Uber Buys Drizly for $1.1 Billion
Once upon a time, people believed that Uber had some form of value. Its app was revolutionary. Its concept of using ordinary people using their own cars to provide rides was revolutionary. But, it turns out that it wasn’t so much revolutionary, as just the first in an easily replicable line of use-your-own-car apps.
Drizly Is Just GrubHub for Alcohol, Which Is Just Uber for Food
Uber is paying Drizly $1.1 billion in a desperate grab for any shot at profitability and sustainability.
Uber’s acquisition of Drizly proves that there is nothing special about Uber. A handful of engineers, a couple of months, and a few million of funding and anyone can copy Uber well enough. After that, the “special” comes from good old fashioned sales. Building Drizly was a lot less about building an app, and a lot more about signing up liquor stores, and then convincing people that it was worth shelling out $5 to stay on their couch instead of heading down to their favorite liquor store.
This was a tough sale pre-Covid. Why pay $5 plus tip for a liquor delivery when you could just swing by your favorite liquor store for free?
Trying to avoid taxes by not cashing savings bonds?
Obviously, there were some use cases. People without cars. People who just didn’t want to leave their house. This didn’t add up to much before the lock downs and people staying at home. Uber comes in with a top-dollar buy-out just months before the Covid pandemic starts winding down, like those software companies that buy out the latest fad game after it already hit its peak.
Drizly, which said it had over 300% growth in the past year. This leaves out the part where it was mostly irrelevant with no meaningful revenues before the pandemic.
“(They) built Drizly into an incredible success story, profitably growing gross bookings more than 300 percent year-over-year.”Uber is buying alcohol delivery service Drizly for $1.1B | TechCrunch
Notice there is absolutely no mention of how much revenue Drizly generates, even with the 300 percent growth, and certainly no mention of Drizly’s profits (none). This is intentional to dupe the lesser informed and reduce the mocking of the purchase price.
Drizly’s 2021 revenue will likely be lower than Drizly’s 2020 revenue, and revenues for 2022 will likely fall off of a cliff as buyers return to their old ways of buying alcohol. That loss of revenue will only be exacerbated by competitors moving into the space. After all, Uber plans to incorporate Drizly into its Uber Eats platform, why wouldn’t GrubHub do the same… and DoorDash, and PostMates, and all of the new delivery platforms being built?
Profitless Uber Buys Profitless Drizly Equals Profit?
Since its inception, Uber has been nothing more than a cash incinerator. The company never had a meaningful profit and continues to lose money every year after the Uber IPO as well.
The goal for Uber seems to become the Amazon of the car-based, gig economy. If it can become the dominant, go-to platform for anything car related, it may have a shot, is the company’s theory.
“Wherever you want to go and whatever you need to get, our goal at Uber (UBER) is to make people’s lives a little bit easier. That’s why we’ve been branching into new categories like groceries, prescriptions and, now, alcohol,” said Uber CEO Dara Khosrowshahi in a statementUber is buying alcohol delivery startup Drizly for $1.1 billion – CNN
It seems like a long shot considering the platforms are so readily replicated.
Restaurant Delivery Profits Are Drying Up
Food delivery revenues have no place to go but down. Restaurants already balk at the high fees delivery apps try and charge them. While they have nowhere else to go during the pandemic, that particular hold over dining establishments is rapidly coming to an end. The result will be a huge slice of restaurants pulling themselves off the delivery platforms altogether. Those that remain have been taught a painful lesson.
Alternative delivery apps are sprouting like weeds. Other restaurants have figured out the simple truth that a functioning website that allows online orders is all they really need. If they are high-frequency delivery, apps are not hard to build. For those that don’t want to support their own, white-glove restaurant apps are just around the corner, for much less than the extortion-like takes current market leaders take.
All of this adds up to a market where revenues will be falling for the foreseeable future, as apps cut charges to get exclusive rights, or even just first billing.
Gig Worker Costs Going Up
Meanwhile, food delivery expenses have no place to go but up. Drivers already occasionally balk at the low rates they are paid. Workers try to game apps to get more profitable deliveries by working for all the apps at once and taking only the best paying opportunities. As the economy recovers, fewer people will be forced into the gig economy leaving those behind able to pick and choose how and when they deliver. The only way to draw more drivers to your platform will be to increase pay, whether in the form of a base rate, bonuses, or even some form of benefits.
Uber Seems Doomed
“During this time our delivery business has been growing at extraordinary rates,” said Uber CEO Dara Khosrowshahi. She left out the part where during this time our ride-sharing business has imploded. Its overall bookings were still down 10% year-over-year for 3Q 2020, meaning food delivery via Uber Eats and recently acquired Postmates couldn’t fill the ride-sharing hole.
The problems with food delivery are replicated throughout the Uber system. When ride-sharing comes back, drivers will choose between fares from easily replicated ride-sharing platform competitors, while riders choose between cheaper rates. But, when ride-sharing comes back, one would assume that at least some of those rides will be the restaurants clipping food delivery revenues.
Uber’s only hope is that it can squeeze out competitors, or it is doomed to a market where its competitors continuously rise up to offer workers more pay, and riders lower fares. To do so, Uber has to convince mobile phone owners that it isn’t worth downloading a competitor’s app. That’s tricky business in a world where legions of consumers continuously use the internet to find the better deal. After all, with the power of modern iPhones and Android phones, what’s one more app? Certainly, it’s worth it for consumers to keep at least two or three delivery and ride-sharing apps, plus one or two local ones, just to check rates.
A better analogy than Amazon for Uber seems to be the cell phone companies. If Uber can become one of the only remaining players, and if those players can keep out competitors, all while consumers see little to differentiate the remaining company’s, then Uber has a shot at existing into the future. To do so, it needs to find an economic moat somewhere, but with every acquisition, it finds another leak in the moat.
“The more you tighten your fingers… the more star systems will slip through your fingers.”Princess Leia, Star Wars
The $2.6 billion paid for Postmates has done little to squeeze out the GrubHubs and DoorDashes. Meanwhile, delivery apps like Toast and Slice pop up by offering restaurants lower costs, and better niche-tailored, customer service.
Uber’s Clock Is Running Out
Uber had $7.3 billion in Q3 2020, compared to $6.7 billion in debt.
It lost $8.5 billion in 2019.
It’s no surprise the company is paying 90% of its billion-dollar Drizly acquisition price in stock. There’s no way it has a billion dollars in cash it can use for anything other than trying to survive long enough to get more cash.
This “blockbuster” announcement just a week before Uber is expected to report its Q4 2020 earnings may be a smokescreen to show how little room the company has left with its current cash and assets.
At this point, it seems the only thing Uber has going for it is how many people can’t afford to see it fail. Look for further cash infusions from investors in 2021 to save the company.
Is Uber a Good Investment?
Is it smart to be investing in Uber?
Based on the fundamentals? Good god, no!
Based on the bigger idiot theory? Maybe.
Based on the odds of the company being propped up yet again by Wall Street and large investors who can’t afford for Uber to fail right now? Probably.
Long-term investors are always better suited to use a well-diversified portfolio tailored to their goals and risk tolerance.
Short-term investors may find interesting moments to make moves, but that certainly wouldn’t be anything you will see me recommend. Good luck getting the timing right.
The smartest play I can see is using options near earnings reporting to profit off of volatility. There is basically no way for this company to hit earnings just right. Wall Street will either be elated by any semblance of improvement or mortified that the company could possibly do worse than already rock bottom expectations. As always, options are volatile and you better already know what you are doing.
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson did not own any securities mentioned above, however, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.