Uber CEO: 'We've Just Never Been In a Better Position'

Every company wants to grow. But for most companies, that growth usually comes at the price of profitability. That has long been the case for Uber, which until this year had never posted an adjusted profit despite securing tens of billions of dollars in venture capital.

But it appears that Uber UBER has entered the next stage in its evolution.

The multifaceted tech company this year managed to achieve adjusted profitability not only for its main rideshare business but also for its burgeoning delivery business. Yet at the same time, it's managed to grow its delivery business substantially — to the point where it's now larger than rideshare.

"While we have been shifting to more profitability as a company, we've also been quietly in the background investing in growth levers — new geographies, hailables, grocery, new verticals for delivery, business, etc.," Uber CEO Dara Khosrowshahi told investors during a live webcast hosted by UBS on Tuesday.

Khosrowshahi was in great spirits on the call, most likely because he had great news to share with investors — that Uber last week had its "best week" in terms of delivery gross bookings since the pandemic began. 

While we have been shifting to more profitability as a company, we've also been quietly in the background investing in growth levers.

Dara Khosrowshahi, CEO, Uber

According to Khosrowshahi, Uber's delivery business, which started out delivering from restaurants but has expanded to deliver groceries and other products, is now three-and-a-half times larger than it was at IPO and has surpassed the size of its rideshare segment. And the Uber CEO said that he believes the company can continue to grow its delivery business while still bringing in profits.

"As it relates to our delivery business, delivery outside of grocery has already gone into a profitable space. We probably delivered incremental margins year-on-year in delivery a little bit below our long-term margins that we put forward in delivery — which are about 5% of gross bookings," he explained. "I think looking at 2022, we think we can not only invest in these growth areas — grocery, new verticals, direct, etc. — but also deliver incremental margins as it relates to delivery at or above our long-term margins."

A 4-factor analysis

So how is Uber able to do all of this?

"I think what's going on there is that there are some really powerful profit drivers in our delivery business that we can reinvest in growth and deliver bottom-line margins to," Khosrowshahi explained.

The Uber CEO cited four factors that he believes have helped its delivery business to grow and profit in tandem. The first is that as the market for delivery services has densified, Uber has increasingly invested in technology relating to pricing, routing, and matching, which has allowed the company to reduce the cost per transaction for delivery.

"The second factor for us is that our ad business is well ahead of plans, close to 100% profit margins in terms of incremental margins coming from the ad business," Khosrowshahi told investors. "That is quite profitable and growing at scale now, and it's going to continue to grow into next year."

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Uber in August began to show ads on its core app for the first time ever, and the company also brought on Amazon Advertising veteran Mark Grether as general manager of Uber Ads. That's helped it to funnel more consumers toward its delivery segment.

Speaking of which, "As we get more and more cohorts of repeat customers in our delivery business, and as the percentage, let's say, of repeat customers versus new customers gets higher," Khosrowshahi said, "repeat customers are just structurally more profitable — especially repeat customers who are members, and a higher percentage of our repeat customers are members."

Khosrowshahi touched on membership as a strategy the company has used to successfully retain users and drive profits. According to him, more than one-fifth of delivery bookings come from members, and they buy 50% more frequently than nonmembers. Basket sizes among members are also 10% higher than among nonmembers, he said.

"There's an early cost of bringing in a member because of the benefits, but then the retention and lifetime value is significant," Khosrowshahi explained. "And our membership, we think, has better content than any other membership program with, now, Uber One."

That's Uber's newest membership program, which was rolled out last month and bundles rideshare and delivery services into one combined membership. It offers perks like priority service and unlimited free delivery, which Khosrowshahi said have helped create a more loyal customer base.

Finally, Khosrowshahi said the fourth factor aiding Uber's delivery business is the fact that there is a low-cost flow of customers going from rideshare to delivery. And that traffic only figures to increase with the addition of Uber One, which fuses the two services together in a way that none of the company's previous offerings ever have.

Staying the course

When Khosrowshahi was questioned about the perception that Uber is overly reliant on mergers and acquisitions, he pushed back hard.

"I don't think there has been any company out there — I'm happy to be misquoted or be wrong — that has organically built a business that is now literally larger than the base business that they came in on."

He went on to tell investors that 90% of Uber's delivery gross bookings have been built organically, with the rest coming from acquisitions like that of Postmates or on-demand grocer Cornershop. He contrasted that with DoorDash, which recently spent $8.1 billion on its acquisition of Wolt, a European food delivery platform.

Khosrowshahi also defended Uber's acquisition of Cornershop, which he said would help Uber build "the biggest grocery business in the world," as well as that of Postmates.

"We brought in Postmates, which was a really strategic deal in the U.S. and gets us a really strong position on the West Coast as it relates to the U.S., which is the biggest and most profitable market in the world," he said.

Khosrowshahi was also pushed on the potential impact of the proposed EU legislation that would effectively reclassify Uber's drivers, who under the current law are independent contractors, as full-time employees. He pushed back again.

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"I think that as far as the EU goes, this is the beginning of essentially a process where the EU consults with the states, and there's a ton of dialogue. And we've already had dialogue with the EU, before anything is finalized. And these regulations usually are finalized on a state-by-state level," he told investors, downplaying the implications of the proposed law.

But he also doubled down on the independent contractor model, saying that Uber couriers "overwhelmingly" want to be independent contractors. A 2020 poll produced by Uber supports this, saying that 82% of drivers would prefer to remain independent contractors, but the validity of Khosrowshahi's claim is somewhat dubious considering recent strikes by the company's drivers and couriers in support of the PRO Act, which "prevents employers from misclassifying their employees as supervisors or independent contractors."

Still, Khosrowshahi said that he would support a model in which his company's couriers remain independent contractors but obtain access to certain benefits.

"We have been quite willing to say we are championing the IC-plus model," he affirmed. "This looks a lot like the worker model as it relates to the U.K., for example, where you retain flexibility, but then you have certain protections, whether they could be minimum earnings or they could be other benefits, pension benefits, etc. I think that that model, in the end, is going to win."

Uber and other gig companies are pushing that same model in Massachusetts, where H.1234, a bill that would give independent contractors portable benefits, is making its way through the legislative process. But Khosrowshahi is still bullish on Uber's prospects even under a full employment model.

We can make any model work, we really can, because our marketplace is incredibly flexible.

Dara Khosrowshahi, CEO, Uber

He cited Uber's delivery business in Spain, which uses a fleet employment model that requires Uber to work with fleet partners that employ drivers. According to Khosrowshahi, though, the company's delivery business in the country is still up 40% year-over-year with EBITDA margins that are close to its long-term margins for the segment.

"We can make any model work, we really can, because our marketplace is incredibly flexible. There's a lot of demand for our technology, our service, our brand, our safety, our reliability. So any model can work economically for us," he said. "This is about what our drivers want and what couriers want, and they want flexibility."

Ultimately, though, the Uber CEO explained that he would be willing to concede some benefits to his company's couriers, which is looking increasingly likely in the EU and could potentially happen in the U.S. if H.1234 is passed in Massachusetts.

"If countries believe that we should also include benefits, like Prop 22 benefits, we're willing to lean in there," Khosrowshahi told investors, "because ultimately it will attract more drivers and couriers to gig work, which we think is a good thing."

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