Uber's CEO is optimistic about Eats growth

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Transportation & Logistics Briefing subscribers. To receive the full story plus other insights each morning, click here.In a wide-ranging interview released prior to Uber's initial public offering (IPO), CEO Dara Khosrowshahi said that it's “a toss-up” as to whether Uber Eats becomes bigger and more profitable than its core ride-hailing segment in the long term.There are two big reasons that Uber Eats could grow to (or surpass) the level of Uber's core ride-hailing business:Food delivery may offer higher profit margins than ride-hailing services for the foreseeable future. Uber does not break out margin information for its various business segments, but it seems likely Uber Eats would have higher margins than Uber's core ride hailing business due to lower customer acquisition costs: Many Eats users are already Uber ride-hailing users. As Morningstar equity analyst Ali Mogharabi argues, that could drive Uber toward overall profitability going forward: “You're basically looking at marginal cost, or cost per transaction completed, declining over time ... We think that's one of the reasons why margins are going to widen.” In fact, Uber Eats is already profitable in at least 40 US cities, an impressive feat given Uber's steep overall losses. And looking ahead, the ride-hailing firm is exploring drone deliveries for Eats, a measure that could improve its food delivery margins as soon as 2021, when it plans to launch food deliveries via drone.Food delivery's popularity overseas could be a sign of things to come in the US and Europe — Uber Eats's core markets. In the interview, Khosrowshahi noted that China's food delivery market could one day be worth twice as much as its ride-hailing market. In fact, as of 2018, China's food delivery market was estimated to reach over $35 billion, which was already larger than its $30 billion ride-hailing market. That could be a harbinger of an enormous opportunity in the US and Europe, where Uber Eats operates.But there are also two big challenges Uber would have to overcome in boosting revenues for Uber Eats:Uber Eats faces a tough competitive landscape in the US food delivery market.The company competes head-on with GrubHub (which also owns Seamless), Postmates, DoorDash, and Deliv. Uber Eats sits in second place behind GrubHub, with 28% of the US crowdsourced delivery market, according to Edison Trends. But with some players like Postmates planning IPOs this year, and others like GrubHub in growth mode, Eats still faces a long road ahead.The firm may need to continue its policy of offering promotions to get restaurants onto the Uber Eats platform — which would be costly and dent revenue. In the firm's S-1 filing, Uber noted that it has ramped up promotions to restaurants in an effort to get them onto the platform for the first time. Such promotions have shrunk Uber Eats's quarterly revenue as of late, as Uber accounted for them in the form of lower revenues — after peaking at $218 million in Q2 last year, Eats revenue dropped to $165 million in Q4 2018. It may need to continue these efforts to continue to bring in more restaurants and increase the utility of its service.Ultimately, if Eats becomes as big for Uber as its core ride-hailing business, it'll be over a very long time period.Even at its quarterly revenue peak in Q2 2018, Eats only made up 8.5% of Uber's overall revenue. Given its significant challenges ahead, it'll likely take many years before Eats is on par with Uber's core ride-hailing business.Interested in getting the full story？ Here are two ways to get access: 1. Sign up for the Transportation & Logistics Briefing to get it delivered to your inbox 4x a week. >> Get Started2. Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Transportation & Logistics Briefing, plus more than 250 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now