You can violate the basic rules of business for a little while, but they eventually catch up with you. One popular way to flout those rules is to grow fast by offering customers a useful service that costs more to provide than the low price you charge them for it.
Some venture investors like this approach because the fast growth interests investors who are willing to pay up when the company goes public. But if the company faces competitors who match its prices and the cost of employing the people who deliver the service goes up, growth will slow down as all growth opportunities are tapped.
So you can try to find growth by using the skills that got you there to compete in another market. But this only works if your new service offers customers a much better value than what existing competitors provide.
This comes to mind in considering Uber’s latest effort to diversify – by supplying staffing services to companies that need temps. Sadly for Uber investors, it looks like a desperate move that won’t solve its growth problem.
(I have no financial interest in the securities mentioned in this post).
Uber – whose stock has lost 29% of its value since going public in May 2019 – just launched its entry into the job-finding app business. As the Wall Street Journal reported, the app – dubbed Uber Works – connects “workers such as chefs and cleaners with companies looking to fill a temporary opening.”
Uber Works – which the company has been testing for the last year – lets those chefs and cleaners search for jobs by location, pay and skills. The app will also help staffing companies that employ the workers pay and handle worker benefits, explained the Journal.
The October 3 launch of Uber Works comes as Uber is slowing down and still losing bundles. In the second quarter, Uber reported its slowest quarterly revenue increase ever – up 14% to $3.17 billion along with a record $5.24 billion loss. The causes include a one-time stock compensation charge, competition in Latin America and deceleration in its core ride-hailing business. In September Uber canned 400 technical employees and it cut marketing in July, according to the Journal.
and one-time expenses related to its initial public offering. . The company laid off more than 400 technical employees last month and pared back its marketing workforce in July
And if that’s not bad enough, the regulatory environment is moving away from allowing Uber to treat drivers as independent contractors and instead requiring Uber to employ them full-time – thus boosting its fixed costs. To wit, in September, “California passed employment legislation intended to force companies that rely on gig workers to reclassify such independent contractors as employees,” noted the Journal.
Can Uber Works Boost Uber’s Revenues And Profits?
I will give Uber credit for targeting a large industry. The staffing and recruiting industry – expected to hit $153.5 billion this year while growing at a 3.3% annual rate, according to Statista – includes companies which help other organizations recruit or hire people on a temporary basis (the latter being significantly larger).
The problem for Uber is that temporary staffing is an intensely competitive industry where the winners focus on specific niche sectors, verticals or particular geographic regions, according to IBISWorld. For example, Upwork and Fiverr International – which went public in 2018 – run platforms to help connect freelancers with work. And Sequoia Capital, among others, has backed similar startups, the Journal noted.
While the industry is fragmented, two of the industry’s largest players, “The Adecco Group and Randstad Holding based outside of the United States and their respective US operations represent a small part of their overall business. Similarly, US-based Allegis Group and ManpowerGroup have extensive operations in Europe, Asia Pacific and Latin America,” wrote IBISWorld.
On first blush, it is hard to see how Uber Works – would generate revenue by charging businesses a fee after a position has been successfully filled – will carve out a significant niche. Uber must first overcome two obstacles: its app does not specialize by job type, industry or geography and its business model could attract regulatory scrutiny.
While Uber sets up jobs for drivers – an interchangeable skill – Uber Works will only work by matching more unique ones. As Louis Hyman, a professor at Cornell University’s industrial and labor relations school, told the Journal, “Uber’s model has worked before because driving is an interchangeable skill in a space that is outside the office. Staffing is a very different business than delivering people or food from point A to point B. It’s not going to be as easy as they think.”
Another problem with Uber Works is that it does not take responsibility for fair worker pay. Sanjukta Paul, a law professor at Wayne State University. told the Journal that this could attract unwanted regulatory attention.
Paul noted that staffing firms generally “share some responsibility with employers in ensuring that workers are compensated fairly.” Since [Uber Works] “connects workers with customers, while disclaiming any employment relationship, [it could] raise issues like price-fixing and joint bargaining.”
Even if Uber could carve out a niche in this industry, those newly public rivals are so small that it is hard to see how this app could generate enough revenue to move the needle for Uber. After all, in the second quarter of 2019, Upwork reported an 18% increase in revenue – to $74.3 million (2% of Uber’s revenues) while reporting a $2 million net loss. Fiverr revenue popped 41% to an even smaller $26 million.