This article was first published by MyWallSt. Do you want access to 25 years of market-beating experience in one day? Find out more about MyWallSt's exclusive InPerson November event!
Uber Technologies (UBER -0.32%) has transformed the modern transportion system across the world. It has been a key force behind the gig economy and has helped make getting from point A to point B cheaper and more convenient.
But it has not found a way to make all this profitable. What's more, it has lost many billions of dollars over the years trying to do so.
Here is a look at three reasons Uber continually falls short:
1. Spiraling costs
While Uber managed to get rid of two of the main costs associated with operating a taxi service -- by paying drivers as independent contractors rather than as employees, and not having to manage any physical assets -- the company's costs are still massive.
Operating losses in 2016 were $3 billion, $4.1 billion in 2017, and $3 billion in 2018. In Q2 2019, Uber posted its largest-ever loss, $5.2 billion.
Image source: Unsplash.
The company has constantly looked to expand geographically. Instead of establishing itself in one particular area, Uber wants the whole pie at once. While being an early mover is an important advantage, it can quickly lead to a company overstretching itself. It takes a huge amount of money to set up in new markets that have unique challenges.
When trying to break into the Chinese market, Uber spent about $2 billion to deal with local regulations, find drivers, and attract customers. Eventually, the company decided to exit the Chinese market, selling its business to local competitor Didi Chuxing.
Other companies have been entering the ridesharing space or trying to solidify their position in the market. Uber has spent hundreds of millions of dollars to try to drive out the competition.
As a result of a 12.5% monthly turnover rate of drivers, it has to spend a lot on promotion and marketing to ensure that the supply of drivers meets the demand. In 2018, it spent $3.1 billion on sales and marketing, with almost $900 million going to create additional incentives for drivers.
Customers are largely brand-agnostic when it comes to ride-hailing -- they'll just take the cheapest and more convenient option. This means that companies like Uber have to keep offering incentives to customers and drivers to keep their market share.
Besides all these business costs, there has been a tradition of unregulated corporate spending within the company. This includes spending millions on office renovations, lavish parties, and company events.
2. Mistreatment of employees
The issues inside the Uber corporate workforce and among its contracted drivers are well documented. A company can only go so far when its own employees are being mistreated.
The workplace at Uber was an aggressive and competitive one, with employees often pitted against one another. While this may have reflected the fast-paced environment the company was working in, inevitably cracks began to appear.
These incidents and the overall unethical culture at the company eventually led to co-founder and then-CEO Travis Kalanick resigning in 2017. The company has taken a lot of steps to change the work culture since CEO Dara Khosrowshahi stepped in. Employees say that the difference is like night and day.
A lot of drivers over the years have also felt mistreated by the company. Naturally, the obligations for Uber is lessened due to drivers being contractors and not employees, but there are basic protections that need to be met. Uber has used behavioral science to encourage drivers to work for longer hours and for less money by tweaking the app. Other issues include luring drivers to lower-demand locations.
3. Diworsification
As well as looking to take over the global market with its ridesharing service, Uber has also tried to get into other ventures, including self-driving cars, a freight service (Uber Freight), and food delivery (Uber Eats). It even plans to offer urban air transportation through Uber Elevate.
While putting all of your eggs in one basket is never a good idea, the same can be said for having too many baskets and not enough eggs. While some of these companies are doing well (particularly Uber Eats), they do not earn enough to cover the failings of its core business.
As a company, it clearly has a great vision: to make all forms of transportation more accessible, faster, cheaper, and more convenient. But it seems to be spreading itself too thin when its main business is still massively in the red.
Instead of trying to diversify into all of these other ventures, the best approach for Uber could be to get its core business in proper working order and turn a profit.
Image source: MyWallSt.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Uber. Read the full disclosure policy here.
