According to Uber, there are now 5 million drivers working for the ridesharing company all over the globe. Meanwhile, Lyft projected that it will have 2 million drivers by the end of 2019. Both companies claimed they would have to reduce or eliminate positions in the state if obliged to recognize its drivers as workers.
Lyft and Uber were spared the most serious threat to their business models when California voters approved a ballot measure that would keep their drivers as independent contractors rather than employees.
However, Uber’s decision to reclassify drivers in the United Kingdom shows that the regulatory battle is far from over.
While the region only accounts for about 5% of Uber’s gross bookings, according to Wedbush analyst Ives, the move could have a larger impact if other countries look to the U.K. as a new model.
Uber has attempted to get ahead of the story by proposing to U.S. officials a “third way” to classify drivers that grants some benefits while maintaining the flexibility of contractor status, similar to how drivers in the United Kingdom will receive some benefits without full employment status.
When contacted for this story, an Uber spokesperson referred to this as the “third way.” A request for comment from Lyft was not returned.
Analysts interviewed by CNBC agreed that the risk of reclassification in the United States, where ridesharing companies generate the majority of their revenue, is significantly lower than in the international market, at least in the short term.
In California, the gig economy companies won an early victory when voters approved Proposition 22, a measure that would maintain their drivers’ contractor status while providing them with additional benefits and an earnings floor.
However, the Biden administration has indicated an openness to worker reclassification, and movement in other parts of the world could still dent revenue, making it more difficult for gig companies to achieve profitability.
One metric to keep an eye on, according to Ives, is the international versus domestic bookings trajectory.
“If there is a much larger disconnect between Europe and the United States, I believe they will face increasing pressure to scale down those operations, particularly in the United Kingdom, with London being a top-five city and the United Kingdom accounting for 5% to 6% of bookings,” he said.
According to Bernstein analyst Mark Shmulik, regulatory pressure on gig economy companies has already been “partially priced in.” However, if forced to reclassify in a critical business area, the firms’ stock prices could still shift, he said.
“If some of these larger decisions do come down against Uber, you can look back at that November vote [on Prop 22] and how the stock performed and roughly size the potential impact that way,” Shmulik said.
The day after it became clear that Prop 22 would pass, Uber’s share price increased by nearly 15% and Lyft’s by more than 11%. This implies that stocks could fall again if a region as important to businesses as California takes a different approach to worker classification.
Nonetheless, the regulatory challenges Uber has faced in other countries may give investors more confidence in its ability to overcome future obstacles.
“They have learned to adapt and have been tested with fire over the last seven to eight years,” Rohit Kulkarni, an analyst at MKM Partners, said.
He believes ridesharing regulation will “become less of an incremental headwind simply because Uber and Lyft have both demonstrated a proclivity to work with regulators over the last few years, so there are a lot of scenarios of middle ground that works for everybody.”
According to Morningstar senior equity analyst Ali Mogharabi, regulations may benefit established players in the space by creating barriers to entry for new potential competitors.
Following the pandemic, lawmakers may prioritize economic growth and job creation, which may deter them from changing rideshare business models — assuming they are able to get workers back on the road, he said.
Uber has made a point of remaining only in markets where it has established itself as one of the top two players. As a result, any new regulations, according to Mogharabi, could actually help the company maintain its position.
Uncertainty about food delivery
The regulatory issues surrounding food delivery services in the gig economy differ slightly from those surrounding ridesharing. This is due in part to the fact that food delivery is one of the few industries that thrived during the pandemic, as stay-at-home orders drove new consumer habits.
This prompted lawmakers in New York, San Francisco, and other cities to limit the fees that food delivery services charge restaurants.
“Investors are simply wondering if food delivery is a viable business.” Shmulik made a statement. “Any incremental pressures on that, whether it’s capping your take rates or how much of the demand is incremental to a restaurant’s sales versus cannibalistic… that would certainly be an incremental worry to how investors view whether food delivery is actually a good business.”
The threat of increased regulation, particularly around driver classification, may be more pronounced in Europe.
For example, while the ruling by the United Kingdom’s Supreme Court has no bearing on food delivery, broader rules are taking shape in Spain and Italy.
“The issue is that we now have precedent,” said Sophie Lund-Yates, an analyst at Hargreaves Lansdown, of the United Kingdom decision. “That means it’s no longer just a possibility; there’s a framework for what could happen.”
Deliveroo’s underwhelming initial public offering exemplified this sense of risk. When Deliveroo debuted on the London Stock Exchange on March 31, its shares plummeted 30%, and investors expressed concern about the company’s gig economy model.
“With companies like Deliveroo and others that rely on such flexible working models… the risk is not just that you’d be looking at higher costs, but you could potentially be looking at: you will never have a profitable business model,” Lund-Yates explained.
Because reclassification is more likely in Europe than in the United States, British-Dutch Just Eat Takeaway may find itself in a better position in the region.
That’s because Just Eat, which acquired GrubHub in the United States, operates a platform that allows people to order food online and have it delivered by restaurants. In addition, the company has been expanding its own fleet of last-mile delivery personnel through independent contractors.
However, Just Eat’s CEO stated in August that the company would hire all of its European gig workers, possibly foreshadowing any future changes.
While the decision will undoubtedly increase the company’s expenses, it may also aid in the creation of a strong moat around the business, according to Ioannis Pontikis, an equity analyst for Morningstar in Europe.
“Essentially, they are lobbying within the European Union for stricter rules for the gig economy markets,” he explained. “Exactly because this is a significant competitive barrier for their main competitors in the primary markets in which they operate. And, because they have market businesses, Just Eat Takeaway can easily be profitable even if all riders are fully employed.”
In Spain, Pontikis estimated that transitioning to a full-employment model would result in a four- to five-euro-per-hour wage increase for workers.
“This could mean the difference between a sustainable and unsustainable business model,” he explained.
A request for comment for this story was not returned by Just Eat.
Pontikis does not expect a complete change in the regulatory environment, but he does expect investors to expect “only upside risk in terms of cost, and no downside risk.” So, in terms of cost structure, the best time is now.”
Even if the current regulations affecting food delivery companies are not materially impactful, they create “uncertainty about the future,” according to Pontikis.
“There is uncertainty about who will be the next country to impose a penalty, fee, or change the regulation in a way that we did not anticipate,” he said.