When Uber expanded into food delivery, it was expected to boost revenue for the ridesharing company. It did, but not without drawbacks.
Since its start in 2016, Uber Eats has grown rapidly. Yet, this growth has come at a cost. Research from the University of Michigan shows that Uber Eats has hurt Uber’s main business, reducing rideshare trips for both Uber and Lyft.
Changing market
The study looked at data from New York City’s rideshare and food delivery markets in 2015 and 2016, with additional tests in 2019. It found that a 1% increase in local restaurants joining Uber Eats led to a 2% drop in Uber trips and a nearly 7% drop in Lyft trips.
This drop in rideshare trips happens because drivers switch between the two services to make more money. Uber’s move into food delivery lets drivers use their idle time for food deliveries.
When many drivers switch to the new service, riders wait longer to get a driver. Over time, this may cause riders to leave the platform, which can lead other riders and drivers to leave too. As a result, rideshare trips decreased after Uber Eats launched.
“Given the network effects and the ‘winner-take-all’ nature of platform businesses, losing riders and drivers can be fatal to the platform,” the researchers say.
Widespread impact
Lyft also felt the impact of Uber Eats. Before Uber started its food delivery business, Lyft drivers interested in food delivery had to use multiple apps like Lyft and DoorDash, which caused scheduling conflicts. Declining requests from one platform could hurt their performance rating and future assignments. Drivers often used multiple smartphones to manage these conflicts, which discouraged some from working in food delivery.
With Uber’s expansion, drivers could choose between rideshare and food delivery within the same app, reducing coordination costs and idle time. This convenience led Lyft drivers to switch to Uber and Uber Eats, further reducing Lyft’s rideshare trips.
“Our research highlights the hidden cost of Uber’s diversification,” the researchers explain.
Each year, Uber Eats cut Uber’s potential trip volume in Manhattan by about 3.3 million trips. With an average fare of $15 per trip and Uber taking 20%, this means a $10 million annual revenue loss in Manhattan. For Lyft, the impact was a 1.3 million trip reduction and a $4 million revenue loss.
To reduce cannibalization, platform businesses can increase compensation for existing services or encourage drivers to use multiple services within the platform, the researchers suggest. For example, Uber could raise rideshare fees for drivers and lower prices for riders.
Also, rewarding drivers who complete more rideshare or food delivery trips might attract new drivers or lure drivers from competitors like Lyft. The researchers also recommend lowering the costs of managing different services within the same platform to attract drivers from rivals.
