In this episode of Industry Focus: Tech, Dylan Lewis and senior technology specialist Evan Niu chat about the service industry and, in particular, the food delivery and restaurant industries, how they're working together to get meals delivered to your homes, and issues including workers' compensation and more.
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This video was recorded on April 17, 2020.
Dylan Lewis: It's Friday, April 17th, and we're talking about the food delivery space. I'm your host, Dylan Lewis, and I'm joined by Fool.com's Evan Niu. Evan, what's going on, man?
Evan Niu: Not much, stuck at home, just like you, just like everyone.
Lewis: But you have some kids at home, though.
Niu: Yeah, so they have started remote learning now. And we're lucky that our kids are at least old enough to where they can kind of be self-sufficient. You know, my youngest is seven so he's in first grade. So, he actually is doing pretty good for being able to stay focused on stuff, but in comparison, my brother has a newborn and a three-year-old, so [laughs] much harder to get work done from home when you have that age group running around -- toddlers just kind of always needing something.
Lewis: Yeah, I was talking to a friend last night actually, and they have two kids that are seven and 10. And I said, "I think that the current situation we're in, the amount that you're enjoying it is largely dictated by whether or not you have kids." [laughs] And it's something that has made it a lot easier if you don't -- it's a tough time for everyone, but I imagine it's very difficult for parents that are trying to balance work and school.
One little upside of all this, Evan, is that you finally got to see Austin Morgan. We're doing this over a Zoom call, and so often when we're in the studio, the camera is only on me. You had no idea what Austin looked like, and now you can put a face to the voice and the name.
Niu: Yeah, I was very confused as to who this person was when I joined the Zoom meeting. Like, that's not Dylan!
Lewis: Yeah. We got to give Austin more screen time and air time, I think. But today we're going to be talking about the ridesharing industry and the food delivery space. A couple of really interesting news items that came out about them recently. And I think that these are really businesses that are worth being in the news, because they are so essential to what's going on right now with everyone being at home.
Niu: Yeah, I mean I think, this whole crisis has really uncovered how essential, just broadly speaking, service workers are so important to keeping everything running from grocery stores to food delivery to, you know, just food supply stuff in general. And the kind of terrible thing is that these workers are, kind of, on the low end of income and pay within our economy relative to other people.
Lewis: Yeah, and these are folks who are generally not being offered health insurance and are contractor status. And so, they don't have a lot of the perks that come with full-time employment. And a lot of the companies that operate in this space have been targeted for that. We're going to be talking about Lyft (NASDAQ:LYFT), we're going to be talking about Uber (NYSE:UBER), we're also going to be talking about Grubhub (NYSE:GRUB) and some of the food delivery companies.
The first news item that I wanted to hit was the fact that Lyft is going to be getting into the delivery business, this is a company that has focused so long on self-driving and ridesharing and, kind of, pushing people, it seems that they are responding to current conditions and are now focusing on being someone that connects items as well.
Niu: Right. So, this week they announced a new program called Essential Deliveries, which is pretty much exactly what it sounds like. They're going to have their drivers delivering things to people. So, think meals, groceries, medical supplies, basic household items. But initially this program is really just, they're basically partnering with organizations that are helping to bring these types of supplies to places like senior homes, senior facilities, food banks for low-income families, stuff like that. It's not a consumer-facing service like Grubhub, where you can just order and have a meal delivered to your house. Because I think that type of platform takes more development and integrations on the backend to really get the infrastructure in place to where you can scale that. So, they probably don't have that ready yet. I imagine they're probably working on it, but we don't know, they haven't really said.
But it is notable, because Lyft has long resisted this whole idea of expanding into these other areas of ride-driving stuff, whereas Uber has long had Uber Eats, which is food delivery, they have Uber Freight, which is their freight network, and Lyft has not done any of that. And they've kind of been hesitant to do it, but now that we're seeing ridesharing demand and the core business get destroyed by the virus, which I think I've seen numbers that is down by 50%, they're, kind of, now exploring it because they need to be giving their drivers more work to do.
Lewis: Yeah, I think that this is probably a combination for them of goodwill efforts and trying to be helpful while we're dealing with such difficult times, and also, trying to keep people employed and trying to keep the folks that are part of their fleet working and driving and doing something, so that they can continue to pay the bills and that those people will stick around when we're back at a point where we can start taking rides again.
Niu: Right. And Uber has been in this business for much longer. I mean, they first started getting into food delivery back in 2014; so, they've been in this for a while. And it's interesting to look at some of the numbers, because being a somewhat more diversified business, you can kind of get an idea of where Lyft might be headed eventually.
But Uber had just, kind of, gotten its core ridesharing business to positive adjusted EBITDA last year; that was, like, $2.1 billion, but the Eats business lost $1.4 billion in adjusted EBITDA last year, because again, it kind of goes back to what we've always been talking about, which really boils down to really aggressive promotions, incentives, spending, stuff like that, that's really driving a lot of those losses. But even for Uber, their Eats business that's many years old, is still burning through a lot of money.
Lewis: Yeah. And I think in the last three months of 2019 alone, they did gross bookings of over $4 dollars for Uber Eats, which sounds incredible. And then, you know, you kind of start slowly chipping away at it. That means gap revenue of just over $700 million; adjusted net revenue, which is a metric they use, of over $400 million; by the time you get down to that EBITDA number for the quarter, I think it's a loss of over $400 million.
We have long talked about the fact that the ride-hailing business is a very difficult one; it's essentially a commodity. And this business of food delivery is really no different. You know, it's not like, any one service is going to be offering you a meaningfully better experience, what they might be able to do is offer more restaurants or be slightly more ubiquitous and give you more options, but at the end of the day, you really just want the food that you ordered to show up.
Niu: Right. One thing I've noticed recently during this crisis, which I'm kind of curious about as far as the economics goes that a lot of restaurants are now offering free delivery. You know, of course, you should still be tipping your driver and stuff like that. But, for example, Chipotle, right now my local Chipotle, you can order and there's no delivery fee, it's totally free as far as just the delivery itself, but then they outsource that to DoorDash or, I think, Buffalo Wild Wings, so same thing. But basically, all these restaurant chains are now partnering with the food delivery companies and offering free service. So, I'm just curious of what that looks like on the backend of the economics, like, who's paying who for what or -- just an interesting thing I've noticed during this crisis as these restaurants are trying to make up for the lost revenue by, at least, making it more convenient and cheaper for the consumer to actually just get food delivered at no cost to them other than the tip.
Lewis: Yeah, I mean if you're a restaurant, that's really the only way that you're keeping the doors open at this point, is if you're able to offer some delivery option. I would have to think, especially with those major chains, that the restaurants would be helping foot that bill, but I don't know for sure, I haven't seen reports on that.
And really the restaurant/food delivery dynamic has always been kind of a strained one. You know, the restaurant business is not an extremely profitable business, especially if you're more of a mom-and-pop shop. And these platforms that have connected customers to the restaurants, Grubhub, Postmates, DoorDash, Uber Eats, they have kind of collected a lot of flak for some of their practices. We're starting to see that come to a head a little bit.
Niu: Right. So, another thing that came out was there's a bunch of consumers in New York City have filed an antitrust lawsuit against these major food delivery platforms. And I think it's just a handful of consumers right now, but they're seeking class action status and they're seeking penalties or damages going back to, like, 2016, but their core allegation is that these companies, you know, there's only, like, four or five big food platforms like the ones you just mentioned. And the allegation is that they're abusing their market power, essentially keeping prices and fees high in a way that the restaurants have to pay these really high fees and then they pass those fees on to consumers in the form of higher prices. And I think the terms of the platform basically say you can't offer different prices based on dine-in versus delivery, but I think that restaurants, theoretically, can fulfill a delivery order a little bit cheaper than some dine-in orders because they have less overhead to deal with and they don't have to hire as many staff to do dishes and all the back kitchen stuff. So, theoretically, a local restaurant could maybe try to offer lower prices for delivery as a way to get more business, but the way that these platforms are set up, they're not allowed to do that, plus they're taking this huge chunk of the order itself. I mean, the fees range from 10% to 40%.
Like, 40% of a restaurant order coming out of a local mom-and-pop restaurant, it's just untenable. They can't survive on that.
Lewis: Yeah, that's huge and it's always been a point of conflict between these restaurants and these platforms, especially the smaller ones, particularly because some of these platforms have done some things that are maybe a little unsavory bordering on unethical with what they've done to present themselves as these restaurants or you create a web presence for these companies that looks an awful lot like the web presence those companies already have.
Niu: Right. We've talked about this before, I think. But, yeah, Grubhub came under fire last summer over all these really shady things where they would set up phone numbers on online platforms that redirect through Grubhub to the restaurant and in the process they get an even bigger cut of [laughs] the order and they also set up websites that do the same thing. Basically, all these things that look like they're representing the restaurant itself, but it's really just a way they jack up their fees.
In some cases they're charging for phone orders that don't even exist because if a person calls the restaurant through one of these numbers, but let's say they're just asking for hours or directions, Grubhub might think they placed order and they're going to charge the restaurant owner, [laughs] like, $8 or something for a phone call; which is just ridiculous. And it's buried in legalese that they're allowed to do this, but certainly the restaurants haven't read these little fine print things, so it's kind of -- that's why it's just so shady. And I mean, Grubhub has also said they're going to be putting a lot of their profits back into supporting the industry through various programs because of this whole crisis, and they updated their guidance recently and said that basically they had previously been targeting some level of adjusted EBITDA, but they're going to basically go for sacrifice a bunch of that by reinvesting that into the industry in the form of, like, lower fees and all the stuff. So, they're trying to do what they can, but at the same time, it's like, these criticisms are still kind of valid in my opinion.
Lewis: Yeah, I'm actually kind of surprised that this lawsuit is coming from consumers and not coming from restaurants themselves. I think it's one of the more interesting elements of it. Like, I guess the logic flow is that the higher prices that these restaurants are being forced to charge are then being passed along to the consumer and so the consumers are being harmed, but at the end the day, I mean it's the restaurants real battle with these guys because you know if you're running on pretty slim restaurant margins and you have to pay $7 or $8 because someone called this number asking for your hours and didn't even place an order, that's going to really eat into your margins.
Niu: I mean, it comes back to that power dynamic too of just, like -- if you're a restaurant, but these platforms are bullying you, but they're also a big, huge source of business for you, like, you don't have a whole lot of leeway, because if you sue them what if they kick you out of the platform and now your business is just screwed too. I mean, it's just a really tough position for them to be in. And there's not really a whole lot they can do unless they all band together like these consumers are doing, which, again, they're seeking class action status, but who knows how that will play out.
Lewis: Yeah, and it's not like restaurants are really in a position of strength right now. For the most part, based on the estimates I was seeing, pre-COVID a lot of restaurants in major metro areas would see somewhere between 20% and 40% of their orders coming through these platforms. Now, if you're using those platforms at all, it's probably a 100% or darn close to it just because there aren't very many options, and not most people live very close to the restaurant, they aren't going to risk going outside to go pick it up or getting in their car or taking an Uber to go there, they've going to have someone come and deliver it. And so, I have to imagine that number is north of 70% for most restaurants.
So, we've talked a lot about all of the different businesses that are kind of, like, uniquely positioned to be in a place of strength, really, during COVID, and, you know, the Netflixes, the Zooms come to mind, these are companies that are probably more relevant than they've ever been, and yet, are kind of in a position where it doesn't really translate into financial strength for them, because they're kind of in a position where they have to provide these goodwill services to help everyone weather what's going on.
Niu: Right. And it really kind of goes back to all the cracks in the model that we've talked about whenever we've talked about ridesharing, which is, this industry has long been essentially funded and subsidized by venture capitalists to the point where the prices and the fares for these services are so low and unsustainably so, which also means that the company itself is not in a good position to really offer good protections for these workers that are, obviously, essential at this point in terms of, like, you know, paid sick leave, health insurance, which are like the two biggest things right now.
And so, I think that the crisis is really just shining light on some of the flaws in this model. And it's just such a tough time for all of these companies. And, you know, the companies are in a bad position, but it's also, kind of, their own fault, but I just feel bad for the drivers themselves because the drivers themselves should be getting -- you know, we should be taking better care of them, they should be getting better benefits and they should probably be making more money.
Lewis: Yeah. And what's tough about this is the model is flawed, like you talked about, you know, the restaurant business has razor-thin margins. We talked about what was going on with Uber Eats before and how that operation's losing money. And if you look at the financials for Grubhub, the story is pretty similar. They did over $1 billion in revenue over the past 12 months, gross profit of over $500 million on that. And they posted a slight operating loss. So, before we even get down to the bottom-line, they're losing money.
Now, there was a time where Grubhub was profitable and they had gross margins of over 50%, but as the space has gotten more competitive, they've had to offer promotions, they've had to discount, they've had to do all these different things, and that's kind of the problem with being a commodity business.
Niu: Right. And at this point, there's also been a lot of kind of consolidation in terms of how big these companies are getting. You mentioned earlier, that's like, four or five to different platforms, you have Grubhub, Postmates, DoorDash, Uber Eats, there's probably another one I'm forgetting, but the more power that gets concentrated on that level of the value chain, the worse off everyone is in terms of, like, the restaurants and the drivers, and arguably the consumers, because again, it goes back to higher prices, arguably. So, I mean, they're really consolidating a lot of power and they're not even profitable. [laughs]
Lewis: [laughs] Yeah, it's a tough space to watch, honestly, because even if someone wins, it's probably coming at the expense of the restaurants or its meaning that consumers are paying more. I think the only way that a lot of these businesses wind up becoming profitable long-term and really being successful is by squeezing the margins there and really, kind of, exerting their power, which is something that ultimately may be good for investors, but not so great for consumers and restaurants.
Niu: Right. I mean, at this point, I'm not a fan of these platforms for a lot of the same reasons I'm not a fan of ridesharing because of all these things, these criticisms that we talked about. So, even for me, I personally have stopped using Grubhub. I used to use it all the time because the app is really nice, it's convenient, it's super-easy to order with your phone, to pay with your Face ID. It's really intuitive and easy, but if that means that my favorite local restaurant is getting, kind of, screwed in terms of the money, then I'm going to prefer to call them directly and just place the order myself, even though it's a little bit less convenient but it's more sustainable and supporting my local economy.
Lewis: Yeah, that's the problem with adding middleman to anything [laughs] there winds up being some money taken out along the way. How have you guys been handling being in the house, Evan. Have you guys been cooking more or have you been ordering in?
Niu: Well, for the first couple of weeks where, you know, right when everyone was really scared, like, we went and stocked up on tons of canned foods and all the stuff and we were cooking a lot, but then as things calmed down and we realized, like, oh, food supply is still pretty strong, you can still order from your restaurants as long as you're just taking home, you can get delivery. So, we've started to slowly do -- just because the dishes have been getting kind of [laughs] overwhelming, with four people in the house, eating three meals a day, you know, the dishes exponentially [laughs] goes up as far as your chores. So, we've been slowly offloading by picking it up a bit more lately, the past couple of days and past week or so.
Lewis: Got you. Yeah, I have resisted the urge to call in and get delivery. I'm trying to work through everything in my pantry at the moment, because I'm going to be in the process of moving over the next couple of weeks. And so, I thought that would be a good opportunity to clean house, so to speak, and so I'm finding muesli from, like, six months ago, I'm finding dried fruit back there. It's a real hodgepodge of things that past-Dylan has bought. [laughs]
Our producer, Austin Morgan, you've done some pretty awesome smoking and grilling in the past. Have you taken on any cool food projects since you've been staying at home?
Austin Morgan: Yeah. It's actually pretty hard to find the meat. We went to Costco last week and I got brisket and I also got some ribs, so we did brisket last week, and we'll do ribs this weekend.
Lewis: Well, there you go; that's something to look forward to. I think, that's the key -- you got to find some fun stuff to make the weekend actually feel like the weekend.
Morgan: The good thing is ribs take all day long.
Lewis: Ribs. [laughs] Yeah, I mean, ribs are the perfect stay-at-home kind of thing. I would like to do some of that while I'm working from home; I got to get on that as well. But I've got a movie situation set up with friends for Saturday night, which I'm pretty excited about. I have a friend who's like a film buff and so he's going to be doing this primer on this Japanese film Lady Snowblood.
Niu: It's like a watch party on Zoom or Facebook or something? How are you watching together?
Lewis: So, we can all rent it in our individual homes. It's on YouTube for, like, $3, and it's this 1970s Japanese horror movie. And he's like a deep film buff and is super into cinema and explaining themes and all that kind of stuff. So, he's going to give us 10 or 15 minutes of preamble, then we're going to watch it and we're going to come back and talk about it. So, that's going to be our Saturday night.
Niu: So, it's not like you all push "play" at the same time and you're on like a group FaceTime and --
Lewis: [laughs] No, I think -- he was like, well, we could like try to stream on someone's laptop, but I said, I don't think that's going to work. [laughs] I think the audio quality is going to be a little too rough on that, but, yeah, I think the key for all of this is supporting local when you can and just trying to make the weekend feel like the weekend. Anything fun for you, Evan?
Niu: No, man. All these days are bleeding together [laughs] even more so than usual, but, yeah, we don't have anything planned, It's also snowing here. [laughs] It's like mid-April, and it's supposed to snow, I don't know if it's going to be snowing all weekend, but it's been snowing the past couple of days. So, we're kind of stuck inside; even more reasons to be stuck inside.
Lewis: Yeah. You know, we're not the only ones that are trying to come up with fun ways to pass the time, I'm sure our listeners are as well. And we threw out a couple of ideas there. You know, getting after it with the food, maybe doing some movie stuff with friends. If you have any ideas or any fun ways that you've been passing time, we'd love to hear about it -- IndustryFocus@Fool.com.
Niu: Probably do a lot of LEGOs this weekend.
Lewis: Oh, I bet. Yeah. [laughs]
Niu: So, my son is huge on LEGOs and he has a closet -- it's like a giant pile from all the years of just breaking down sets. So, one of our projects that we've been putting off is to organize the giant pile of LEGOs to make it more approachable, because it's kind of scary-looking right now.
Lewis: Well, you know what, Evan, LEGOs are far better in the closet than on the carpet floor. [laughs] I think that one of the worst things you can do is step on a LEGO in a house.
Niu: Yeah, we run into that far too many times.
Lewis: [laughs] Well, maybe clean the house is up there, too. [laughs] We've been kind of riding out the banter here. I think we'll wrap the show. Listeners, if you have any fun ways to spend the time while you're staying at home, let us know, IndustryFocus@Fool.com or you can tweet us @MFIndustryFocus.
Evan, thanks so much for hopping on today's show. It's great to see you, and I'm glad you finally got to meet Austin.
Niu: Yeah, of course. It's good to see you guys, too.
Lewis: [laughs] Listeners, if you're looking for more of our stuff, subscribe on iTunes or you can get content wherever you get your podcasts.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for all his work behind the glass -- metaphorical glass. He's just hanging out at his home office. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!