A buddy of mine asked last week for my take on the Uber Eats/Postmates acquisition, as a delivery driver (and former rideshare driver) myself. As an industry insider, I obviously know all there is to know about this and what follows is gospel, which is to say that I’m not a financial expert and you should not use the following as advice of any kind.
Below is my lightly edited response to the email my friend sent me. You will have to guess what he said.
***
This seems like the paradox of so many of these startups—profitability isn’t happening and there aren’t any concrete plans for profitability to happen. I have no idea what will happen with the industry overall, so working backwards I don’t have much to say about Uber Eats and Postmates. All I can guess is that the bet really is that eventually consumers will be so hooked on rideshare (and food delivery, to a lesser extent) that they’ll suck it up when prices start to rise, or that drivers will be so hooked on the immediacy and flexibility of the income that they’ll suck it up when wages drop. In other words, I have doubts about the strength of the current model, but I don’t know enough to make too strong a judgment.
What I can offer from whatever inside view I have is this:
From what I can gather, the average full-time rideshare driver in Austin over the period I drove (March 2019-March 2020), assuming 40-hour work weeks and two weeks off a year, would make a wage equivalent to roughly a $30K salary in a job without so many expenses baked in (gas, car depreciation, etc.) and with normal taxes (the self-employment tax is rough). No benefits, few barriers to entry, lots of flexibility, weird hours, no advancement potential, and a salary right around the edge of the lower quartile for American household income (this breakdown Stuart did of household incomes is helpful for perspective sometimes). In other words, I’m not sure how much room Uber and Lyft have to cut wages before it stops being feasible for drivers—even drivers without a lot of better options. At some point it makes more sense to go work in an Amazon distribution center (or something similar). I know they have different wages in different cities, and it’s possible supply and demand irons it out to a comparable Cost-of-Living-adjusted wage everywhere, but my impression is Austin’s a good city to drive in because of cheap gas and a few other factors, which further makes me doubt that they’ll be able to continue the way they’re going.Delivery has been a better wage, with fewer miles driven per dollar. Closer to a $35K equivalent. But…that’s in the middle of a pandemic, in which restaurant dining is rarer. I have a hard time believing there’s actually more demand for the combined rideshare/food delivery market in the midst of all this, but either there’s more demand in Austin or drivers are surprisingly inelastic. Tips are also a much larger share of my delivery income than they were of rideshare income—they’re 30-40% of my delivery income, and while I don’t have concrete numbers on rideshare, my perception is that they were closer to 5-10%, if that.
I’ve wondered before whether Lyft and Uber would cap hours more aggressively to discourage people doing it as a full-time source of income (they cap it to a degree right now, and that degree is always increasing, but it’s something like 12 hours/day for both and seems more geared towards safety than discouraging using it as full-time income—also, I’ve met drivers who do both and just switch over if they want to drive more than 12 hours/day on one platform). They often pitch drivers as entrepreneurs, which isn’t a fair assessment—entrepreneurs don’t have such a firm ceiling on their income. I’ve also heard it pitched as just a part-time thing for people like me with temporary needs (for whom it’s great, for all of these reasons), but the truth is, for a lot of “unskilled” workers, $30K in Austin isn’t a bad wage (especially if you’re a two-income family living in Bastrop—the thin-ness of Austin’s line of suburbs is another big Austin advantage compared to, say, San Francisco). I can’t see why they’d actually cap it, unless they were really getting legally strong-armed by independent contractor laws—seems like a huge increase in costs because they’d presumably have to raise wages to get more people into their workforce.
I’m curious exactly how negative the profit margins are. Would it take a 10% increase in cost/decrease in wage for these guys to be profitable? A 50% change? I’d guess this information is possible to figure out, but maybe not.
Anyway, that’s all I can offer on the supply side analysis. Very curious how it compares across markets. In the end, it doesn’t seem like Uber buying Postmates really changes the game that much—a little less competition, but all the incentives are still the same for everyone involved. Maybe Postmates is less unprofitable than Uber as a whole, just because Uber’s sunk so much investment into different projects?
***
