Run on Numbers: Lessons from Uber

From individuals to reserve banks across the world, the effects of inflation are feared and resented. Picture: Independent Newspapers.

From individuals to reserve banks across the world, the effects of inflation are feared and resented. Picture: Independent Newspapers.

Published Jan 22, 2024


From individuals to central banks across the world, the effects of inflation are feared and resented. Inflation is central to economic policy and on an individual level, consumers battle to manage their budgets.

Yet there are world trends that engulf consumers, who gladly accept new products and trends that are making huge inroads on their available cash flow. One must only think about telephone communication costs.

In the days that we only had fixed-line phones, consumers spending on this item was minimal. Today, many companies provide workers with huge budgets for cellphone usage. The monthly cost for the latest phones almost matches the payment for a small vehicle. The children also want cellphones, and only the latest and best is acceptable as it is a status symbol at school.

Consumers are no different from the frog in a water container gradually being heated. It happens so gradually that the frog never considers just jumping out until it is too late, and the heat overcomes the little guy.

There are other pools in which we find ourselves gradually consumed by an ever-increasing heat, self-induced in blissful ignorance. One such that stands out is the brand Uber.

1. International giants: The following companies seem almost too good to be true and they include Tesla, Microsoft, Apple, Yahoo, Saudi Aramco, Alphabet (Google), Chrysler, Coca-Cola, and well-known to South African investors, Tencent, Amazon, and various others.

One of the more recent brands to become a household name across the world is Uber. Uber, the ride-hailing giant, has been in operation since 2009 and has disrupted the traditional taxi industry. Uber reported a total of 7.6 billion trips, $31.9 billion in revenue, and a net loss of $9.1bn in its annual earnings release, for 2022. Since its inception, Uber has been expanding rapidly and has become a popular choice for millions of people worldwide. One of the primary reasons for Uber’s inability to turn a profit is the significant amount of money it has invested in research and development and expanding its business.

Uber has been investing heavily in research and development to improve its technology and expand its services. The company has been working on autonomous vehicles, which is a significant expense. Additionally, Uber has been expanding its operations worldwide, which requires a lot of investment.

2. Before its highly anticipated initial public offering (IPO) in 2019, Uber was valued at as much as $120bn by investors. But after going public on May 9, 2019, it made history with the biggest first-day dollar loss in US history.

Uber has been making efforts to improve its financial performance. The company has been cutting costs by reducing its workforce and selling its non-core businesses. Uber has also been increasing its prices in certain markets to improve its revenue. Additionally, the company has been expanding its services to include other areas such as food delivery and freight transportation. But there have been many mistakes along the way. For instance, Uber is shutting down its alcohol delivery app, Drizly, just three years after acquiring it for $1.1bn. Buoyed by the pandemic-era at-home delivery boom, Drizly had grown to become the largest online marketplace for alcohol in North America, but it will officially shut down at the end of March 2024, according to Uber. The alcohol delivery service operated as a stand-alone app, and its marketplace was to be integrated into Uber’s delivery app, Uber Eats.

Pierre Dimitri Gore-Coty, Uber’s senior vice-president of delivery, said Uber had decided to focus on its “core Uber Eats strategy of helping consumers get almost anything – from food to groceries to alcohol – all on a single app”.

3. The graph below shows that investors have not given up on Uber as an investment

The investors that continue their belief in this company must be brave, or they know something that is not in the numbers. Valuations not based on earnings but on other parameters are not new; the technology stock bubble, also known as the dot-com bubble, which occurred in the late 1990s and early 2000s, is a stark reminder. There was a widespread belief that traditional valuation metrics did not apply to technology stocks, leading to a “new economy” paradigm where traditional financial fundamentals were overlooked. This mindset fuelled excessive optimism which seems to be the case with Uber.


4. What traction does Uber have in South Africa?

The taxi-hailing business. A report on taxi violence in South Africa dated 2020 produced by the SA Institute of Race Relations states: “The minibus taxi paratransit industry developed and from the beginning, it was part of the so-called ‘second economy’ or ‘informal economy’. It was a cash business, without published fares, schedules, or routes, and it largely remains so today.” A noteworthy finding of this report states: “The rapid and complete deregulation of the industry, South Africa’s fraught socio-political environment in the dying days of apartheid, as well as the inability of police to maintain law and order, combined to create a volatile, overtraded market in which violence became an effective way of keeping prices up and competition down.”

When the Uber drivers entered the fray there was much resistance from the traditional taxi operators. Uber has spent a huge amount in investing in driverless vehicles. In the South African context, it is hard to see driverless taxis competing alongside an already violent and aggressive taxi industry. It is hard to see any insurance company willing to take the risk to insure such vehicles. Our industry is still suffering from the consequences of the Covid-19 pandemic and companies such as Transaction Capital have incurred huge losses on their taxi insurance offering.

5. Uber Eats

People are increasingly turning to online shopping and some retailers such as Shoprite have been highly successful in setting up a fast, cost-effective, and reliable delivery infrastructure, known as Sixty60. A comparison of the cost of for instance ordering from Uber Eats with other options of purchases leaves a bad taste in the mouth (pun intended). The table below is a small sample of consumer items, but it does give a good idea of the cost implications that consumers are accepting. Not everyone is astute enough to compare the cost implications, and when people do not calculate the cost, they should not complain about inflation.

Consumers are free to choose comfort above price, but if using this service becomes a habit it can add to a substantial amount over a month, of the available money for this category of spending.

* Kruger is an independent analyst.