economics, Uber is heading one way, bankruptcy or one of the largest meltdowns in US corporate history.
In sum, Uber are in a rock and a hard place and it hard to see them getting out of it alive.
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