Emerging from the pandemic, Uber, Lyft may face global challenges to their gig work model

Published Thu, May 13 20212:02 PM EDT

Key Points

For rideshare companies like Lyft and Uber, the slow emergence from the pandemic brings hope that their services will hum back to life as customers resume travel.
But there are still challenges ahead for gig-economy companies operating in the rideshare and food delivery spaces.
One was signaled by Uber’s recent decision in the U.K. to reclassify its drivers as employees after the supreme court there handed down an unfavorable ruling.

Things seem to be looking up for rideshare companies Lyft and Uber as people prepare to resume travel, but new worries may be around the corner. That's because while these companies may enjoy pent-up demand for travel and a political win in California that reaffirmed their gig work model, firms that rely on a fleet of independent contractors face global challenges to the way they operate. For starters, there's Uber's recent decision in the U.K. to reclassify its drivers as entitled to some benefits, though not full employee status, after the supreme court there handed down an unfavorable ruling. As workers in Britain, these drivers are entitled to minimum wages, holiday pay and retirement benefits. "I think everyone was watching the U.K.," said Wedbush analyst Dan Ives. "There's a lot of fear that now this is going to spread to France, to Germany, to Scandinavia. And ultimately that can really crimp a lot of that gig economy if other countries follow it." Generally, by classifying workers as independent contractors, the firms avoid the expense of maintaining employees. This year, Uber has 5 million drivers around the world, according to the ridesharing giant. Meanwhile, Lyft said in 2019 that it had 2 million drivers on its platform. While fighting to maintain the independent contractor model in California, both firms said they would have to retreat or scale back jobs if they were forced to claim drivers as employees. Rideshare driver reclassification Lyft and Uber fended off the biggest threat to their business model when California voters approved their ballot measure to maintain their drivers as independent contractors, rather than employees. But Uber’s decision to reclassify drivers in the U.K. shows that the regulatory fight is far from over. While the region only makes up about 5% of Uber's gross bookings, Wedbush's Ives estimated, the move could have further impact if other countries look to the U.K. as a new model. Uber has tried getting ahead of the narrative by proposing to U.S. officials what its CEO has called a "third way" to classify drivers that grants some benefits while maintaining the flexibility of contractor status, similar to the way drivers in the U.K. will receive some benefits without full employment status. A spokesperson for Uber referred to this "third way," when contacted for this story. Lyft did not return a request for comment. Analysts interviewed by CNBC agreed that the threat of reclassification in the U.S., where the rideshare companies derive most of their revenue, is substantially lower than in the international market, at least in the near term. The gig economy companies secured an early victory in California when voters opted to pass Proposition 22 , a measure that would maintain their drivers’ contractor status while providing them with additional benefits and an earnings floor. But the Biden administration has signaled openness to worker reclassification , and movement in other parts of the world could still dent revenue, making it harder for gig companies to reach profitability. Ives said one metric to watch is the international versus domestic bookings trajectory. “If there starts to be a much bigger disconnect between Europe and the U.S., I think they're going to have more and more pressure to scale down those operations, especially in the U.K. with London being a top-five city and the U.K. accounting for 5% to 6% of bookings," he said. Bernstein analyst Mark Shmulik said the regulatory pressure on gig economy companies is already “partially priced in.” But if forced to reclassify in an area that’s big for business, the firms' stock prices could still shift, he said. “If there are some of these bigger decisions that do come and land 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 rose nearly 15% and Lyft’s more than 11%. That suggests the stocks could fall back down if a region as important to the businesses as California takes another approach on worker classification. Still, the regulatory challenges Uber has faced abroad may give investors more confidence in its ability to overcome future hurdles. “They have learned to adapt and have been kind of tested with fire over the last seven to eight years,” said Rohit Kulkarni, an analyst at MKM Partners. He said regulation of ridesharing will likely “become less of an incremental headwind simply because Uber and Lyft have both shown propensity to work with regulators over the last few years, so there are a lot of scenarios of middle ground which works for everybody.” Morningstar senior equity analyst Ali Mogharabi said regulations could benefit the established players in the space by creating barriers to entry for new potential rivals. Coming out of the pandemic, lawmakers may prioritize economic growth and reducing unemployment, which could temporarily deter them from changing rideshare business models — assuming they are getting workers back on the road, he said. Globally, Uber has made a point to only remain in markets where it has established itself as one of the top two players. Because of that, Mogharabi said, any new regulations could actually help the company maintain that position. Food delivery uncertainty The regulatory questions around food delivery services operating in the gig economy differ slightly from those about rideshare. That’s partially because food delivery is one of the rare sectors that thrived during the pandemic as stay-at-home orders drove new consumer habits. In some places, that led lawmakers in New York, San Francisco and other areas, to limit the fees food delivery services charge restaurants. "Investors are just wondering, is food delivery a good business?” Shmulik said. “Any incremental pressures on that, whether it be about capping your take rates or how much of the demand is incremental to a restaurant’s sales versus cannibalistic … that would certainly just be an incremental worry to how investors view whether food delivery is actually a good business." In Europe, the threat of greater regulation, particularly around driver classification, could be more pronounced. For instance, while the U.K. supreme court ruling does not impact food delivery, broader rules that do are taking shape in Spain and Italy . "The issue with it is that we now have precedent,” said Sophie Lund-Yates, an analyst at Hargreaves Lansdown, of the U.K. decision. “That means it's not just a possibility anymore, but there is a framework for what could happen.” There is uncertainty about who is going to be the next country that is going to impose a penalty, fee or will change the regulation in a way that we didn’t foresee. equity analyst, Morningstar Ioannis Pontikis That sense of risk was demonstrated by Deliveroo’s lackluster initial public offering . The company's shares tanked 30% when it debuted on the London Stock Exchange on March 31, and investors raised concerns over Deliveroo's gig economy model. “With companies like Deliveroo, others that are relying on such flexible working models… the reason that the risk is so high is not just [that] you’d be looking at higher costs, it's that you could potentially be looking at: you will never have a business model that could be profitable,” Lund-Yates said. The more likely threat of reclassification in Europe compared to the U.S. could place British-Dutch Just Eat Takeaway in a comparatively good position in the region. That's because Just Eat, which acquired U.S.-based GrubHub , operates a platform for people to order food online and have it delivered by the restaurants themselves. The company has also been growing its own fleet of last-mile delivery personnel via independent contractors. But Just Eat’s CEO said last August that it would make all of its European gig workers employees , perhaps preempting any coming changes. While the decision will surely add expenses for the company, it could also help create a strong moat around the business, according to Ioannis Pontikis, an equity analyst for Morningstar in Europe. “Essentially, they’re lobbying inside the European Union for more strict rules for the gig economy markets,” he said. “Exactly because this is a significant competitive obstacle for their main competitors in the main markets they operate. And Just Eat Takeaway can easily be profitable, even by having all riders fully employed, especially because they have the market businesses.” In Spain, Pontikis estimated moving to a full employment model would represent about a four to five Euro per hour increase for workers. “This could be the difference between a sustainable and non-sustainable business model,” he said. Just Eat did not respond to a request for comment for this story. Pontikis said he doesn’t foresee a complete change to the regulatory environment, but said investors should expect “there’s only upside risk in terms of cost, there’s no downside risk. So the best environment in terms of cost structure is right now.” Even if the current regulations food delivery companies are seeing are not themselves materially impactful, it creates ”uncertainty about the future," Pontikis said. “There is uncertainty about who is going to be the next country that is going to impose a penalty, fee or will change the regulation in a way that we didn’t foresee,” he said.