While headlines focused on Uber's record adjusted EBITDA and the looming specter of Tesla's robo-taxi ambitions, a more subtle revelation emerged from the Q1 2024 earnings call: the unassuming rise of grocery delivery as a potential profitability powerhouse.

Uber's suburban strategy for Eats, as outlined by CEO Dara Khosrowshahi, hinges on expanding their delivery dominance beyond urban centers. This isn't groundbreaking news. But what caught my attention was the seemingly casual mention of grocery's outsized role in this suburban push.

Khosrowshahi emphasized that Eats is growing faster in the suburbs than urban areas, attributing this to the classic expansion playbook: building audience, increasing selection, optimizing pricing, and maintaining high service quality. Enter the Instacart deal. This partnership, he argued, injects a highly targeted, high-quality suburban audience directly into the Uber Eats ecosystem, providing a surge of demand beneficial to both the platform and its merchants.

This is where the narrative takes a fascinating turn. CFO Prashanth Mahendra-Rajah, discussing the overall delivery segment, dropped a bombshell: despite a 40% year-on-year growth in grocery and retail gross bookings, the segment actually improved its EBITDA margins by 20% sequentially.

Think about that for a moment. We're accustomed to high-growth, capital-intensive ventures dragging down profitability in their early stages. Yet, Uber's grocery business, while still not in the black, is bucking this trend. It's growing at an explosive rate and simultaneously becoming more profitable.

Mahendra-Rajah pointed to a few key drivers: the platform's inherent efficiency, the attractive advertising proposition for CPG brands (with the tantalizing comparison to Instacart's mid-20% advertising revenue as a percentage of gross bookings), and the potential to reduce consumer promotions.

Let's dig deeper into these factors. Uber's platform advantage stems from its massive network of drivers and couriers, already optimized for efficient last-mile delivery. This means that onboarding grocery delivery doesn't necessitate a complete overhaul of their existing logistics infrastructure.

Moreover, Uber's existing user base, 15% of whom now order groceries through Eats, provides a ready-made, captive audience for CPG brands eager to reach consumers. This high-intent audience translates into higher advertising conversion rates, driving up ad revenue and bolstering profitability.

Now, consider the potential impact of the Instacart deal. By integrating Instacart's user base, already accustomed to grocery delivery and possessing a higher average order value, Uber could see a significant boost in both grocery gross bookings and advertising revenue.

Hypothetical Scenario: Grocery vs. Restaurant Delivery Profitability

Here's a hypothesis to consider: What if Uber's grocery business is on track to become more profitable than its core restaurant delivery segment? This may sound audacious, but the numbers hint at the possibility. Instacart, a pure-play grocery delivery platform, already boasts higher advertising revenue as a percentage of gross bookings than Uber Eats. If Uber can leverage its platform advantages and the Instacart integration to capture a similar level of ad monetization, grocery could emerge as a surprisingly profitable segment.

This subtle shift in Uber's narrative hasn't garnered much attention, overshadowed by flashier headlines. Yet, the unassuming rise of grocery delivery could prove to be a game-changer for Uber's long-term profitability. Investors should keep a close eye on this quiet giant as it emerges from the shadows.

Growth of Uber's Key Segments

The following chart illustrates the hypothetical growth trends of Uber's Mobility, Delivery (Restaurant), and Delivery (Grocery & Retail) segments, based on information from the Q1 2024 earnings call.

"Fun Fact: Uber Eats' expansion into grocery delivery goes beyond just food. In select markets, users can order from convenience stores, pharmacies, and even pet supply stores through the platform."

"Interesting Insight: Uber's focus on suburban growth aligns with broader demographic trends. Many cities are experiencing a shift in population from urban centers to surrounding suburban areas, creating new opportunities for businesses like Uber to cater to this expanding customer base."