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By Moneyweb

Moneyweb: Journalists

Increasingly ‘broken’ Uber in South Africa points to market failure

But with drivers not making money on short trips particularly, something has got to give …

It seems everyone you speak to these days has a story about a recent negative experience with Uber, especially in Gauteng, Cape Town and Durban.

Drivers arriving in visibly unroadworthy vehicles – never mind dents and scratches – petrol warning lights permanently on (worse is when a driver stops for fuel and attempts to get you to ‘help’ contribute), a refusal to use air conditioning, driving dangerously, unclean cars – the list goes on. Quality control is practically out of the window.

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Trying to get to or from an airport is seldom a pleasant or even seamless experience. In Cape Town, one must also contend with the many illegal operators on Uber who aren’t enlisted in the city’s permit scheme.

A more recent scourge is insistent in-app messaging by drivers, after accepting a trip, to find out your destination.

Based on this, they will decide whether the trip is worth their while. If they decide it isn’t, they will either cancel it or not arrive – if you don’t then cancel the trip, which could negatively affect your rating – you’re stuck, unable to find another ride.

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Unprofitable rides

Some have suggested drivers do this to avoid certain unsafe areas and driver safety is absolutely as important as rider safety. But the platform allows riders to add destinations or change this mid-trip, so an unscrupulous rider could easily send a driver into an area they would be trying to avoid.

A fundamental part of the problem is that certain trips simply aren’t profitable for drivers anymore.

If Checkers, with the AA’s help, has proved that it is cheaper to use Sixty60, at R35 per delivery, than to drive 7.5km to and from the supermarket, how on earth can short trips be profitable for drivers?

The AA calculates that the top-selling passenger vehicles cost around R7 per kilometre to run.

Assuming a hypothetical R50 (±10 min/3.5km) trip in Joburg, the running costs of the trip alone will amount to R25. This doesn’t account for the driver getting to the pick-up, and assumes they’ll immediately find an onwards passenger after drop-off. Traffic and delays caused by load shedding make things even harder.

This excludes any fees for the driver using the platform.

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Driving costs

In its mobility unit, Uber’s so-called take rate reached 27.8% in the fourth quarter (in some public rider documentation, it cites ‘25%’ as the fee charged).

This means that on R1 000 worth of trips that a driver does, Uber takes – on average – R278. But this doesn’t take into account any fixed fees, which means that on shorter trips, the portion drivers ‘pay’ to Uber of each fare could be substantially higher than 28%.

There is ample evidence available online that points to Uber’s share of revenue sometimes being higher than 25%, and sometimes as high as 50%.

Locally, drivers will openly admit that shorter trips are simply not profitable. Sometimes, they only accept these to get back to high demand area.

So, with running costs and platform fees eating away much, or all, of that hypothetical R50 trip, how much could the driver possibly be earning for their time?

This excludes the cost of the vehicle or insurance – drivers need to be earning around R100 a day (after ‘paying’ themselves) to afford to rent a car provided by a financier– the going rate is between R2 000 and R2 500 per month “all in”, including insurance.

And you wonder why your driver arrives in a barely roadworthy, banged up, eight-year-old car (the oldest allowed in this market, according to the platform) …

Overall, though, Uber’s platform numbers globally look amazing. Active drivers, riders and monthly supply hours are at all-time highs.

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Stop trip harassment

But as a recent Wall Street Journal (WSJ) puff piece on CEO Dara Khosrowshahi reveals, the platform has spent less time and effort than it probably should have on actually using the app as drivers.

Everyone uses the app to take trips. But because people at Uber have well-paying jobs, they’re probably less inclined to need to use the app to put food on the table and pay rent.

Somewhere along the line, Uber has seemed to forget that it operates a two-sided market. The drivers and riders are both important – the former arguably more so. Given its scale, stimulating demand for trips isn’t actually all that difficult.

Good drivers in safe cars still exist. There just aren’t that many of them anymore.

Fixing the undesirable parts of the Uber experience for riders in the South African market is going to be tough. It is nearly impossible for the platform to police what one could euphemistically call “unintentional behaviours”.

A start would be for the app to be more transparent to drivers about its fees and fares for prospective trips. According to the WSJ this is being rolled out. At least this will put a stop to the harassment from drivers when accepting trips. Its demand/supply and efficiency models will continue to improve to ensure drivers spend more time carrying paying fares.

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Getting the numbers to work

However, the harsh reality is that fares need to increase – or, for trips to be more profitable for drivers, Uber’s take rate needs to decrease. The latter, for short trips especially, is critical.

But Uber cannot cut its share of the fare. The platform is not profitable – even at take rates approaching 30%.

The obvious way out is for Uber to raise trip fares.

Those willing to pay R50 for a trip to a nearby restaurant will probably be just as likely to pay R60 or even R65 for that same trip, as long as the vehicle that arrives is of the quality they have come to expect from the platform.

Conversely, people who rely on Uber for their daily transport, and who alternate between it and Bolt, are probably less likely to afford the higher prices.

With little action from the platform in this market – at least from users’ lived experience so far – its best customers will continue to abandon it. People are more than happy to use private shuttle services for airport transfers at a cost that’s three or four times more than Uber (read: Uber X). These trips are bread-and-butter for Uber drivers and make them decent money.

What happens when these start drying up?

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.

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