Technology

What the Uber Eats-Postmates Merger Says About the Restaurant Industry

When Uber Eats announced its acquisition of rival food delivery service provider Postmates for $2.65 billion in stock, the market reaction was split between naysayers who figured the deal was rife with regulatory problems and supporters who see it as a commonsense deal.

One article in The New York Times derided the deal as a way for food delivery companies to make the economics of delivering restaurant food stink less by consolidating forces. The author proclaims, “big picture, right now, in the real world of 2020 America, food delivery isn’t working out for just about everyone involved — including restaurants, delivery couriers and certainly not the app delivery companies. They are almost all losing money.”

On the other side of the coin, supporters say the deal isn’t about market dominance—or cutting costs for that matter. Instead, it’s about making restaurants more competitive with eCommerce behemoths like Amazon and Walmart.

Geoffrey A. Manne, the president and founder of the International Center for Law and Economics, recently made a similar argument in an op-ed he penned for The Hill about the merger.

“…Buying Postmates will do little to alleviate the competitive pressures on Uber Eats. With or without Postmates it will still face the boundless threat of new entrants, the ongoing risk of losing business to existing competitors (including restaurants themselves), and the inherent constraints of the platform,” he wrote.

Regardless of where you stand on the issue, one fact remains the same: this deal speaks volumes about the current state of the restaurant industry.

Independent Restaurants are in Dire Need of Help to Survive

According to recent figures from CDH Expert, a data analytics company serving the foodservice and hospitality industry, independent restaurants make up 68 percent of the total US restaurant landscape.

And while independent restaurants are often pushed to the wayside by the industry behemoths, they make up over half of total restaurant sales in the US, according to Statista. The National Restaurant Association estimates that independent restaurants raked in over $390 billion in sales last year.

Part of their success is the low barrier to entry for both business owners and employees. One in three adults have worked in a restaurant at some point in their lives, many of whom began in local independent operations.

Yet, even though independent restaurants play an important part in the industry writ large, recent research from the Independent Restaurant Coalition suggests that over 85 percent of independent restaurants could shutter for good without federal relief.

The outlook is even bleaker industrywide. Recent research from Yelp shows that 53 percent of all restaurants that closed during the coronavirus pandemic will never reopen.

So, how can Uber Eats and Postmates help alleviate these issues? For starters, both companies have shown a willingness to put profit aside to help their business partners.

Postmates took steps to reduce costs for small businesses by waiving its fees and operating expenses during the coronavirus pandemic.

Similarly, Uber Eats launched a $5 million funding initiative for its small business partners. Parts of the initiative included free marketing for small businesses on Uber Eats’ app, a 0 percent service fee for all pickup and delivery orders, and allowing restaurants to sign up for daily pay programs to improve cash flow.

Another way both companies help small businesses is by focusing on serving small businesses. Postmates has a strong foothold in the small-to-medium restaurant space, which is part of the reason Uber Eats acquired them. According to the company’s 2019 Economic Impact Report, 41 percent of small businesses who partner with Postmates see a 10 percent increase in revenue.

Hyper-Local Focus

And while growth is always good, the coronavirus pandemic is forcing the restaurant industry to shy away from marketing businesses as destination spots with once-in-a-lifetime experiences toward a consolidated focus on local communities.

Consider this: when you are scouring the internet for food delivery options, how far away from your house do you look? I doubt anyone is seriously looking to get a burger from Grindhouse Killer Burgers in Athens, Georgia delivered to their house in Los Angeles or even Atlanta. That’s because while convenience is King, freshness is still Queen.

As Manne surmised in his op-ed, “The majority of deliveries are made within a small radius, and even within the same city delivery services often end up predominating in different neighborhoods. At the same time, Uber Eats and Postmates largely cater to different restaurants and customers. While Uber Eats tends to deliver lower-priced orders from national franchises, Postmates focuses on higher-priced orders and local-favorite eateries.”

Both platforms Uber Eats and Postmates operate on, are built to thrive in hyper-local settings. CNET recently ranked the best delivery services for its efficiency, accuracy, and speed. Uber Eats was ranked the best choice for fast delivery while Postmates was ranked as the top choice for delivery deals. Combined, the two services offer customers a way of getting their favorite meals for bargain prices and at a convenient time.

The two businesses also serve a wide variety of restaurants and have very few overlapping customers. According to a report by Second Measure, a data analytics company, 12 percent of Uber Eats customers also use Postmates. Conversely, 22 percent of Postmates customers also use Uber Eats. This means that each service’s customer base complements the other and won’t hinder future growth.

Fighting Against Amazon-sized Competition

The coronavirus pandemic not only impacted restaurant sales, but it also forced them to reshape their business models and thereby place themselves in direct competition with retail giants like Amazon and Walmart.

This was one of the first things Uber CEO Dara Khosrowshahi spoke to investors about after his company announced its acquisition of Postmates. He told them that the focus of the merger is not strictly about delivering food.

“Uber and Postmates have long shared a belief that platforms like ours can power much more than just food delivery—they can be a hugely important part of local commerce and communities, all the more important during crises like COVID-19,” he said in a statement.

Khosrowshahi specifically called out eCommerce giants Amazon and Walmart in his statement for a reason: he knows his restaurant partners are now in the unfamiliar territory of eCommerce. And with Uber’s expansion into grocery stores, supermarkets, and retailers, it seems as though the plan is to help guide restaurants into this space and diversify their overall customer base.

It’s not worth recapping the volumes of press about restaurants and food distributors morphing into pseudo-grocery stores in order to stay afloat. What is important to note is that Uber Eats and Postmates have been working toward these ends and can help small businesses reach their customers in new ways.

For example, Postmates delivers alcohol in certain markets like San Francisco, San Antonio, and Philadelphia already. The company already has the infrastructure available to help its small business partners expand alcohol sales as cities relax rules regulating to-go alcohol sales for restaurants.

Uber added additional delivery packages in April to help its customers survive the coronavirus pandemic as well. These packages include personal protective equipment for frontline workers and essential household items. Uber integrated some of these features in its Cornerstore platform by allowing users to shop for groceries, placing the company in direct competition with Walmart and Kroger which both have similar platforms.

While competing with behemoths as Amazon and Walmart seem like a risky maneuver, it is a necessary step toward saving the restaurant industry. Without focusing on eCommerce and delivery services, restaurants will be like a school of fish awaiting the hungry mouth of the Amazonian and Walmartian whales.

Author:
Categories:
Technology
  • Subscribe to our latest insights

Are you capital raise ready?