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Coronavirus is forcing Uber to return to its start-up roots

With rides down as much as 80 percent, the pandemic is testing whether Uber and other large start-ups can still innovate

(Julia Dufosse for The Washington Post)

SAN FRANCISCO — Sabrina Wang, a D.C. commuter who used to take Uber or Lyft multiple times per week, says she can no longer fathom sharing a ride pool.

“I think it’s unimaginable at this point,” said Wang, who works in health policy but is enrolling in medical school this fall. “You don’t know how many rides that person accepted, you don’t know how often they cleaned the services ... you don’t have control over your environment.”

But the 22-year-old does order meals from delivery services such as Uber Eats every couple weeks, taking care to transfer the food to her own containers and reheat it, in accordance with guidance for takeout orders. It’s “not a perfect system,” she said, but “it alleviates most of our worries.”

Wang represents the new reality facing Uber, Lyft and other large start-ups that have built their businesses over the past decade banking on connecting consumers with drivers, rooms for rent and office space — all tech-heavy business lines that have evaporated in the midst of the novel coronavirus, with little known about if and when they may return.

It’s one of the reasons Uber is reportedly considering purchasing restaurant delivery service Grubhub. It has also doubled down on its own restaurant delivery app and has added package deliveries to its roster of services.

For years, Silicon Valley start-ups have built a culture that relies on moving fast and turning on a dime. Failure is accepted, but companies and founders need to quickly find a new path forward. Venture capitalists — and now traditional investors — have poured billions of dollars into these companies with the faith they will figure out how to eventually make money, much like tech giants before them.

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The global pandemic presents the biggest test of this class of large start-ups, which also includes Airbnb and WeWork. It’s putting a huge strain on their business models, raising the question of whether they are too established to innovate.

“I think if you’re not using this time to think about strategic alternatives to reinvent at least part of your business offerings, then you’ll get passed by,” said Jason Schloetzer, a professor of business administration at the Georgetown University McDonough School of Business. “Everybody is trying to think about ... ‘How do we need to adopt or evolve?’ because the way that we used to do things may not be applicable to the next six months or 18 months.”

These large start-ups had all achieved the size and scale within the past year to attempt going public. Lyft and Uber did so roughly a year ago, to lukewarm receptions from investors. Airbnb has said it plans to go public this year.

Meanwhile, WeWork’s initial public offering was derailed by questions over its financial viability and mounting scandals, including conflict-of-interest allegations, that led to the ouster of its CEO late last year. Those issues kneecapped the company even before the pandemic further crippled its business.

All of the companies have cut costs. On Monday, Uber said it will lay off 6,700 employees this month, or a quarter of its global staff. That follows Lyft’s announcement last month that it would lay off 17 percent, or 982 employees. Airbnb announced it was laying off 1,900 workers, or a quarter of its staff, earlier this month.

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But so far, they are taking different tacks to shifting their business models. Airbnb is pulling back on experimental projects and transforming its app for longer-term rentals. It also launched an offering to connect customers with digital experiences such as cocktail mixing, workouts and tarot card reading.

WeWork is pondering how to redesign its office spaces for a changed world with social distancing.

Lyft, on the other hand, is largely staying the course, relying on its ability to survive on fiscal responsibility until the end of the crisis. In April, it launched a program called Essential Deliveries, in which it aims to facilitate the delivery of meals, groceries and hygiene and medical supplies to organizations. The company is also focused on instilling consumer confidence with guarantees of clean vehicles, masks and proper social distancing.

“We recognize that this downturn may be longer and more severe than predicted, and we fully recognize that the ride volumes we saw in the first quarter may not be achieved again for some time,” Lyft Chief Financial Officer Brian Roberts said on the company’s earnings call this month.

Lyft spokeswoman Alexandra LaManna said that the company is on solid footing. “As the world is facing a new reality, our focus is on putting ourselves in the best possible position to deliver strong growth and improved financials on the other side of this global downturn,” she said. “Lyft believes ridesharing is a significantly better market opportunity than food delivery, and there are limited synergies between the two.”

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Uber is the company that is attempting to make perhaps the biggest change, building on the ambitious vision it laid out last year to become the Amazon of transportation. At the time, it made the argument that it planned to do for passenger trips, food delivery and micromobility what the online retail giant did for shipping and logistics.

Uber is no stranger to innovation. The company popularized ride-hailing a decade ago, growing its business to nearly a hundred million active customers who took more than 10 million trips per day by the end of 2018. While Lyft followed in its footsteps in 2012, Uber has remained the larger, more diversified competitor credited with largely obliterating the taxi industry and pulling riders off traditional transit and onto the roads.

And since taking its business public a year ago, Uber has tightened its belt to prove itself: conducting substantial layoffs, consolidating departments, and getting rid of workplace perks that gave off more of a start-up environment than its maturing businesses reflected. Uber also became the first of the two major ride-hailing companies to deliver on reporting on its safety record in December, when it disclosed it received more than 6,000 reports of sexual assault from 2017 through 2018.

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Employees who’ve spent months working on experimental projects only to see their teams gutted before products could ship have expressed frustration and uncertainty with Uber’s new direction. The employees, who spoke on the condition of anonymity for fear of retribution, said repeated rounds of cuts have left the workforce shaken and wondering if they’ll be targeted next. The volatility also has left some skeptical of any new formula for success.

Uber has been proactive during the crisis. In March, before the downturn reached its nadir, company executives held a call to tout the company’s balance sheet, including $10 billion in cash, and its ability to survive the crisis. And CEO Dara Khosrowshahi said this month that the while the company’s ride bookings were down 80 percent in April, overall gross bookings dropped 40 percent. That’s because Uber Eats, the company’s food delivery arm, is doing so much more business.

“If you take a look at Uber versus Lyft, Uber has outperformed based on the fact that it has Uber Eats,” said Benjamin Black, consumer Internet research analyst at the firm Evercore ISI, adding “that’s just been a shot in the arm in terms of people trying it.”

Even before the crisis hit, Uber wasn’t profitable. It said its global rides businesses are profitable, subsidizing some of its less profitable businesses, including some domestic markets. Uber Eats, which made up a quarter of the company’s gross bookings at the end of last year, however, lost large sums of money as it pushed incentives to pull drivers and customers into its fold.

That makes Uber’s strategy to push even further into that business a risky one, analysts say. Food delivery is inherently unprofitable — even more so than ride-hailing. Paying a delivery driver to drive to a restaurant, wait for food, then drive it to one address is an inefficient way to get things from point A to B, especially when comparing it to an operation such as UPS or Amazon package delivery. And it can be dicey, requiring food to arrive in a timely manner, still hot or cold.

Not everyone has succeeded in the space. In fact, Amazon shut down its restaurant delivery operations in 2019, pulling out of what had become a crowded market. (Amazon CEO Jeff Bezos owns The Washington Post.)

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The biggest restaurant delivery companies, such as Grubhub and DoorDash, still lose huge sums of money. Grubhub, for example, reported a $33 million loss last quarter, although its active users grew by nearly a quarter to 23.9 million from the same period a year ago.

Grubhub declined to comment on the acquisition reports, but spokeswoman Katie Norris pointed to a statement issued this month that said “consolidation could make sense in our industry, and, like any responsible company, we are always looking at value-enhancing opportunities.”

Uber Eats has experienced a meteoric pace of growth, taking in 73 percent more in gross bookings in 2019 compared to the year before. That business lost more than $300 million in the first quarter on an adjusted basis, something executives have said is a priority for the company to change.

And that doesn’t include other inherent risks. A Washington Post investigation found that Uber Eats was delivering alcoholic beverages in markets where doing so is not permitted on the app, meaning drinks were handed over in paper bags without ID checks or proper handling by couriers. The California Department of Alcoholic Beverage Control clamped down on the practice and found, in a subsequent investigation, that minors had an 80 percent success rate ordering alcohol through third-party delivery apps.

Many couriers also hold food delivery apps in low regard, seeing them as a sub-tier of the gig economy, where increasingly desperate workers are exploited.

Jonathan Mouzon, who worked as bicycle courier for Uber Eats last year before switching to driving with the app Via, said the brutal winters and low pay made it a much more difficult task than ride-hailing. Couriers were making $50 to $70 working full days, he said, work that should have paid out $200 or more.

“It would have to be the last thing on earth I do,” the New York City-based Mouzon said of going back.

For Uber, analysts said adding Grubhub to the mix could cut marketing expenses and, with the sheer size of the combined businesses, allow a pullback of price-war-motivated incentives and discounts. Analyst Dan Ives, of Wedbush Securities, wrote that the merger would “create an opportunity to reach profitability, without raising rates on restaurants, and with some pullback on consumer discounts, creating an overall healthier ecosystem.”

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It’s unclear whether that possibility can go through, even if Uber and Grubhub strike a deal. A group of senators led by Amy Klobuchar (Minn.), the ranking Democrat on the Senate Judiciary antitrust subcommittee, penned a letter Wednesday urging the Justice Department and Federal Trade Commission to keep an eye on any potential merger. They expressed concern about any merger stifling competition on efficiency, innovation and affordability.

“A merger of two of the three biggest rivals in an already concentrated market risks depriving consumers of that outcome by potentially eliminating competition between the existing market participants,” the senators wrote.

Uber is also focused on other bets. In April, it launched Uber Direct, which allows retailers and sellers of over-the-counter medication, for example, to deliver items directly to consumers in some markets. It also launched Uber Connect, which allows users to hail a private car to deliver items to others in the same city.

A previous foray with delivery aimed at competing with UPS and Amazon, UberRush, shut down after it generated little demand.

Uber has also been offloading products that either have been afforded too long of a development window or didn’t make a lucrative enough business case.

It recently offloaded Jump, which it acquired in 2018 and offered bikes and scooters for urban commuters, a segment that has been dominated by Lyft. Uber led a $170 million investment round to have Lime operate the service instead. Analysts say the business is heavy on infrastructure and presents no immediate upside from a profitability standpoint, and it’s best in the hands of a dedicated player.

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Uber is still pursuing a bet on self-driving vehicles, part of the promise that attracted investors to the company and its rival Lyft when they went public last year. But it’s doing so in a restrained capacity, shuttering a San Francisco facility devoted to autonomous vehicles and pulling back investments in areas such as artificial intelligence.

Meanwhile, both Uber and Lyft are focusing on making their businesses safer for when riders do return — whenever that may be.

The companies announced policies this month requiring masks, empty front seats and sanitization, along with passenger and driver checklists — including verifying they don’t ride or drive if they’re displaying any symptoms.

There are no more pooled trips for now. And a typical UberX of Lyft, with the requirement that no one sits in the front seat, will have 25 percent less passenger capacity.

Mark Mahaney, who covers Internet research as managing director with RBC Capital Markets, said it was impossible to predict how the ride-hailing industry would fare because the companies, which emerged a decade ago, have not felt the full brunt of a recession — let alone public health orders that hit the core of their businesses.

“Those two cannot get back to normal until shelter-in-place restrictions are removed,” he said, adding it could take more than a year after that for business to return to levels resembling normalcy.