Uber (UBER 0.96%) Eats is shrinking its footprint once again. Following the company's decision to back out of food delivery in South Korea in October, the ride-hailing giant is selling its Uber Eats India business to Zomato, an Indian app-based food delivery company, for $35 million and convertible stock equivalent to a 10% stake in the company.
CFO Nelson Chai explained the move, saying, "It is another proof point -- following our decision to exit Uber Eats South Korea in October 2019 -- of our commitment to take a hard look at Eats markets where we do not have a path to leadership. At least some of the investment that we would have otherwise made in India will now be redeployed to other countries we serve where we believe we have a clear path to #1 or #2."
Investors cheered the move, sending Uber shares up 7% as they seemed to interpret it as another step on the company's long road to profitability. Following a familiar playbook, at the same time, Uber cut its losses and took a stake in a fast-growing start-up in an emerging market.
Image source: Uber Eats.
Less is more
Following a disappointing IPO, several quarters of widening losses, Uber is singing a different tune. The company promised to deliver an adjusted EBITDA profit by the end of 2021. The quickest way to get there, it seems, is to sell off many of its loss-generating business and focus on categories and markets where it can be a leader, as Chai said above. That's a significant reversal from the early days when Uber had a grow-at-all-costs mentality and funding from Softbank and others was flowing freely. It also belies CEO Dara Khosrowshahi's frequent comparisons to Amazon more recently.
In the third quarter, Uber Eats' adjusted EBITDA loss expanded 67% to $316 million. It was by far the company's worst-performing category, and that realization seems to be in part what has driven sales of its businesses in India and South Korea.
On the last earnings call, Chai noted that Uber Eats is profitable on an adjusted EBITDA basis in nearly 100 cities, and said that 15% of Eats' gross bookings drive half of its adjusted EBITDA losses.
Given those facts, Uber is likely to continue to sell off underperforming businesses, but the exit from India, a huge emerging market, is noteworthy as management has argued so many times that its competitive advantage lies in how apps like Rides and Eats overlay each other and can benefit from things like cross-promotions and sharing the same customer base.
Threading the needle
Though Uber is still growing both organically and through acquisitions like Careem and Cornershop, the company will likely make changes to its portfolio several times before now and the end of next year as it strives for profitability.
Considering its statement that it will exit Eats markets where it doesn't see a path to No.1 or No.2, it's worth remembering that the company is actually No.3 in market share in the U.S., according to data from Second Measure. While I wouldn't expect Uber to abandon its position in the domestic food delivery wars, that market has become highly competitive, and profitability appears to be fast disappearing according to Grubhub's recent results. The cutthroat domestic food delivery market is just one of the many challenges the company faces as it works toward profitability.
In order to please investors and fulfill its promise, Uber needs to deliver strong revenue growth and make progress toward profitability. Investors like the latest move with the sale of Uber Eats India, but the road ahead won't be easy. We'll learn more when the company reports fourth-quarter earnings on Feb. 6.
