Over the past three months, we’ve watched as COVID-19 basically moved in and took over the country. It has disrupted the lives of nearly 2 million Americans who contracted the virus, as well as the entire U.S. population that has been forced into adapting to a new normal.
And there’s no doubt that this new normal has been devastating, with offices, restaurants, factories, retail shops, hair salons, gyms, and all other businesses deemed “non-essential” closing their doors indefinitely. And while these adaptations are necessary to protect public health, they’ve had catastrophic consequences … causing consumer spending to shrink by 16%, unemployment to soar to levels not seen since the Great Depression, and urban mobility to grind to a near halt.
As Americans took to their homes, we saw a dramatic decrease in ride-hailing, with Uber and Lyft reporting as much as an 80% decline in major cities. The visualizations shown below of rideshare activity in both New York City and Los Angeles depict just how much the rideshare industry has declined since COVID-19 took hold of the country.
But in the face of crisis, we human beings are strong, tenacious, resilient, and adaptable, as we have proven through other crises in the past. So just as grocery stores, restaurants, and our medical professionals have adapted to this new normal, the rest of us will also adapt. It’s what we do.
As the reopening of economies begins across much of the U.S., many in the mobility space are asking what the future holds for the ride-hailing industry. Will consumers flock back to Uber and Lyft? Will more people take public transportation … or fewer? And how fast will we finally get back to normal?
To find answers about the future of the ride-hailing industry, we turned to an often-overlooked source: drivers.
Using our anonymized data from more than 120k rideshare and delivery drivers, we can see how the supply side of the ride-hailing industry is reacting to COVID-19, and we can start to understand how the industry as a whole will fare in 2020 and beyond.
Let’s start by taking a look at recent ride-hailing driver earnings data.
How have ride-hailing driver earnings fluctuated amid COVID-19?
With ride-hailing down nearly 80% since COVID-19 took hold of the United States, we were not surprised to see driver earnings drop drastically as well. In Figure 1 below, you can see that during the week of March 16th, hourly driver earnings plummeted 36% in a matter of two weeks.
Figure 1: National ride-hailing driver earnings per hour
After such a drastic decline, we were surprised to see that driver earnings started climbing back toward pre-COVID-19 levels rather quickly. As you can see in Figure 1 above, drivers were earning $20.04 per hour for the week beginning May 24, 2020.
Why, in the midst of a pandemic, would driver earnings decline so fast—and then bounce back up as the COVID-19 threat was growing worse?
Because, as Freakonomics author and University of Chicago Professor of Economics Steve Levitt says, in many ways Uber is the embodiment of what economists would like the economy to look like. Why? Because the prices people pay for Uber directly respond to supply and demand … like a market should.
When there are lots of people looking for rides and not enough drivers, the price goes up. And when there are too many drivers and not enough people, the price stays low.
The fact is, 57% of drivers have completely removed themselves from the road to stay safe amid the COVID-19 crisis, while another 14% have turned completely to delivery driving as a way to continue earning a living while staying safe .
That’s 71% of the supply of rideshare drivers being sucked off the road.
Figure 2: 71% of drivers have stopped driving for ride-hailing services
In many cities, if you open up your Uber or Lyft app to request a ride, you may find that both apps have a wait of 10 minutes or longer, whereas previously you could find an Uber or Lyft in just a few minutes.
What we’re observing is a supply-side market contraction. In other words, ride-hailing drivers who are on the road are making more money because there are more rides needed than drivers to fulfill the need.
Inside the data: What level of rider demand are Uber and Lyft seeing?
Let’s take a quick look at the demand-side data that is publicly available to us.
On their respective Q1 earnings calls, both Uber and Lyft gave insight into rider demand over the past few weeks.
Here are highlights from Uber’s earnings call:
- In April, Uber saw gross booking decline 80% globally;
- For the week ending May 3, 2020, Uber saw 9% trip growth and 12% gross bookings growth globally week-on-week;
- For the week ending May 3, 2020, Uber saw gross bookings rise by 12% overall week-on-week, including New York City up 14%, San Francisco up 8%, Los Angeles up 10%, and Chicago up 11%;
- For the week ending May 3, 2020, Uber saw gross bookings in large cities across Georgia and Texas grow 43% and 50% respectively;
- As of the week ending May 3, 2020, Uber saw Hong Kong ridership back to 70% of pre-crisis gross booking levels.
Here are highlights from Lyft’s earnings call (note that Lyft only operates in the U.S. and Canada):
- In April, Lyft saw gross bookings decline 75%, with ridership appearing to bottom out in the second week of April;
- For the week ending Sunday, May 3, rides were up 21% from their low point;
- For the week ending May 3, total rideshare rides grew 7% week-on-week;
- For the week ending May 3, ridership was still down over 70%;
- In April, airport rides were less than 2% of total rideshare rides, and this was down from about 9% in Q3 and Q4 of 2019;
- When comparing the week ending April 5 and the most recent week (ending May 3), rideshare rides increased 25% in Atlanta, 35% in Chicago, 29% in Houston, 39% in New Orleans, 22% in New York City, and finally, 25% in Seattle.
- For the week ending May 3, Lyft saw the following growth: in Las Vegas, rides grew 22% week-on-week; Nashville grew at 16% week-on-week; Miami grew at 15% week-on-week; Orlando grew at 14% week-on-week; Austin at 16% week-on-week; and Houston at 12% week-on-week.
So with all of these data points in mind, what hypothesis can we make about the future of the ride-hailing space?
Hypothesis #1: In the short term, ride-hailing companies may struggle to win back drivers
Both Uber and Lyft may face an uphill battle in terms of winning back rideshare drivers. Not only have they received a litany of negative press, but they are facing new supply-side competition they haven’t seen in the past.
For ride-hailing drivers, driving for delivery services was always kind of an afterthought, as ride-hailing was significantly more profitable. However, drivers are now seeing that both food and grocery delivery are becoming just as, if not more, profitable than rideshare. Just look at what DoorDash drivers have made over a four-week period from April 19, 2020 to May 17, 2020.
Figure 3: National DoorDash driver earnings per hour
While DoorDash drivers are still making less per hour than their ride-hailing counterparts, these earnings are closer than ever before. And delivery drivers won’t face the same level of risk to their health as rideshare drivers. Also, smart drivers are being more selective when they choose to drive for DoorDash, which will continue to increase their earnings per hour.
What’s even more interesting is how grocery delivery shoppers have often made MORE than rideshare drivers during the same time period.
Figure #4: National Instacart shopper earnings per hour
We can see here that grocery delivery shoppers made more than rideshare drivers for several weeks in April and May, while paying significantly less in expenses because they don’t have to drive around as much. So drivers are saving a lot of money on gas, vehicle maintenance, vehicle repair, and depreciation.
Ride-hailing drivers are also more likely to stay at home since they can collect unemployment benefits for at least the next few months.
Given the increased supply-side competition, fear of COVID-19, and widely available unemployment benefits, traditional ride-hailing companies could face an uphill battle when it comes to driver supply.
Hypothesis #2: Driver incentive spending will increase, which could result in a lower overall take rate
One of the most important numbers to look at when Uber releases its financial statements is its take rate, which is defined as adjusted net revenue as a percentage of gross bookings. In Figure 6 below, you can see that Uber has been gradually improving its take rate.
Figure 6: Uber’s increasing take rate
There are two primary ways for Uber and Lyft to improve their take rate, one of which is cutting driver base pay or bonus pay.
Let’s look at the GAAP to non-GAAP reconciliations included in Uber Q1 earnings reports to see how driver costs have been trending.
Figure 5
In Figure 5 above, we see that both excess driver costs and driver referrals have been trending down, aside from a seasonal bump in Q4 2019, as Uber needs to spend less and less to incentivize drivers to get on the road. However, if Uber struggles to engage drivers (as drivers have more opportunities available), the company will need to increase spending on driver incentives, which will negatively affect its take rate.
Historically, Uber has been able to offer bonuses to incentivize drivers to get back on the road. But until drivers can be on the road safely, Uber is not likely to explicitly encourage them to work.
Instead, expect the company to spend millions on COVID-19 response initiatives, like we’ve already seen them do. Figure 5 shows a $19 million expenditure for COVID-19 response initiatives, and we know these expenses will increase in Q2 of 2020.
Hypothesis #3: Uber and Lyft will turn to premium offerings, not price wars
Historically, the ride-hailing business was a race to the bottom, with every service trying to offer the lower price. Then in 2019, both Uber and Lyft began to slowly raise their prices … and you probably didn’t even notice.
That’s because ride-hailing is surprisingly inelastic.
Again, we look to economist Steve Levitt to help explain. In a podcast Levitt broke down the economics of the ride-hailing industry, saying:
So the elasticity of demand that we estimate overall turns out to be a number, which is like a -0.6 or -0.7. So what does that mean? That means that when the price of Uber say, doubles, it means that the demand for Uber only falls by about 40 percent. So that is what an economist calls inelastic demand. An inelastic demand is a sign that people are not very sensitive to price.
So based on the inelastic demand principle, even as the economy constricts and consumers have less disposable income, they will likely be willing to pay as much for their rides as before COVID-19—and possibly even more.
If you’ve been paying attention to Uber’s marketing lately, you’ve undoubtedly noticed its heavy focus on brand and reputation as opposed to price. Uber was the first to release a safety report because company officials know they can, and will, improve their safety metrics. And when they do, they will point to their improvements as they declare themselves the safe option.
We can expect Uber to use the same strategy for COVID-19 and cleanliness. The company will spend millions of dollars to provide drivers with PPE and disinfecting agents, and will spend millions more in advertising, in which Uber will refer to itself as the safe brand.
All of this will result in Uber not only keeping prices consistent, but also continuing to raise prices as planned while offering even more premium options that have a considerably higher take rate than UberX.
Hypothesis #4: Rideshare demand will rebound quickly
Although driver supply may be difficult to come by for ride-hailing companies, there is plenty of evidence that rideshare demand is already starting to bounce back and will do so quickly.
Let’s look to the earnings of ride-hail drivers in various markets to understand how rider demand has shifted.
We’ll start by looking at earnings numbers for Atlanta.
Figure 6: Atlanta ride-hailing driver median earnings per hour
Here we can see a steep decline in earnings in mid-March, followed by a gradual resurgence to earnings that were even higher than pre-COVID-19 levels.
This tells us that either supply has continued to fall faster than demand, or supply has stabilized and demand is ticking back up. Luckily for us, we have a few other data points that we can leverage to better understand what’s going on, including Apple’s mobility charts.
Apple’s mobility trend data gives us a great view of how people are starting to move in their cities once again. Let’s take a look at what the data in Atlanta shows.
Figure 7: Atlanta mobility trends
Here we can see that since April, both driving and walking activity have steadily increased closer to what they were pre-COVID-19. This is a likely indication that rideshare demand is picking up.
We can also look directly at earnings data that Uber and Lyft have released around key markets.
On Uber’s Q1 2020 earnings call, CEO Dara Khosrowshahi stated that rides have been increasing week over week in Atlanta. He also said that rides were up 43% for the week ending May 3 when compared to the week ending April 12, which was the low point for Uber rider demand.
On Lyft’s Q1 2020 earnings call, CEO Logan Green stated that the company saw rides increase 35% from April 5 to May 3.
In Atlanta, we can see median driver earnings bouncing back even beyond their peak from 2020 to $17.83 per hour—the same week that the state reopened. We can also see that driver earnings are correlating with increased rider demand.
Hypothesis #5: Consumers will choose ride-hailing over public transportation
In Figure 7 above, we see that as driving and walking have picked up, public transportation has stayed at the same low levels.
That’s because as people begin to move around their cities again, they are going to try to avoid being in large groups of people as much as possible.
The Gridwise team conducted a study in late April to better understand passenger settlement around urban mobility, and we found that after stay-at-home orders are lifted, passengers plan to use public transportation for commuting to work 23.37% less than they otherwise would have. Passengers also stated that they will use public transportation 31.49% less for recreational purposes than they otherwise would have.
As more cities open up and people start heading back into offices, we expect to see a continued increase in driver earnings as people continue to avoid large crowds and public transportation.
Hypothesis #6: Ride-hailing companies will continue to focus on delivery and consolidate the market
It’s well documented that the demand for food and grocery delivery has skyrocketed over the past few months as COVID-19 has forced the majority of Americans to stay inside—and we don’t expect that demand to evaporate when the country starts opening back up again. According to our Gridwise data, most Americans will continue to leverage both food delivery and grocery delivery options quite often through 2020 and beyond.
From looking at the increasing earnings of food delivery drivers and grocery shoppers (Figure 3 and Figure 4), we can see that they are currently more in demand than ever.
With that in mind, expect the major players in the ride-hailing industry to focus on delivery, and to consolidate the market.
We can already see that Uber is attempting to purchase Grubhub for two main reasons, one of which is to keep cutting out competition. Uber understands that if it’s not the category leader in a market, it becomes extremely difficult to be profitable in that market. With the acquisition of Grubhub, Uber can claim 55% of the U.S. food delivery market share more cheaply and more easily than growing its Uber Eats business organically.
Secondly, it is incredibly hard to be profitable as a food delivery company without tremendous scale. Just ask Grubhub; as one of the most senior companies in the space, it has struggled mightily to turn a profit even as COVID-19 has increased demand. That’s because overhead costs to run these apps are huge—but with a merger, many of the costs can be swiftly cut, which could result in a road to profitability.
Bottom line: Expect ride-hailing to survive and thrive while transitioning to a new normal
Despite a brutal first quarter and no end in sight for the COVID-19 pandemic, Uber is in a tremendous position to succeed in the long term. While it may not be as transparent now with the losses the company is currently facing, we recently did a study to learn whether consumers planned to use rideshare as often post-pandemic as they had pre-pandemic. What we learned was that consumers don’t plan on going out as often, and more than one-third indicated they plan to reduce going out by 25% to 50%. In addition, riders indicated that they plan to use public transportation to and from work 23% less often than before, and 31% less for recreational purposes.
This may not sound like good news for the rideshare industry—but based on what our study showed about Americans planning to avoid public transportation, we anticipate more people turning to rideshare apps, which will ultimately increase their demand over time. Also, the delivery industry is booming, and experts don’t expect that to change anytime soon. So Uber will likely adapt to build out the delivery sector of its business.
We’re stating the obvious … but like a lot of businesses, Uber had a pretty rough start to the year. Even after the stay-at-home orders are lifted, we don’t expect Uber to bounce back overnight. We do, however, foresee a slow and steady rise in demand, eventually coming back stronger than ever with new delivery options available.
