As coronavirus lockdowns batter its mainstay ride-hailing business, San Francisco-based Uber yesterday announced drastic cutbacks with ominous implications for Chicago. Uber plans to eliminate 6,700 jobs, or 25 percent of its total headcount, and reevaluate two new business lines based in Chicago.
Only last September, Uber was touting a big expansion in Chicago. It signed a 450,000-square-foot lease at the Old Main Post Office, where it would hire 2,000 workers in Chicago over three years and launch digital staffing and freight brokerage businesses.
The big lease boosted a critical redevelopment project on the southwest edge of downtown, and the new digital ventures fueled hopes for more well-paid technology jobs in the city.
Today, future of those businesses is in doubt, as Uber explores “strategic alternatives” for Uber Works, and reassesses Uber Freight. At the same time, Uber has paused construction of its post office space and pushed back the move-in date from this fall to sometime next year, blaming the coronavirus.
Even more troubling is Uber’s effort to acquire Grubhub, Chicago’s best-known technology success story. According to multiple media reports, Uber and Grubhub are hashing out the terms of a buyout that would combine the Chicago-based online food delivery company with Uber’s competing service.
A deal would extend the sad custom of Chicago tech standouts succumbing to out-of-town takeovers. It seems every time a local company establishes itself as a force in some technology sector, a larger company based elsewhere scoops it up.
Data storage specialist Cleversafe sold to IBM for $1.3 billion, workforce software provider Fieldglass took a $1 billion offer from SAP, and digital logistics company Coyote Logistics accepted a $1.8 billion bid from UPS, to name just a few of the biggest buyouts over the past decade.
The upshot of all those buyouts is that Chicago never quite reaches the upper tier of U.S. technology hubs. Admission to that club alongside the likes of Silicon Valley, Seattle and Boston requires at least one flagship independent technology company with broad reach across an important sector. So-called “platform” companies like Amazon or Facebook generate billions in revenue, create thousands of jobs, and spawn ecosystems of innovation.
For a while, Grubhub looked like Chicago’s best shot at a platform company. It pioneered online restaurant ordering, building a profitable business model that enabled eateries to efficiently field and process take-out orders. Unlike so many fast-growing digital startups, Grubhub produced consistent profits as annual revenues grew to more than $1 billion. Grubhub went public at $26 per share in 2014, and saw its shares rise nearly sixfold to a peak of $146.11 in September 2018.
Around that time, pressure started building to add delivery to Grubhub’s online ordering platform. CEO Matt Maloney resisted at first, justifiably wary of the costs of delivery.
Well-funded rivals spotted opportunity. Uber Eats, Doordash, Postmates and others quickly launched restaurant delivery businesses, buying market share with deep discounts that unleashed torrents of red ink. When Grubhub added delivery, Maloney tried to maintain enough pricing discipline to preserve profits.
Before long, market share losses forced Grubhub to respond in kind. Maloney unleashed promotions that submerged the bottom line.
Then came COVID-19, which stoked demand for food delivery while igniting a simmering revolt by restaurant owners complaining that delivery fees consume their narrow profit margins. Fighting for survival under lockdown orders that closed their dining rooms, restaurateurs pressured politicians in some cities to enact caps on delivery charges.
Regulatory pressure arose on another front as California enacted a law that would force delivery companies to treat their drivers as employees, and other states considered similar measures.
With its shares down two-thirds from the 2014 high, Grubhub seems to be losing its taste for battling competitive and regulatory headwinds alone. The Wall Street Journal reported that buyout talks have been going on since Uber approached Grubhub in February. Grubhub recently proposed a price of 2.15 Uber shares for every Grubhub share, while Uber has offered 1.9 shares, according to the Journal.
I figure they’ll agree on a price. Even the 1.9 ratio values Grubhub at more than $64 per share, some 37 percent above its price before news of the talks leaked. Investors sent Grubhub shares up 29 percent on the news; expect the stock to plummet if Maloney walks away from a deal Wall Street wants.
Besides, combining Grubhub with Uber Eats would create an industry giant with as much as 55 percent of the delivery market. A company that large would have at least a decent shot at rationalizing the chaotic business, if antitrust authorities allow the deal.
In a statement responding to reports of the deal talks, Grubhub said, “As we have consistently said, consolidation could make sense in our industry, and, like any responsible company, we are always looking at value-enhancing opportunities. “That said, we remain confident in our current strategy and our recent initiatives to support restaurants in this challenging environment.”
Sounds like a company that’s ready to make a deal. And we know only too well what happens next. Acquisitions create overlapping cost structures, which lead to cutbacks. Layoffs typically fall disproportionately on the acquired company. Its hometown loses jobs, decision-making authority and industry stature. That’s been the story of tech buyouts in Chicago.
A sale of Grubhub to Uber would likely entail deep cuts as the combined company looked to bring greater efficiency to an unprofitable business. Wall Street estimates of potential cost savings range as high as $800 million. That’s a lot of jobs, most of them likely Chicago jobs.