Uber buys food delivery service Postmates for $2.65 billion

Uber has strengthened its food delivery service, Uber Eats, with the purchase of Postmates in a $2.65 billion all-stock deal. Analysts from The Freedonia Group, a Cleveland-based market research consultancy, weighed in on what the deal means for the delivery app industry.

The pandemic has cratered Uber’s flagship ride sharing service while increasing demand for its food delivery app, as consumers prioritize social distancing. CEO Dara Khosrowshahi said in a conference call on Monday that ride share use dipped 75% in the second quarter compared to Q2 2019, while Uber Eats orders doubled.

According to a Freedonia consumer survey from May 2020, 30% of adults said that they are using restaurant delivery more because of the pandemic.

With Covid-19 accelerating the uptake of delivery services and depressing demand for ride sharing for the foreseeable future, Uber’s acquisition strengthens the bright spot in its service portfolio.

Uber Eats will maintain its position as the second-largest food delivery service in the US, growing to a market share of 37% and adding Postmates’ strong presence in US Western cities such as Los Angeles, Las Vegas, and Phoenix. Doordash remains the largest food delivery company in the US, with a 45% share.

Uber buys food delivery service Postmates for $2.65 billion

“This combination of Uber and Postmates will enable the two companies to expand to a more comprehensive delivery service, as both are working to build networks to deliver groceries and other essentials,” Jennifer Mapes-Christ, consumer and commercial group leader at Freedonia, said.

Uber and Postmates have been working to capitalize on increased demand for deliveries of all sorts in the pandemic era, including groceries, pharmacy items, and alcoholic beverages.

More competition ahead

Third-party delivery apps give consumers the convenience of ordering from a wide range of restaurants in one place. The companies also spend lots of cash on discounts in a bid to attract customers.

However, many restaurant owners are unhappy with third-party delivery apps, which can charge between 20% to 40% in commission per order.

Pizza shops and Chinese restaurants have long had their own independent delivery services, and nationwide chains such as Domino’s and Pizza Hut have developed their own advanced delivery apps. The cost pressure of Uber Eats deliveries and the continued closure/restriction of dining areas due to the pandemic could incent more restaurants to develop their own delivery systems.

“In the longer run, third-party digital delivery operators will be faced with more foodservice operators developing their own delivery services,” said Cara Rasch, an analyst at Freedonia. “Foodservice companies may also combine with other local foodservice providers to offer the service at a lower fee level and to have more control of the delivery process.”

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