What is Rationalization in Business?
Rationalization in business is the elimination of waste and inefficiency in the industry by the combined efforts of the industry. Competitive rationalization eliminates cut-throat competition by establishing co-operation between the producers or leaders of an industry.
Why does competitive rationalization in the rideshare industry matter?
Simply put — competitive rationalization is a key step toward dueling rideshare companies working together to achieve profitability.
In the case of Uber and Lyft, competitive rationalization means that Uber and Lyft are less aggressively competing for drivers from a shared pool.
- Drivers will begin to earn less through decreased financial incentives to sign up;
- Uber and Lyft are taking steps toward achieving profitability;
- and ultimately, shares in Uber and Lyft should now begin to rise in price.
This is especially important for Uber, which has dropped 35% in price since going public in May.
What Evidence Exists of Rationalization of the Rideshare Industry?
- The elimination of cut-throat competition by establishing co-operation between the producers — As noted by several industry analysts, Uber and Lyft seem to be increasingly less aggressive in competing for the pool of eligible drivers.
- Securing maximum labor efficiency with minimum efforts — One of the key overhangs on Uber’s stock is uncertainty regarding labor classifications, including California AB5, which restricts how companies can classify workers as contractors rather than full-time employees who are entitled to benefits. Uber and other rivals have indicated there have been “constructive discussions” with lawmakers and say they are “optimistic” that a middle-ground solution can be reached.
- Simplification in distribution of goods — Uber’s latest disclosures indicate that was only a 20% overlap between monthly active platform consumers (MAPCs) for its Rides and Eats businesses, which implies there are significant potential runways for synergies, including lower-cost user acquisition.
How Will This Affect the Share Price of Uber?
Potentially, shares in Uber may rise, making it a good potential buy. Shares of Uber Technologies Inc. gained ground again Friday, to extend their bounce off last week’s record low, after Stifel Nicolaus analyst Scott Devitt turned bullish on the ride-sharing company, citing “reasonable” valuation and signs that fundamentals are “turning the corner.”
Devitt raised his rating to buy, after initiating Uber at hold in July. He kept his stock price target at $34, which is 15% above current prices, but 24% below the $45 initial public offering price.
Devitt wrote in a note to clients:
“Some competitive rationalization in ridesharing and related progress in reining in costs has pulled forward breakeven expectations meaningfully versus six months ago…”
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Casey Botticello is a partner at Black Edge Consulting. Black Edge Consulting is a strategic communications firm, specializing in online reputation management, digital marketing, and crisis management. Prior to founding Black Edge Consulting, he worked for BGR Group, a bipartisan lobbying and strategic communications firm.
Casey is the founder of the Cryptocurrency Alliance, a Super PAC dedicated to cryptocurrency and blockchain advocacy. He is a graduate of The University of Pennsylvania, where he received his B.A. in Urban Studies.