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Will food delivery prices rise following Uber’s purchase of Postmates?

July 6, 2020, 9:02 PM UTC

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Uber’s planned $2.65 billion acquisition of rival Postmates is turning up the heat in an already hot food-delivery market. But as the number of competitors shrinks, one question remains: Will fewer delivery services result in higher prices for people who want their pizza, pad thai, and tacos delivered to their homes?

The answer, according to three analysts is: probably, in some form.

“Over the intermediate and long term I would expect that consolidation will lead to higher prices for diners,” Tom White, analyst for investment banking firm D.A. Davidson, told Fortune. “These businesses need to get profitable.”

Analysts said consumers will likely see either fewer promotions for free delivery or an increase in delivery fees in the future. But they said such changes would have likely occurred even without the recent proposed acquisitions of Postmates and Grubhub, which Europe’s Just Eat Takeaway agreed to buy for $7.3 billion last month.

“Uber has been pretty clear that [promotions are] a thing of the past,” said Brad Erickson, an analyst at investment banking firm Needham & Co. “My view is, as these businesses get bigger, it’ll happen less and less.”

Food delivery companies like Uber Eats, DoorDash, and Postmates have experienced explosive growth in the past few months, as more people stayed home because of the coronavirus pandemic. Meanwhile, more restaurants turned to the services following city mandates that allowed eateries to fulfill only takeout and delivery orders, analysts said. But the rapidly growing food delivery services are still suffering from big losses, mainly the result of steep diner discounts and big driver incentives. 

Though the coronavirus has altered the outlook for these services, they’re still expected to crack down on expenses and start working toward profitability—following a similar approach to ride-sharing services. 

Mark Shmulik, analyst at brokerage firm AB Bernstein, said that as seen with ride-sharing, price changes will likely happen city by city, as food delivery services determine where they can pull back on promotions or raise delivery fees. Acquiring Postmates and its clientele will likely help Uber Eats in places—including Los Angeles, San Diego, Phoenix, and Las Vegas—where it has historically struggled to gain popularity.

“This is going to play out on a metro-market level,” Shmulik said. “These companies are going to battle it out, and they’re going to pick and choose which cities’ [prices]” will change.

Food delivery services will likely have to both cut some marketing costs, such as free delivery promotions, and raise delivery fee prices to reach profitability, White said. With three large players, Grubhub, Uber Eats, and DoorDash, in competition, each will have to find some way to increase revenue. Given the economic pressures the coronavirus has placed on restaurants, White said, the services likely won’t increase fees for eateries. Therefore, consumers will likely have to pay more.

But Erickson disagreed. He said fewer promotions, which already aren’t as common these days, combined with increasing efficiency fueled by growing demand and consolidation will be enough to get these companies on the path to profitability. He added that food delivery services are aware of their customers’ price sensitivity, and that driving up delivery fees in a lot of cases means driving away customers.

“[The companies] test that all the time, so they have a keen sense of what they can do and can’t do,” Erickson said. “When they talk about getting to profitability, it’s not about raising the [delivery fee] for consumers.”

Because Uber’s proposed acquisition of Grubhub reportedly fell apart owing to antitrust concerns, Erickson said Uber will likely lie low and not raise prices anytime soon. An antitrust investigation could postpone the deal for several months, at least. 

At the end of the day, though consumers may have less opportunities for free delivery, the acquisition works in their favor, said Shmulik.

“Consumers probably spend way too much time figuring out what to eat on these apps,” he said. “The fewer there are, the simpler it is to figure out what we want to eat.”

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