Uber's $2.5 Billion Hidden Toilet Synergy [Bit by Byte]
How Uber Eats turned two-ply into cash: the invisible impact of bathroom logistics on Uber's value creation
Welcome back to The Innovation Armory! I’m launching a new content series called “Bit by Byte”! In addition to my long form technology thesis and company deep dives, I’m going to start publishing bite sized short form content about weird and whacky topics related to tech innovation. My goal with these posts is for you to see the headline in your inbox and be like: “why on earth is Sam thinking about this topic”, but by the end of the piece, be convinced it was actually a valuable thought exercise. As I go about my week, I often find myself writing down a storm of notes in my phone about random thoughts that will extrapolate an observation during my day into a business insight. Unfortunately, most of these get stuck in my Notes app and never actually make it out into the public domain which is unfortunate. Until now. I’m thinking about these posts as crossovers between Tweets and longer newsletter pieces that will go strangely and unnecessarily deep on some of my oddest insights. These posts are for striking thoughts that would make great tweets but are worthy of going way deeper than 280 characters.
For me, one of the coolest parts of this series will be highlighting how carving out the headspace in our hectic lives to be mindful and observant can catalyze some interesting insights. We all like to think there is always some special narrative behind acts of innovation, be it driven by some transformative experience, thesis research or an inspiring conversation with another founder. The reality is that sometimes our most interesting ideas just whack us in the face while we go about our day. A lot of innovation is simply randomness combined with an insight that feels so striking you feel an irrational compulsion to see it through. A function of asking questions about weird things most people don’t care about and being whacky enough to find answers that many may think are pointless. This series aims to expose the value of following those curiosity-stricken moments scattered throughout our lives to the ends of the earth rather than forgetting about them, burying them in your phone notes or conveniently tweeting out a couple characters.
This first Bit by Byte struck me while I was waiting to be seated for dinner at a Mexican restaurant and saw a bunch of Uber Eats delivery workers head into the bathroom.
My Initial Thought
“Wow, Uber Eats has probably created billions in shareholder value by giving drivers a convenient and minimally disruptive way to use the bathroom.”
What’s that old adage again? Don’t s**t where you eat, but rather make $$$ where you s**t? 🤑 🙃
Before Uber offered food delivery, Uber drivers (particularly in tier 1 cities) probably wasted a lot of time satisfying one of our most basic human needs: using the bathroom. If you’re purely driving passengers for Uber, going out of your way to end your routes and use the restroom must be stressful and inefficient. As a driver, you need to find a place to park your car where you won’t get a ticket, find a convenient restaurant with a public restroom and convince the owner to let you use the restroom. While to the average person, this may seem like a small-time inefficiency, compounded across Uber’s full driver network, making this process easier must have created a tremendous amount of value. Now with food delivery via Uber Eats, the ability to seamlessly switch between ride sharing and deliveries builds in time where drivers are effectively getting paid during restaurant pickup waiting time to be able to use the restroom. More states like New York are also requiring restaurants who do business with delivery platforms to allow workers to use the restroom albeit with certain exceptions. My hypothesis from this initial observation was that In all likelihood, one of Uber’s biggest synergies branching out from pure ridesharing into food delivery was catalyzing higher driver utilization by minimizing wasted time on inconvenient bathroom stops. I will call this the “Hidden Toilet Synergy”, which helps Uber print an extra $700 million per year in revenue. Don’t be surprised if we see more restaurants changing their bathroom signs across San Francisco to…
My Deep Dive
Based on this initial hypothesis, I set out to quantify how much potential value is being created at Uber by virtue of finding synergies in an unexpected place: the bathroom. I pulled apart Uber’s 2023 10K to grab relevant assumptions for yearly trips / active driver, average gross bookings / mobility trip, net take rate, etc. At a micro-level, I applied conservative assumptions related to bathroom use: 1 trip every four hours, 5 minutes wasted / trip, etc. to arrive at a per driver time efficiency that drives significant revenue uplift when extrapolated across Uber’s entire base. I estimate that Uber’s Hidden Toilet Synergy has conservatively created nearly $700M of annual incremental revenue and ~$2.5 billion of enterprise value. See below and feel free to message me if you want the Excel backup behind the analysis:
Note: “Uber Extra Net Take / Year” assumes a 10% discount on current take rate to be conservative on impact of higher driver time supply on price.
There are some key variables that could impact the analysis that I don’t explore in-depth that are important to call out: First, Cannibalization – by launching Uber Eats, there has been some degree of cannibalization of Uber’s core rideshare business as drivers have a fixed time resource and must choose how to efficiently allocate their time between mobility rides and meal delivery. Counter-balancing this dynamic is the fact that by making restroom logistics easier, Uber incentivizes its drivers to stay on the road longer and accept more trips. Further, is Uber can maintain similar take on mobility vs. delivery, it should be indifferent in the face of some cannibalization. Second, without corresponding demand gains, increases in driver time on the road will cause some degree of downward pressure on pricing by increasing the total supply of driver time. In my analysis, I am assuming Uber’s average pricing and take on those incremental rides. Third, while I apply the revenue efficiency gain across Uber’s full base of drivers and trips, in reality, time wasted on inefficiencies in bathroom logistics may be higher in tier 1 urban areas where it is tougher to find parking. Outside urban areas, while parking is easier, available bathrooms are also spread out further which can pose its own set of issues. I accounted for these differences using a conservative blended estimate of time wasted / bathroom trip. Fourth, there are metrics that are tougher to quantify with publicly-available information like increases in driver satisfaction, driver network growth and improvements in driver retention that have likely benefitted from easier restroom access. Lastly, since I’m applying this efficiency gain to Uber’s current network, I have the benefit of hindsight. At current unit economics, driver network scale, trip volumes, etc., the Hidden Toilet Synergy seems self-evident, but it was probably significantly less apparent at a smaller scale. At the time Uber added Uber Eats, their marketplace was also less efficient than it is today. The product expansion decision timing is impacted by relative opportunity cost. At the time, there were probably other ways to drive even more efficiency across the driver network than maximizing bathroom access.
My Main Takeaways
Unorthodox Synergies – At scale, when the law of large numbers kicks in and competition intensifies, it is increasingly important to look beyond traditional revenue and cost synergy frameworks to generate massive value from unexpected areas. The easiest synergy path in an acquisition is unfortunately most of the time to cut employees. It takes courage to stand behind off the beaten path synergies that will create tremendous shareholder value while also bettering the lives of employees.
Product Trajectory – The most killer product expansions simultaneously expand your total addressable market, while also improving the unit economics of your core business. Not all product growth is created equal.
“Pay to Play” —> “Pee to Play” – Large marketplaces have a lot of leverage to force unfavorable conditions onto suppliers, effectively offloading network ownership costs onto a specific group of network participants. This can take the form of forcing hard dollar economics on smaller participants, but also more subtle mechanisms like a toilet tax. Uber is starting to refuse to deliver for / do business with restaurants that turn away drivers who need to use a restroom during the day.
Short-circuiting Customer Feedback Cycles with Deeper Empathy – You can often sidestep usability testing, customer surveys and analytics of customer support by expanding your empathetic imagination. Some of the most obvious business decisions are knowable with near certainty through deep empathy for the top 2-3 issues you’d face if you performed the job of someone in a high volume marketplace or services role.
Services Optimization Opportunity – Complex services businesses and marketplaces probably have more room for creative time optimization than most technology investors think. In large networks, relatively small efficiency gains can amplify at the speed of light to drive incredibly large capital gains.
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