Over the years we’ve written a lot about Uber and much our work has been decidedly bearish. We’ve poured over the Los Gatos company’s terrible unit economics ), historically bad losses and the myriad of controversies with competitors, regulators and even their own drivers, however in spite of our still bearish position towards the ride haling and delivery giant, Uber as an investment makes a lot of sense and could shoot up significantly other the course of the year and beyond.
Uber, on the face of it, Uber is a terrible business with even worse growth prospects but that’s only if you see the company as merely a ridesharing company. During the Buildup to its IPO, the company touted itself as a “mobility” service but of late Uber has been moving away from mobility and the wholesale disruption of transportation as we suspect Uber has found its true core competence, distribution. While many (Including us) scoffed when Uber’s CEO were making comparisons between them and the 800-pound gorilla in every room imaginable, Amazon, the moves Uber have made in the last 18 months has made even long-time skeptics like us look more closely at what the company is trying achieve.
From acquiring food delivery business Postmates, moving into the grocery delivery market to paring down to outright selling off its risker bets, it’s no wonder Uber has been so confident in forecasting profitability by the end of 2021. But what has caught our eye is how potential and direct competitors have taken notice, especially Amazon
When you ask what makes Amazon so dominant you might get answer like Amazon prime loyalty program or Amazon cloud business Amazon Web Services but what makes Amazon dominant as well as dangerous is relatively simple.
There are many reasons why so many well run and funded companies are scared to death of Amazon but the biggest but less cited reason of what makes the Seattle based company so dominant and dangerous is the way for the last 20 years Amazon has innovated in the most critical yet unheralded organ of most businesses, its supply chain.
From one click ordering, free shipping to same day delivery, Amazon has been at the forefront of supply chain optimization and innovation with the customer, instead of products, at the forefront which has made the company almost impossible to compete with as through growing and optimizing its supply chain over time it has managed to change consumer expectations forcing its rivals to adapt as it also sets industry standards that most to this day cannot match. Read any blog or listen to any podcast about e-commerce, almost all the advice and guidance is to do what Amazon mastered 15 years ago which to us means that competing with Amazon is an ill-advised strategy.
There are a few companies that can match Amazon for supply chain excellence and even fewer that can match them for reach, customer data, value, convenience or selection which makes Amazon so dangerous to so many industries outside its bread-and-butter ecommerce business. The only companies that even have a chance of competing with Amazon often compete for sellers (Shopify) or match them in scale and operational excellence (Walmart) and even then, sellers (through Amazon’s FBA program) and large businesses have to contend with the Seattle ecommerce giant as they’re quickly becoming the only game in town.
Through all the tragedy and damage endured through the pandemic, what the COVID-19 crisis has done has revealed just how important supply chains are to the global economy and just how dependent the world is on the companies (Amazon) and nations (China) that have mastered it. It’s no surprise Amazon has been a big winner since the onset of COVID-19 as consumer in the face lockdowns and social distancing turned to companies offering goods online.
Ecommerce in truth is a horrible business plagued with low margins and competitors in every direction not to mention the presence of an 800-pound Gorilla that can do what you do but so much better because they’ve invented many of standards in the space. However, despite Amazon’s dominant position and the threat it poses to many industries, it has its eye on its nascent competition, Uber.
Most people see Uber as a ride sharing company but we see and what we think Amazon sees is an unlikely but increasingly credible threat to its dominance as the Los Gatos based company moves aggressively into last mile food and delivery markets. Think about it, Uber is asset light, global with a strong brand and has successfully disrupted transportation forever. It also cash for acquisitions and is improving its notoriously bad unit economics.
What Amazon sees is a company that is just as relentless as they are (just as ask Lyft) entering spaces quickly with better unit economics than their core business which while famously unprofitable can be repurposed as Uber could easily leverage its current driver pool to deliver goods. The company has already moved upstream with its Uber freight business and with a few smart acquisitions, could really disrupt the relatively archaic shipping industry.
We believe Amazon is beginning see a company widening its selection, collecting and leveraging customer data at scale while moving upstream without the possibility of competing with its partners which makes it attractive potential sellers who have burned by Amazon entering their category then undercutting them to oblivion. While Uber has gotten this far because it’s asset light, the company becomes a real threat the moment become more capital intensive. The best to start would be investing heavily and acquiring cloud kitchen companies in its biggest markets then charging restaurants a fee for based on usage.
As Amazon has proven beyond doubt, the great thing about supply chains is that every business you enter provides an opportunity to move either up or down stream to where the margin is largest and once Uber starts to move aggressively up and down stream towards the largest margin in each of its businesses, Uber becomes a trillion-dollar company quickly. While Uber path to trillion-dollar valuation is unlikely as it is difficult, what should give anybody bearish about Uber (including us) is how Amazon, arguably the hardest of the FAANG stocks to topple, is reacting to the nascent threat Uber could pose to their business.
You would have thought the 800-pound gorilla wouldn’t be worried about an upstart losing money left and right but Amazon clearly is taking notice of Uber’s potential to become a supply chain and distribution monster. It would be a far stretch to say Amazon were concerned about Uber’s relatively new focus (keeping a close eye would be a more apt description) but Amazon have clearly made a beeline for Uber.
In what looks like a completely defensive move in hindsight, Amazon invested in major UberEATS competitor Deliveroo when it was a death’s door made sense after UberEATS, as well other food delivery operators, made Amazon’s “Amazon Restaurants” business obsolete. It (investing in Deliveroo) was Amazon second chance to thrive in their highly lucrative food delivery market (projected by Morgan Stanley to be worth £470 billion by 2025) and since it’s investment Deliveroo has thrived but what spurred the investment in the first place was it not being able to compete with UberEATS in the first place,
A more direct shot at Uber was buying Zoox, an autonomous vehicle start-up months after the self-driving startup acquired Uber self-driving unit a few months earlier. While it makes sense for Amazon to enter the self-driving vehicle race as advances in the space could significantly impact its business, the fact it bought shortly after Uber sold its self-driving business shows that Amazon has Uber in its crosshairs or at least Uber is more than a blip on it radar.
However, Amazon aren’t the only competitor noticing Uber’s increasing focus on its new core competency. Instacart has been the first to blink with the company threatening to take the Chile based Cornershop to court for scraping and taking copyrighted product images. On top of that, Instacart are going for Uber’s neck accusing the ridesharing giant up having knowledge of Cornershop data scraping practices and alleging the only reason Uber acquired the online grocer was because it could, off the back of its illegal methods, scale faster into the US market. What could mean if Instacart wins is Uber picking a bill matching its $459 million it spent to acquire Cornershop.
While this can be explained away as Instacart checking a competitor overstepping the mark, the fact that it moved forward with legal action speak volumes to threat Uber’s new focus poses to even relatively new players. Instacart are very aware that the online grocery delivery market has better unit economics than food delivery and so do Uber. Instacart is also aware of the Uber’s well-earned reputation for being cutthroat and hyperaggressive towards its rivals but given the nature of the ridesharing business, it had to be.
The world is full of rough businesses but ridesharing has to be up there as ridesharing has proved to be the mother of all red ocean traps. In businesses like this, companies have to compete viciously for market share when the technology isn’t there to make innovation viable. Peter Thiel, the co-author of “Zero to One”, would balk at entering businesses like unless you can become the last mover in the space which is an unlikely outcome for Uber with Lyft threatening their lead in the US and its recent history of humiliating defeats or stalemates in growing number of markets (most famously in China to local competitor Didi Chixung in 2016 where Uber sold its Chinese operation to the Beijing based company).
Add to that super low switching costs, local network effects (which leaves Uber vulnerable to well run and funded local competitor's ala Didi Chixung) and no real customer loyalty beyond price (which are artificially low but now customers expect thanks to Uber’s aggressive strategy to capture the market through subsidizing the cost of rides pancaking) Uber quickly realized their core business was a money loser once it found out the hard way the technology (autonomous vehicles) wasn’t ready enough to make its ridesharing business viable.
However, what really makes Uber’s main business so awful is a lack of loyalty among its drivers mainly because the only value Uber can offer drivers is money. Reports vary how much Uber drivers make but it's clearly not enough as a 2017 report revealed that 96% of drivers are gone within a year.
What this means is that Uber have not only have to spend heavily acquiring customers and subsidizing rides but also have to spend heavily acquiring drivers who often leave Uber for other gig economy players that offer better perks and pay or work a regular job. This explains why Uber’s marketing costs are so high despite it being a global brand as it’s spending heavily to recruit new drivers they can’t keep and with its recent losses in US and UK courts, may have to pay as employees. While this may improve its retention among drivers, it makes reaching profitability harder in those markets as recent defeats in court could set a precedent and other countries could follow.
With this in mind, Uber knows it has to enter into other businesses with better economics and while the economics of the online grocery delivery business are notoriously trying, a growing number players (Including Instacart) in the marketplace are experiencing positive unit economics. While much of this success is taking place in a few markets, it’s more than enough reason for Uber at least to jump into the online grocery business and Instacart are acting like it knows it.
While Uber’s new focus makes a potential threat to Amazon and a host of other players, the company recent strategy could easily pancake as its susceptible to unforgiving unit economics in its new businesses. Uber are paying the price for choosing scale over its underlying economics and despite the case we’ve laid out above, Uber still looks like a company that looking for a way out of the worse place to be in business: being at scale and finding out you don’t have a business.
Uber’s not the first company to ignore its underlying economics but for it to become a real rather than a potential threat to Amazon it must address its cost structure or suffer the fate of “scale at all costs” disasters.
In sum, Uber new strategy has clearly ruffled the feathers of giant players such as Amazon as it bids to become a supply chain and distribution monster and has already butted heads to with online grocers which shows that Uber reputation for being cutthroat and aggressive precedes them. However, Uber new strategy is risky to say the least as it enters markets that are famous for bad underlying economics and intense competition which means Uber will have to fight tooth and nail for every gain. To wrap up, Uber have a way out to become Amazon but may have become a different company to do it.
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