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Uber buys Postmates in deal where restaurants, delivery people and customers all lose

Despite their financial struggles, new food-delivery apps are acting as middlemen and taking a cut from both ends.
Image: FILE PHOTO: An Uber Eats bicyclist makes a delivery during the coronavirus outbreak, in the U.S. Capitol Hill neighborhood in Washington
An Uber Eats bicyclist makes a delivery in Washington, D.C., in April.Jonathan Ernst / Reuters file

On Monday, Uber announced it was acquiring the food-delivery service Postmates for $2.65 billion in stock. While Uber says it will keep the Postmates app running as its own separate brand, the move effectively reduces the food-delivery industry from four major players — DoorDash, GrubHub (which owns Seamless), Postmates and Uber Eats — to three, and that could have consequences for the drivers and couriers who are already feeling squeezed by high commissions and low pay.

The acquisition is already questionable because arguably, neither company is in a healthy financial state.

The acquisition is already questionable because arguably, neither company is in a healthy financial state. Uber continues to lose billions of dollars a year, reporting a $2.9 billion loss in the first quarter of 2020, while the food-delivery companies are similarly struggling to turn a profit. Only GrubHub has tipped into profitability in some quarters by serving online ads. (Although GrubHub’s “success” might also come from its shady practice of tricking customers into calling GrubHub-generated phone numbers that charge restaurants additional fees.)

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And yet, despite their financial struggles, new food-delivery apps act as middlemen and take a cut from both ends. They usually charge customers a delivery fee (some have been waived during the pandemic) and take a commission on the total amount of the order from restaurants. Those commissions can range from 15 percent to as high as 40 to 60 percent, depending on many factors — and restaurants say those fees eat up thin margins and then some. McDonalds even ended its exclusive arrangement with Uber Eats because its fees were too high.

The services also rely on delivery couriers. These essential but low-paid workers don’t have good things to say about the apps either. Couriers work as independent contractors, meaning they don’t have to get paid a minimum wage or get health benefits, and the companies take full advantage of that. While New York City passed regulations ensuring Uber and Lyft drivers get paid at least $17.22 an hour, delivery couriers are not covered and can make less than the city’s minimum wage.

During the pandemic, orders on delivery apps have soared. Uber Eats, for example, was up 54 percent in the first quarter over the previous year, but the service still lost over $300 million. However, couriers, who already face high injury rates say that despite being deemed “essential,” have said they received no additional pay, very little protective equipment or sanitizer. Some restaurants wouldn’t even let them wash their hands, according to part-time courier Wilfred Chan.

And the customer isn’t spared. A proposed class-action lawsuit filed in April against the big four food-delivery services claims customers are paying artificially inflated prices for food. Since the high commissions are cutting so deeply into restaurants’ bottom lines, that means prices have to go up for everyone, not just those using the delivery services.

In short, the food-delivery app business right now seems like a long-term loser for everyone involved. The customer may get a bit more convenience, but it’s unclear how Uber’s acquisition of Postmates will make anything significantly better for anyone. The deal will allow the companies to dominate the Los Angeles and Miami markets — where the companies have significant combined market share — which could attract antitrust scrutiny, but its business is premised on minimizing courier costs, which it might not be able to maintain much longer. California is already taking Uber to court for flaunting labor rights and filed an injunction in June to force it to reclassify its contract workers as employees. And workers themselves are beginning to organize to demand better treatment by the app companies and for governments to hold them accountable.

The food-delivery services are a typical example of a rentier business model where the companies effectively put themselves in the middle of transaction and charge a toll from everyone involved while reducing the wages of workers and even stealing their tips, as DoorDash did. There’s absolutely no reason to believe that giving the intermediary even more power will improve the situation for any of those groups. A report in The Information suggests DoorDash thinks it will get all the benefits of consolidation without having to spend a penny, and the acquisition will allow both companies to spend less on incentives for couriers.

Uber has already spent more than a decade trying to turn a profit from disrupting the taxi industry and failed. It also tried to dominate the bike-share industry, but gave up in May as it was still losing $60 million a quarter. That same month it laid off thousands of employees, closed 45 offices, shuttered a start-up incubator and even signaled it could finally abandon its autonomous-vehicle project.

Maybe the Postmates acquisition is a signal Uber thinks the food-delivery business could be the one that will finally work. But it seems far more likely this venture is its latest attempt to delay investors pulling the plug and will fail like so many before it.