Last November, Uber (UBER 9.24%) CEO Dara Khosrowshahi outlined the company's strategy for its food delivery business, Uber Eats.
On the earnings call, Khosrowshahi said, "Our strategy for Eats is simple: Invest aggressively into markets where we're confident we can establish or defend a number one or number two position over the next 18 months."
What was left unspoken in that message was that Uber would also pull out of markets where it didn't believe it could be one of the top two players, as it seeks to bring the historically unprofitable food delivery business out of the red. Since last October, Uber Eats has exited South Korea, India, Czech Republic, Egypt, Honduras, Romania, Saudi Arabia, Uruguay, and Ukraine, as it's eyed a pre-pandemic goal of reaching profitability on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by the end of this year, which it since pushed back to 2021.
Trimming Uber Eats' exposure internationally is just one part of the equation, however, as Uber also wants to solidify its market share in the U.S. where it's essentially tied in second place with Grubhub (GRUB). Both operators are well behind DoorDash, which owns 45% of the market, according to data from Second Measure, while Grubhub has 23% and Uber Eats comes in at 22%.
In May, Uber sought to acquire Grubhub, but the two couldn't come to terms on price, and Grubhub instead agreed to be bought by European food delivery giant Just Eat Takeaway, stymieing Uber's attempt to double its market share in the U.S. and at the same time giving Grubhub additional capital to deploy in the U.S food delivery battle.
Second time's a charm
After failing to acquire Grubhub, Uber is now seeking to take over the #4 food delivery app in the U.S., Postmates, with 8% share of the U.S. market. According to The New York Times, Uber has offered to buy Postmates for $2.6 billion, slightly above the $2.4 billion at which it was valued in its last funding round.
Postmates was an early player in the restaurant delivery industry and is still the leading provider in Los Angeles. However, the company has fallen behind over the years as Grubhub made a string of acquisitions, and Uber Eats and DoorDash barreled through the industry, backed by billions from Softbank.
Postmates actually filed to go public last February, but never followed through with an IPO. Last September, it raised $225 million at a $2.4 billion valuation just weeks before an expected IPO, but the public offering never came. That may show that Postmates had a change of heart after both Uber and Lyft plunged in their IPOs, and as WeWork unraveled shortly after its filing. Possibly management didn't see sufficient demand for a public offering given the challenges in food delivery and the busted IPOs that came before it.
Postmates previously fielded takeover offers from Grubhub and DoorDash, showing the company has been on the selling block for a while. Given its inability to go public and the consolidation in the food delivery industry, selling itself to Uber seems to make sense, especially as food delivery demand has intensified during the pandemic, meaning Postmates' valuation may be temporarily inflated.
Since Postmates' financial results haven't been made public, we don't know exactly what Uber would be getting in the deal, but Postmates' strong position in the LA market would be an asset to Uber Eats as it lags behind there. Postmates' business delivering non-restaurant items like groceries could also be an asset to Uber as it looks for new ways to expand its transportation business.
Perhaps, most importantly, a Postmates acquisition would make Uber Eats the clear #2 restaurant delivery company in the U.S., and that, along with pulling out of unprofitable markets, could help it move closer toward a profit, especially with demand spiking during the pandemic.
Uber Eats lost $313 million in adjusted EBITDA in the first quarter, about even with the quarter a year ago, showing the company has a lot of work to do to reach breakeven. But acquiring Postmates looks like a step in the right direction. Investors seem to agree as Uber stock finished up 5% on Tuesday. A deal could be announced as soon as this week.