Foreign Doordash, Delivery Hero and Grab All have in common. They're all ride hailing or food hailing companies which have collectively raised tens of billions of dollars from investors. Another thing they have in common is in 2022, every single one of them reported at loss in excess of one billion dollars. Investors were attracted to platform companies like Uber and Doordash because they were viewed as capital Light software companies that could become extremely profitable.

At scale, about 25 percent of money paid out to drivers is taken by the platform as a commission and the marginal cost of operating the app is almost zero. Because of this, these Gig Economy platforms should be among the most profitable in the world. Yet, as of today, not a single major ride hailing or food delivery company has ever made a gap operating profit despite billions of dollars of investment in many years of trying. In this video, we'll take a look at the fundamental flaws underpinning the gig economy and why these companies may be structurally unprofitable.

While Uber has never turned a profit, they've been able to sustain themselves by raising tens of billions of dollars from investors. A key part of raising money is having a business plan. That's why if you're planning on founding your own startup, I Highly recommend you check out this free Business Plan template from HubSpot. It provides templates for writing about what products or Services your company makes who your Target customer base is, your financial plan and much more.

We at the Wall Street Millennial team recently used this template to make a plan for our YouTube Channel's growth over the next year. The most interesting parts of Brainstorm was what problems we are trying to solve and how our Solutions are different from other competitors. This led me to thinking more deeply about new content verticals we can cover which will differentiate us from other YouTubers and by setting out our target audience, we've been able to refine our video topic selection whether you're wanting to start your own YouTube channel, the next Uber or anything in between I Highly suggest you check out HubSpot Startup Business Plan template. There's a link in the description where you can download it for free Foreign 10 or 15 years ago, it became obvious that internet platform companies like Google and Facebook would become extremely successful and extremely profitable at scale.

This is because they're platform companies with almost zero marginal cost. For each new Facebook user, the company generates incremental ad Revenue but negligible additional cost once they scale to over 1 billion users. They were indeed extremely profitable, with the company achieving a market cap in the hundreds of billions of dollars and founder Mark Zuckerberg achieving a net worth in the tens of billions starting around 2010, Every entrepreneurial minded college student wanted to found the next Facebook and every venture capitalist wanted to fund it. If you wanted to found the next tech unicorn, you need to fulfill the following two conditions: It has to be an internet-based platform which millions of people will use and has zero marginal cost per user.

Two of the most obvious cases that fulfill these requirements were ride sharing and food delivery. All you have to do is create an app that will connect paying customers with drivers or food couriers who want to make some money. As a platform, you can charge a fee on each transaction. The business model is capital: A.

Unlike a traditional taxi company, you don't need to own any cars or employ any drivers. The drivers will be independent contractors who bring their own car. There are zero marginal cost, so as the platform scales, it should be just as profitable as other platform companies like Facebook. Throughout the 2010s, entrepreneurs founded dozens of ride-hailing companies around the world, such as Uber Lyft and Doordash in the US, Grab in Southeast Asia and Delivery Hero in Europe just to name a few.

Every one of these companies has raised billions of dollars of investor money and iPod on major stock exchanges, but despite scaling to tens of millions of users, not a single one of them has ever turned a profit. How is it possible that these internet platform companies with zero marginal costs still can't make a profit? We'll start our analysis with Uber which is the biggest of the group. It has been operating for over 10 years, has 130 million active users, over 30 billion dollars of Revenue, and has raised over 33 billion dollars of equity. Capital since Inception If anyone should be profitable, it should be them, but they're not.

In the past, a lot of Uber's losses came from their overseas operations in places like China Russia and Southeast Asia. They face intense competition from local competitors in these markets and there is no realistic path to profitability, so they divested these non-core geographies in 2018. they also used to waste a lot of money on research and development for self-driving technology. In 2020, they gave up and divested this unit as well.

Since 2020, Uber has been focused on its Core Business of ride hailing and food delivery in North America and Europe. Their business model is pretty simple: You use the Uber app to call up an Uber an Uber driver will come and pick you up and take you to your desired location. You'll pay a fee in the app. about 75 percent of the fee goes to the driver and the remaining 25 goes to Uber itself as a commission.

They also have ubereats for food delivery. You order a meal on the app and someone will pick it up from the restaurant and deliver it to your home, but the pricing system is a little bit less transparent. Take the example of this: Uber Eats receipt posted by a user on the subreddit r slash mildly infuriating. The order costs 32 dollars, which is inclusive of a 3.54 service fee, a 49 delivery fee, and a two dollar driver benefits fee which is only applicable in California.

This is six dollars a fees in total. However, the 32 dollar bill charged to the End customer is twelve dollars higher than the 20 on the receipt provided by the restaurant. So where is this extra six dollars coming from? As it turns out, the prices of the items themselves are much higher on Ubereats. The Pad Thai costs 11.50 if you physically go to the restaurant and buy it, but on Uber it costs 14.95 30 more.

The same with the steamed button at the restaurant costs six dollars and fifty cents, but on Ubereats costs 8.63 cents. Also, about thirty percent more. If you are a restaurant and you want your food to be available on Ubereats, you have to pay a fee between fifteen and thirty percent of your gross order value. With the 15, Tier you receive minimal discoverability on the app.

Basically, you'll only show up if someone specifically searches your restaurant's name. With the 30 tier, you'll have maximum discoverability. Consumers will be likely to see you immediately when they open the app, or at least when they search for your genre of food. As you can see, Uber is making a killing.

Not only do they take a cut from the Courier's fee, they're also taking a significant fee from the restaurant itself. The total amounts of fees charged to end users is called gross bookings not Revenue. The majority of this goes to drivers, with the rest going to Uber. Only the portion that Uber keeps is recognized as revenue revenue divided by the gross bookings is called the take rate.

Historically, the take rate has been about 20. so if an Uber ride costs you ten dollars, eight dollars would go to the driver and two dollars would go to Uber in an attempt to reach profitability Uber increased their take rate to 28. Yet, despite increasing their take rate to such an exorbitant level, Uber still managed to post a 1.8 billion dollar operating loss for 2022. As we dig into the numbers, we'll see some fundamental flaws in the Gig Economy business model, which may render the entire industry structurally unprofitable.

foreign. In 2022, there were 7.6 billion rides worldwide on the Uber platform. On average, the gross fee charged per ride was 15.10 of which 72 percent or 10.93 was paid to the driver. After paying the driver, Uber generated 4.17 of net revenue per order.

The majority of this 2.57 cents goes to the cost of Revenue. Cost of Revenue includes things like credit card processing fees Insurance data center fees for hosting the app, licensing fees paid to Google Maps and other similar expenses. After subtracting costs of Revenue Uber only achieves a gross profit margin of about 40 percent. This is far below the 80 or even ninety percent gross margins achieved by PurePlay software companies.

One of the reasons Uber's cost of Revenue is so high is because they have to pay credit card processing fees on the entirety of gross bookings. So even if the credit card processing fee is only three percent, this will account for almost 10 percent of their recognized Revenue Their insurance costs are elevated for the same reason. Then they spend 32 cents per order on customer support in similar operations, 29 cents on consumer promotions and discounts, 22 cents on Advertising 11 cents on their sales and marketing staff, 37 cents on research and development, 41 cents on General and administrative expenses. And finally, they have 12 cents of depreciation and amortization All Things Considered They make an operating loss of 24 cents per ride or order.

Some of these expenses are discretionary. for example, they could cut back on consumer promotions and advertising, but then they risk losing market share to their competitors. It would be risky to cut customer support for the same reason. One thing they could cut is research and development, which cost them 37 cents per order.

This would turn their 24 cents per order into a 13 cent profit. They had 7.6 billion orders in 2022, so a 13 cent profit would equate to a roughly 1 billion operating profit. About half of that operating profit would be eaten up by interest expense as they have more than nine billion dollars of debt 500 million dollars annual net profit for a company that has cumulatively raised over 30 billion dollars of equity financing over the course of 15 years is not exactly a win, and this wouldn't even be sustainable. The 1 billion dollars of operating profit assumes that they cut their research and development budget to zero so there would be zero Innovation and they would eventually lose their dominant Market position to a competitor.

So, despite being the largest Gig Economy Company outside of China Uber still can't turn a profit. There's another problem. In most cases, the drivers and Couriers who use these platforms are classified as independent contractors, not employees. As independent contractors, drivers don't receive worker protection such as minimum wage, health care benefits, unemployment insurance, or paid time off.

This has caused protests in many jurisdictions demanding better benefits and protections. Remember that these platforms are already losing money. Treating their drivers as employees would increase their costs even further and they would burn even more cash. In 2015, the German Food Delivery giant Delivery Hero acquired another food delivery company called Fedora which operated in Europe Australia and Canada.

In 2018, Feudora's Australian subsidiary went bankrupt and ceased operations. This came as they were facing lawsuits from drivers who claimed that they should be classified as employees and receive workers protection such as minimum wage. The average Fedora worker was making less than minimum wage in 2020. Fedora also ceased operations in Canada after facing similar issues in November of 20 20.

California passed the referendum that forces Gig Economy companies to offer a minimum wage, unemployment insurance, and sick leave to its Riders This substantially increases cost for the ride-hailing companies. In response, Uber implemented a driver benefits fee of between 30 cents and two dollars per ride only applicable within California. If more jurisdictions require similar benefits going forward, this will make Uber's path to profitability even more difficult. Foreign.

So what went wrong? For years? people thought that Uber and other Gig Economy platforms would be the next Googles and Facebooks Why have none of them been able to achieve profitability? There are two main reasons. Firstly, there's too much competition. Secondly, end users aren't willing to pay enough money to justify the delivery costs. While Uber has never turned a profit, it's been extremely successful in terms of raising tens of billions of dollars from investors.

Throughout the 2010s, hundreds of Gig Economy startups were founded all across the world by entrepreneurs and Venture capitalists trying to recreate Uber's apparent success. That's how we got Lyft in Doordash in the U.S Delivery Hero in Europe, Grab in Southeast Asia and countless other examples. All of these competing apps basically do the same thing, so the only Vector of competition is price. This led to a race to the bottom where they all tried to out-compete each other with unsustainable user discounts and promotions.

Because the drivers are technically classified as independent contractors, they are free to ride or deliver for multiple platforms at once. This creates an extremely competitive market for drivers who look at the various platforms and see who offers them the highest rate. The competition issue has been well known by investors since the beginning. The idea was that eventually the smaller players either go bankrupt or be acquired, leaving just a few survivors.

The survivors would achieve near Monopoly status and eventually be able to raise prices and reduce user promotions. The thinking was that the US Ride-hailing market would consolidate around Uber and the Food Delivery Market would consolidate around Doordash. Because of this, both companies were able to achieve premium valuations. Despite posting negative profits, This has largely played out.

in recent years. The competing U.S Ride hailing company Lyft has floundered as of 2022. Uber has a dominant 71 domestic market share. Doordash is similarly dominant in the U.S Food Delivery Market As of 2022, they had 65 market share, with Ubereats holding the second place spot at 23.

Despite achieving such impressive market share, both companies are still losing more than one billion dollars per year here. While competition is a problem, it's not even the root problem. The root problem is that the services that Uber and Doordash provide are not valuable enough to justify the cost. Let's go back to the example of the Ubereats receipt posted by the angry Reddit user.

The delivery fee itself is only 49 cents. If the delivery driver only received this amount of money, it wouldn't be worth their while. Remember that Ubereats also charges a 15 to 30 fee to the restaurant. Uber uses part of this fee to subsidize the delivery driver's pair.

The restaurants could theoretically decide to eat this cost on their own, but most restaurants have very low profit margins to begin with, so they have no choice but to pass this on to the consumer in the form of higher food prices. That's why it's not uncommon for Ubereats receipts to be 50 higher than what you would pay if you went to the restaurant physically. Despite the high fees gig economy workers don't make very much money. According to Glassdoor The average doordash driver in the US makes between 13 and 26 dollars per hour.

The average Uber driver makes between 16 and 34 dollars per hour. The upper ends of this range are in large cities like New York or San Francisco which have a high general cost of living if you're living in a Suburban neighborhood in the U.S you can probably expect to make between 15 and 20 dollars per hour, at least in the neighborhood that I live in. Walmart and McDonald's are hiring entry-level workers starting at 16 per hour with minimal or no experience required. They're paying pretty much the same rate that you can make on Uber or Doordash.

That's not even considering the fact that as a delivery driver, you have to pay for fuel and if you're driving around town all day, your chances of getting into a fender bender increase substantially, even if you have insurance, frequent fender benders will increase your monthly premium. That's to say nothing of the potential for bodily injury. On the other hand, if you work an entry level job at Walmart or McDonald's there is at least some opportunity for career advancements. Store managers are often promoted from amongst the crew members.

If you drive for Uber or Doordash, you have no career advancement opportunities at all. One of the reasons the hourly wage is so low for Gig economy workers is because they only get paid when they deliver an order. They have to spend a significant amount of time sitting in their car waiting for the next order time. they are not compensated for.

Companies like Uber and Doordash are middlemen who connect the restaurant with a delivery driver with the unconsumer. Every one of these stakeholders has been stretched near to their Breaking. Point. The restaurants operate on paper-thin margins, so any fees they are charged are passed on to the consumer.

Because of this, the consumer ends up paying up to 50 more than what they would pay if they just drove to the restaurant themselves and the delivery drivers are paid so little that they'd be better off taking entry-level jobs at Walmart or McDonald's In most cases, if Uber and Doordash want to reach profitability, they don't have a lot of options. If they increase the fees to the restaurant, consumers will stop using the platform because it's too expensive if they decrease the fares, pay to the drivers, the drivers will leave the platform and get regular jobs instead. The whole business model is economically inefficient. If you want restaurant food, the most efficient way is to drive to the restaurant yourself because you know exactly when you want to go.

It's obviously going to be much more expensive if you have to pay someone to wait around until they get an order right. Handling, on the other hand, is a viable business. There are cases such as going to the airport where you need to hire a ride in the early days Uber and Lyft were credited with disrupting the New York Taxi industry. Prior to the emergence of ride hailing, you needed a license to operate a taxi in the city.

The taxi Union limited the number of permits to ensure taxi drivers could make a decent living. Uber and Lyft created a massive influx of Supply causing the price of ride hailing to tank with no barriers to entry. Uber and Lyft have created a race to the bottom where Uber drivers are often worse off than fast food workers. That's exactly why tax unions limited the number of permits in the first place.

They knew that limiting Supply was the only way to make the business sustainably profitable. Uber did successfully disrupt the taxi industry, but they replaced a profitable business with an unprofitable one. Companies like Uber and Doordash are close to break even. It's possible that they will find some way to make a profit, but they will never be as profitable as Pure Play Internet platforms like Google or Facebook.

This is because they have to set the prices high enough to drivers, while the same time low enough to entice customers. This margin is extremely small. Very little profits are left over for the platform, if any at all. All right guys, that wraps it up for this video.

What do you think about Gig Economy platforms? Will any of them ever achieve profitability? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.