Despite changing the face of transport forever, Uber is still failing to turn a profit, and these are 3 reasons why.
Nov. 4, 2019
Uber Technologies Inc. (NYSE: UBER) has transformed the modern transport system across the world. It has been a key driver of the gig economy and has helped make getting from A to B cheaper and more convenient.
However, the company has not found a way to make all of this profitable. What’s more, it has lost many billions of dollars over the years trying to do so.
Here is a look at three reasons why Uber continually fails:
1. Spiraling costs
While Uber managed to get rid of one of the main costs associated with operating a taxi service, such as paying drivers as independent contractors rather than as employees and not having to manage any physical assets, the company’s costs are still massive.
Operating losses in 2016 were $3 billion, $4.1 billion in 2017 and $3 billion in 2018. In Q2 2019, Uber posted its largest-ever loss of $5.2 billion.
The company has constantly looked to expand geographically. Instead of establishing itself in one particular area, Uber wants the whole pie at once. While having an early mover advantage is important, it can quickly lead to a company over-stretching itself. It takes a huge amount of money to set up in new markets that have their own unique challenges.
When trying to break into the Chinese market, Uber spent about $2 billion to deal with local regulations find drivers and attract customers. Eventually, the company decided to exit the Chinese market, selling its business to local competitor Didi Chuxing.
Other companies have been entering into the ride-sharing space or trying to solidify their position in the market. Uber has spent spend hundreds of millions of dollars to try and drive out the competition.
As a result of a 12.5% monthly turn over rate of drivers, Uber has to spend a lot of money on the promotion and marketing side of things to ensure that the supply of drivers meets the demands of the app users. In 2018, there was $3.1 billion spent on sales and marketing, with almost $900 million going to create additional incentives for drivers.
Customers are largely brand-agnostic when it comes to ride-sharing — they’ll just take the cheapest and more convenient option. This means that companies like Uber have to keep offering deals and incentives to both customers and drivers to keep their market share.
In addition to all of these business costs, there has been a tradition of unregulated corporate spending within the company. This includes splashing out millions on office renovations, lavish parties and company events.
2. Mistreatment of employees
The issues inside the Uber corporation workforce and among its contracted drivers are well-documented. A company can only go so far when its own employees are being mistreated.
The workplace at Uber was an aggressive and competitive one, with employees often pitted against one another. While this may have reflected the fast-paced environment the company was working in, inevitably, cracks began to appear.
Eventually, these incidents and the overall unethical culture at the company led to co-founder and then CEO Travis Kalanick resigning from the company in 2017. The company has taken a lot of steps to change the work culture since CEO Dara Khosrowshahi stepped in. Employees at the company say that the difference between the old and new culture is “night and day”.
A lot of Uber drivers over the years have also felt mistreated by the company. Naturally, the obligations on Uber is lessened due to drivers being contractors and not employees, but there are basic protections that need to be met. Uber has used behavioral science to encourage drivers to work for longer hours and for less money. These behavioral scientists would regularly tweak with the app to try and get drivers to work more. Other issues include luring Uber drivers to lower-demand locations and encouraging drivers to continually accept rides.
As well as looking to take over the global market with its ride-sharing offering, Uber has also tried to get into other ventures. These ventures, including self-driving cars, a freight service (Uber Freight) and a food delivery service (UberEats). It now even offers urban air transport through Uber Elevate.
While putting all of your eggs in one basket is never a good idea, the same can be said for having too many baskets and not enough eggs. While some of these companies are doing well (particularly UberEats), they do not earn enough to cover the failings of its core business.
Uber as a company clearly has a great vision – to make all forms of transport more accessible, faster, cheaper and more convenient. However, it seems like Uber is spreading itself too thin when its main business is still massively in the red.
Instead of trying to diversify into all of these other ventures, the best approach for Uber could be to get its core business in proper working order and turning a profit.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Uber. Read our full disclosure policy here.