Retail giant Wal-Mart (NYSE:WMT) is testing a new, same-day delivery service with help from Silicon Valley “unicorns” Uber and Lyft.

It’s clear Wal-Mart wants to attract more customers to its promising online grocery business, but why are these high-tech archrivals so eager to collaborate with an old-school retailer?

In this week’s episode of Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and John Rosevear take a close-up look at Uber and Lyft and the fiercely competitive business of ride-hailing.

They dive into the challenges and controversies facing both companies as they fight for growth, their plans for expansion in international markets like China, how new technologies like self-driving cars will help the business evolve -- and, of course, what investors will want to know about this fast-growing industry.

A full transcript follows the video.

This podcast was recorded on June 7, 2016. 

Vincent Shen: This episode of Industry Focus is brought to you by Harry's. For guys who want a great shave experience for a fraction of what you're paying now, and just in time for Father's Day, you can get $5 off the limited-edition Father's Day set by entering promo code "Fool" when you check out.

Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It is Tuesday, June 7, and I am your host, Vincent Shen, here to bring you the latest news and insights from the consumer and retail sectors. Joining me remotely from Massachusetts today is our senior auto specialist and contributor, John Rosevear. How are you doing, John?

John Rosevear: I'm doing great, Vincent. How are you?

Shen: I'm doing well. I'm really excited to have you on. We're talking about some pretty interesting companies today. Actually, we're talking about mythical creatures and fairy tales -- at least that's the way I was inspired by some of the recent news from last week, and I'm specifically talking about giants and unicorns. Before I scare you off, and probably our listeners as well, I should clarify that I'm referring to the retail giant Wal-Mart, and the two unicorns are actually hailing from Silicon Valley. They're known as Uber and Lyft. If you're wondering what unicorns have to do with anything, that is the loving name given to start-up companies that have achieved a valuation of $1 billion or more, which, like the mythical horned creature, is a pretty rare and coveted feat.

There are some amusing offshoots to this term, too, that I thought I wanted to share with you, because I really thought this was pretty funny. For a Canadian start-up that reaches the same billion-dollar milestone, they are actually called narwhals, named after the horned whales found in the Canadian Arctic. If you go even bigger, a decacorn is a start-up with a $10 billion valuation, which, as you will see, Uber does qualify for, while Lyft is a little bit short.

Back to the consumer and retail world, and really, I feel like the story that brought us into these topics. Wal-Mart CEO Doug McMillon, he announced that his company would be partnering with Uber and Lyft to essentially have them offer last-mile delivery services for some of their grocery orders as they expand their e-commerce and direct consumer initiatives. For these companies -- the ride-sharing companies, at least -- we'll discover what their business is like, how they're expanding into complementary business, like in retail with delivery, and just what their story is like, some of the opportunities and challenges they have ahead. For our listeners, John, who might not be as familiar with these two unicorns, could you give us a really quick overview of Uber and Lyft and their business?

Rosevear: OK. These are two companies, the two leading companies -- in the United States, at least -- that specialize in what we call ride hailing. Most of you listening have probably had some experience with this, directly or indirectly, but for those who haven't, you get a smartphone app that allows you to summon a ride in many cities, from one of these companies. It's like a private taxi service. You use the app and summon a ride. Now, these are crowdsourced, we say. The drivers are not licensed taxi drivers or anything like that. They're just regular folks who have signed up with the service to provide rides, and Uber and Lyft say they're providing gig-type jobs for people, chances to make extra income, and so forth, as well as transportation that goes around a lot of the existing infrastructure and fills in some of the gaps.

Shen: I personally have used this service quite a bit, both during my time in New York and also my past few years living in D.C. I am somewhat agnostic between the two; I don't have a preference. Overall, it just depends on who's charging more and which one has a shorter wait time, but it seems like Uber is the far bigger, the dominant player in the space at the moment.

They also had a bit of the first-mover advantage. They were developed in 2009 by Travis Kalanick, who is still the CEO, and Garrett Camp, and they launched in San Francisco officially in May of 2010, whereas Lyft did not launch until June 2012, and that was started by Logan Green and John Zimmer as an offshoot, actually, of Zimride, which is another service that they were working on for longer ride shares between cities rather than within cities, which, I think, is the way that most people use these two services now. Beyond the ride hailing that you mentioned, the core service, with this Wal-Mart announcement, it seems like potentially, they're testing some new ways to grow their businesses, and it seems like, I think from my research, Uber has done this in the past with things like UberRUSH and UberEATS, but what do you think?

Rosevear: I think there's a lot of experimentation going on. This deal with Wal-Mart, it's, they're actually running three city tests. They've got Uber in Phoenix, they've got Lyft in Denver, and they've got a third start-up called Deliv in Miami. Deliv specifically does crowdsourced delivery services. They say their goal is to help their retail partners "out-Amazon (NASDAQ:AMZN) Amazon". You can see what everybody here is thinking, that Amazon is moving into same-day service, and Wal-Mart is like, "Whoa, we've got to compete with that."

It looks to me right now like this is a test. Where will this catch on, as well as how do the different partners for these tests perform -- Uber, Lyft, and Deliv? They may be in competition with each other in terms of who Wal-Mart will choose to go forward with long term, which is an interesting dynamic. It is interesting that they've signed up three different companies to do this in three different cities, but the general structure of it, as Wal-Mart has announced it, is a lot like the same-day service that Amazon has rolled out in some places. You order online, groceries, it's specifically for groceries. You order online, you choose a two-hour delivery window, and then whichever of these services is active in your city brings the stuff within that window, your groceries.

With respect to how it plays with some of the other stuff Uber has done, Uber is doing its own testing. They have this program, UberEATS, where they'll deliver your dinner. It's running in 16 U.S. and Canadian cities, I think, or maybe some in Europe, too. Then there's this little thing they've got going that they just started, UberRUSH, its courier service. It's just in three cities right now -- New York, San Francisco, and Chicago. Interestingly, it includes bike couriers as well as cars, but this is business courier service. We got to run the documents to the courthouse, we got to run this package to -- these samples to our client, that kind of thing. It's within a city, it's fast delivery, mostly for businesses, it sounds like.

Like I said, there's a lot of experimentation going on right now. Uber is experimenting, Wal-Mart is experimenting, we know Amazon is experimenting, although not with these services. Lyft is part of this experiment as well. What will get steam? What will people really dive into to adopt? Do Amazon Prime members really need same-day delivery, or is tomorrow fine? These are a lot of the things that are being explored right now. Jeff Bezos with Amazon seems determined to have the thing pop out of the computer the moment you click "order," or as close to that as he can possibly get. I think Wal-Mart needs to figure out how close to that do they need to get to stay competitive in a retail world that's increasingly dominated by Amazon.

Shen: Yes, and in general, the theme, it seems now with retail, and I've touched on this many times on the show, is that these companies want to get their customers whatever they're buying, as quickly as possible, if that is able to allow them to differentiate themselves and their services or their products in any way whatsoever. You're right. Do people absolutely need that within that two-hour window so soon, or is the next day or even two-day delivery, that's standard with Amazon Prime, for example, enough? But I'm curious to see what the results are from this initial testing. And just to add on to that, the cost, by the way, I think it's around $7 to $10 additional per order, if you're getting your groceries through Uber or Lyft through this testing. Then it's charged from Wal-Mart as if it's their shipping and handling, and then they pay to the ride-handling services on the back end.

Rosevear: Interesting, yeah.

Shen: With some of this expansion, too, I think we don't want to, I guess, get away from the fact that those are still very small parts of their business, both for Uber and Lyft. Ultimately, they have been able to reach the so-called "unicorn" status through their core ride-hailing service. Just to give you a sense of their size and their growth, investors for Uber have included some fellow tech companies like Microsoft and Baidu, a lot of institutional names like Goldman Sachs, BlackRock, government funds, and even some industry leaders like Jeff Bezos. As the biggest player, there has been a lot of fundraising for them, over $10 billion, I think, to date, which has given them quite a bit of a war chest, so to speak, to essentially expand as aggressively as they have.

They have a much bigger worldwide global footprint than Lyft does, which is still very much focused in the United States, but there were some leaked financials last year that I wanted to share with you from Uber that I thought were pretty interesting, giving you an idea of how this is basically a company that's bleeding growth, but also highly, highly unprofitable, which is common for these Silicon Valley start-ups.

Net revenue, or total bookings, actually, let's start there, were $3.6 billion for the first half of 2015. That's essentially everything that the drivers collect. They take a cut that's about 75%, so net revenue actually for Uber was about $663 million for that first half of last year. Keep in mind, that is up from $495 million in all of 2014. Just in that first half of the year, they're already on pace to easily double the prior-year amount.

Some of their expenses that are coming in -- 24% of their net revenue went to operations support, 27% went to general and administrative expenses, and then here's the kicker, 44% of their net revenue, so some $295 million for that period, went to sales and marketing. The competition in this transportation industry -- this niche, you might even call it -- has been very intense. Their GAAP losses amounted to about $671 million in 2014, and then $987 million, just for that first half of 2015.

Those are the most recent numbers I could find; whereas for Lyft, on their side, they're at a much smaller scale, where they had about a $127 million loss in the first half of 2015 on $47 million in revenue. They think their run rate, in terms of actual gross bookings, is at about $1 billion, and potentially more in the coming year, but they spent more than twice of their revenue, again, over the same period, on marketing. You can see how they're just trying to one up each other.

Moving forward, just wanted to talk a little bit about some of the challenges that they faced also. I know when we were speaking yesterday about this, you mentioned some of the legal hurdles, the regulatory hurdles, and just also the issue of finding drivers. If you could touch on that more, I'd love to hear it.

Rosevear: Well, I mean, we've all read about this. Uber and Lyft go into some city somewhere, and the taxi drivers protest and flip out, and the regulators say, "Well, we can't have unlicensed hackney carriages," or whatever. In some places this has been easy, and in some places like New York, they've worked to compromise, and in some places, like Austin, Texas, for the moment anyway, Uber and Lyft gave up. They said, "The rules you're demanding here are too onerous for us," and they went away.

There's been a lot of that. Uber, separately, has huge issues in China, where they are being outpaced by Didi, the local company, which is much bigger in China, in part because Didi is native to the country and native to dealing with Chinese very complicated government regulations and pacifying the officials in every city and so forth, to operate, whereas Uber has spent a lot of money trying to keep up and has maybe not kept up. There's a lot of skepticism that Uber is going to be able to really challenge Didi in China, whereas Lyft hasn't even bothered. Lyft partnered with Didi. Didi invested in Lyft, actually. I mean, they've gone right around those.

It's interesting that one of the big differences between the two companies is that Uber is doing things on its own, and Lyft is doing them through partners. We talk about retaining drivers, hiring, retaining drivers. That's a huge thing for both of them. One of the problems is people come and want to drive and they don't have what is deemed a suitable car, a car that's fairly nice and fairly new and that has a back seat that passengers can easily get in and out of. Uber has set up various leasing programs, including one that is getting some controversy right now, called Uber Xchange, which is a sub-prime leasing program for drivers with poor credit. You make weekly payments on your car that I think come out of your Lyft earnings, but it's a huge markup over what you'd pay if you just went to a Toyota dealer or whatever and got the same car.

Evan Niu, our senior technology specialist, has a great article on this on right now. It's really, the charges that they're charging these drivers for are really extreme, and it's the company-store thing. You've always got to work more to stay ahead of the company store and your debt to the company store.

Lyft is doing something a little different here. Lyft has, and I will look here to find the name of it briefly, they have something called Express Drive. This is something they've set up with their most recent big investor, who is not a Silicon Valley name; it's General Motors (NYSE:GM). GM and Lyft are doing some really interesting things. This is the first thing that came out of that partnership. It's a rental program, they've started it in Chicago and they're going to roll it out to other cities over the next year or so.

You rent, by the week, a GM vehicle. It starts at $99 a week, but here's the key. The more rides you give for Lyft during the week, the cheaper it is, and it can go right down to nothing, where Lyft is paying it. That $99 a week includes insurance and maintenance. The terms are more flexible, and this is part of how Lyft has been working against, with some of the controversy that has come around Uber. They're saying, "We're the kinder, gentler company. We're a little nicer to drive for. We take better care of our drivers; we provide a little better service." Whether all of that is true is open to some discussion, but that's certainly been their positioning, and it does seem to be working for them. Yeah. The big problem for them both is retaining and finding, drawing drivers. That's part of the expansion. I mean, they want more customers, and they want more drivers to serve those customers.

When we look at some of the deals like Wal-Mart, that's something that could grow into a big side business over time, but of course, they'll need to crowdsource the drivers to do it, at least for the next several years, because it's interesting that both of these companies are making big moves toward self-driving vehicles, which will replace drivers in time, or at least that's the thinking. I think that's the real investment bet here.

Shen: Yep. OK, so I definitely want to turn to that, some of the opportunities and the challenges with that, because I think Uber's CEO has talked a lot about the huge opportunity he sees with self-driving cars and changing their business model with their tens of thousands of drivers.

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Getting to the self-driving car thing that you mentioned, and some of these opportunities that the two companies, Uber and Lyft, have to face ahead of them. And actually, I want to double back really quickly, I hope listeners don't mind, to the Didi, the incumbent in China that leads with market share in that market, which you mentioned. In terms of the international expansion, Uber has been much more aggressive with that. Lyft has been much more focused on the U.S. and taking a more measured approach.

That partnership that you mentioned, with Didi investing in Lyft, they also launched a partnership in conjunction with Ola, which is the leading service in India, and then GrabTaxi, which leads for Southeast Asia, where the four of, these four services basically give riders a seamless experience in that you can use your native app. If you're a Lyft user, and you travel to China, you can use Didi ride-hailing services on that same Lyft app for that cross-functionality.

This is part of their, I think, alliance, essentially, to fight back against Uber and it's more dominant position, I think, overall. Something that's really interesting, behind the scenes, all these services that have allied together have shared a common investor that is coming out as a behind-the-scenes challenger to Uber, and that's Softbank, surprisingly, the telecom based out of Japan. An interesting dynamic there, but Softbank has pushed to invest a lot of money into start-ups, and this is just one byproduct of that.

More on the opportunities, now, with the self-driving cars, I've seen this presented both as a huge chance for them to essentially reduce their cost and to have a more flexible business model, but at the same time, I think it might represent a double-edged sword, because if you think like Alphabet (NASDAQ:GOOG) (NASDAQ: GOOGL), which is seen as a leader in the space in terms of actual driverless-car technology, they could hop into this themselves, couldn't they?

Rosevear: Well, our friends at Google Cars don't want to build cars. They would need an automaker partner. Let's back up a minute. Uber has a partnership going with a research team out of Carnegie Mellon, where they are working on self-driving technology. They just, a couple weeks ago, put their first self-driving prototype on the road in Pittsburgh, where they're testing it with the support of Pittsburgh's city government and so forth. I think their idea is that if the automakers don't get to market quickly enough with something, they will develop a system that maybe can be retrofitted to existing vehicles to provide self-driving technology.

Their program seems to be not too far along compared to where some rivals, and we're going to get into this in a moment, not just Alphabet's Google Cars, but some of the automakers are farther along than people realize, and one in particular, General Motors, put $500 million into Lyft in January, and has become Lyft's new best friend. This comes down to GM's new electric car, the Chevrolet Bolt. I think some casual investors have looked at it and said, "Ha-ha, it's ugly, and the Tesla's not ugly." What they're missing is that the Bolt was designed, in part, with ride hailing as well as ride sharing services, sort of a Zipcar type thing, that GM is starting on its own.

It's designed with those kinds of services in mind. It's an electric car that can be easily maneuvered in tight city spaces, it can come right up to the curb, it has great visibility, a rearview mirror that's aided by cameras to provide a much wider view, rear doors that open wide, a flat floor to make it easy to get in and out of the rear seat. I was looking at the car at the North American International Auto Show in January, and the GM folks who had worked on the project were going on and on about all the features that they'd built in for ride sharing and for ride hailing, for Lyft drivers, to make it friendly for Lyft drivers, and maybe even for Uber drivers, if they buy one on their own.

There's a program going forward. Lyft has talked about this, GM officially has no comment, but they certainly didn't challenge it when Lyft came out with this a few weeks ago, and said, "We're going to be testing a self-driving car service in a to-be-determined American city within a year, and the self-driving cars will be Chevrolet Bolts, equipped with GM self-driving technology," which has taken a big leap forward recently because they acquired another start-up called Cruise Automation, which apparently had the missing piece of the technology that GM had been struggling to develop. We don't know exactly the whole story around this, but this acquisition has apparently let GM take a big leap forward with self-driving cars, and Lyft is probably going to be the first to benefit from that with this test program.

They're actually going to be testing a self-driving taxi service. Apparently, the way this will work, at least in the beginning, to get people comfortable with it, is there will be a driver in the car, and you can opt in or opt out in the Lyft app. If you opt in, the car comes and picks you up, with a driver keeping an eye on things, but the car drives itself. This is part of their test program that they're going to roll out, and that this, in time, with this Express Drive service that Lyft has, where GM provides this weekly rental service to its driver, right now those are small Chevy SUVs, crossover SUVs. It's thought that, in a couple years, those are going to be Chevy Bolts. Maybe a few more years after that, there isn't going to be that, they're just going to be self-driving Chevy Bolts, and GM leases them to Lyft or something like that, or maybe Lyft will buy them. We don't know how that deal will work yet.

That does seem to be, given that finding drivers is the hassle here, just replacing the drivers with self-driving cars, in time, seems to be where both companies are going. Although, again, they're going about it very differently, where Uber is trying to grow the technology organically within its own organization, and Lyft is looking to partnerships to keep pace or maybe even get an advantage.

Shen: Yeah, absolutely. I was really surprised to see, in that General Motors-Lyft tie-up, how quickly they were expecting to do their first test with those Chevy Bolts that you mentioned, and just the fact that Uber has generally had that first-mover advantage, but I think management, their side, has generally said that the timing to launch a full driverless fleet wouldn't be until 2020, and here you have Lyft, in a not-yet-determined city, but potentially testing something within the next year. It's really incredible how quickly this is coming along after the investment that General Motors made earlier this year.

Rosevear: It's really GM, and just to take a little diversion here, GM, as Americans, I think we say, "Aha, stumblebum GM, they sell giant SUVs. They don't know anything about technology," but since GM reformed out of bankruptcy and got a new management team, it's a really different company, and they were maybe the first automaker to see what was coming out of Silicon Valley, between Tesla and companies like Uber in 2011, 2012, and really say, "OK, we got to jump on this." CEO Mary Barra talks repeatedly about how GM is determined to disrupt itself before anybody else does.

A lot of automakers are now saying things like this, but GM is actually doing it. They've got a very advanced self-driving program. They have started their own car-sharing service, sort of a Zipcar competitor, called Maven, which is in cities, which uses GM vehicles, and partly, this is a revenue opportunity for them, and partly, it's about, I think, introducing people to GM vehicles. If you're in your 20s, and you live in Chicago, and you use Maven to get that same Chevy Volt every weekend, and then you move to the suburbs, well, maybe Chevy is what you're going to consider when it's time for you to buy a car for your house, now that you're setting up a family outside of the city. I think that's part of their vision for this as well, and I think that might even be part of the partnership with Lyft. Lyft drivers, maybe they're young, and maybe as they, it's a way for them to expose this large crowd of people to General Motors vehicles.

GM has not traditionally been strong in American cities, doing better in the suburbs and in rural areas, and they would like to do better in cities, with cars like the Chevy Volt and, soon to come, the Chevy Bolt, and vehicles like that. It's interesting that they have been able to give Lyft a real boost, and to really jump into this partnership with Lyft, and step up and give them what looked like some roots to some really significant advantages.

Shen: Absolutely. So, tying this all together, I think some of our listeners are curious, like, "OK, these sound like interesting businesses, really incredible growth rates, big opportunity overall. Where is the investing angle?" I have to say that, at the time, right now, there is, it's quite a bit of uncertainty. Overall, Uber CEO Travis Kalanick, he's indicated that an IPO, if it were to happen, is still quite a long ways off, and they've generally been quite vague on timing. Lyft is in a similarly uncertain state regarding its IPO, especially considering both companies, very heavy spending and losses.

Some people have pinned a potential Uber IPO to the end of this year. I think that is calling it maybe a little too early. I think, if anything, listeners should take away, generally, just the scale and the growth behind these opportunities, and the fact that it's, they've had an opportunity to start making an impact outside of their core space with these partnerships with the auto industry, for example, but then also some of these expansions with Wal-Mart and with things like UberEATS, and delivery, and UberRUSH, for small business or enterprise courier services. It's interesting, at this point, I think it's too early to tell. These companies are so young -- six, seven years for Uber, and then just four or five years for Lyft, that they have an opportunity, I think, to still disrupt in a lot of different businesses and industries going forward, and it will just be a really fun, fun sector to watch. If there's anything else that you wanted to add, John ...

Rosevear: Yeah, I just wanted to add a note about the timing of a maybe IPO. Uber, just in the last couple of weeks, got a $3.5 billion investment from Saudi Arabia's public investment fund. Women, of course, are not allowed to have driver's licenses in Saudi Arabia, so the idea is that Uber will come in and give women rides so that they can get around. That says two things. First of all, Uber is having to go further and further afield for capital. I mean, they're long past the point where any of the Silicon Valley funding options are going to jump in there. They've already long since had investments from venture cap companies like Benchmark and Kleiner Perkins and some of the other ones you mentioned.

Shen: Of course.

Rosevear: They've got mutual fund investments, Fidelity is in; Wellington Management, which runs some of the active Vanguard funds and so forth, they're in. They got a small investment from Toyota, but that's more of a, that's not, that's very different from GM's investment in Lyft. I think Toyota is just putting a finger in the pie, or a toe in the water, perhaps, to see how this works.

Again, back to the point of the IPO, they're having to go farther and farther afield for capital, it seems, but they're finding capital. Likewise Lyft, which is a much smaller company and has taken in much less capital, I mean, they got $500 million from General Motors in January. I think Lyft's valuation is said to be about $5.5 billion in the round with General Motors, whereas Uber's valuation is at $62.5 billion. They are, in fact, the highest valued of all of the unicorns. They're a megacorn, even. The question is, I think, part of the question is, given that the IPO market has cooled off considerably in the last several months, can they go public at anything close to that? If not, what does that mean for their investors who are already on board and who invested at these really wild valuations?

Shen: Yeah, absolutely, and especially, I feel like the IPO market overall has cooled to some of these tech unicorns that you've mentioned. The fact that they were able to raise that $3.5 billion from that Saudi fund means they're probably not that hungry for capital, even though they need it with their expansion plans. Thanks a lot, John, for joining me on the show today. It was awesome having you on.

Rosevear: Thank you. Always a pleasure.

Shen: That's a wrap for us today, but you can continue the conversation with us via Twitter, @MFIndustryFocus, or send us any questions or comments via email, You could also enjoy the other great podcasts from The Motley Fool by checking out People in the program may own companies discussed in the show, and The Motley Fool may have formal recommendations for or against those stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening, and Fool on!

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