DoorDash: how it dashed past Uber and won America

By going public, we get to see a detailed case study of the food delivery business model.

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On Wednesday DoorDash, America’s newly crowned market leader in food delivery, went public. On the opening day of trading its stock price popped, nearly doubling the IPO price, before eventually closing the week valued at over $55 billion. Perhaps it simply rode the 2020 tech IPO wave shared by many of its peers, including Airbnb this week. This year a record 19 companies have doubled their valuation on opening trading day, the next closest over the past 10 years is six, which happened in both 2013 and 2014. All during a global pandemic and high levels of unemployment.

But the story of food delivery companies in 2020 is far too complex and interesting to just focus on the public markets. Uber Eats has propped up Uber’s 50% loss in ride sharing revenue during the pandemic. While Uber would also agree it dropped the ball in the US by letting DoorDash to accelerate past it in securing half of America’s lucrative food delivery market. Meanwhile in the UK Deliveroo is putting the pieces together for its own IPO in 2021 after gaining clearance from the UK competitions authority on their Amazon investment. 

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Meanwhile there has been aggressive M&A activity. Uber Eats acquired Postmates to consolidate second position in the US, while Grubhub, America's third most popular food delivery platform, was acquired by European giant Just Eats in the summer. These deals demonstrate a couple of things; first, it’s often cheaper and easier to acquire your way into a new market (Just Eats/Grubhub) than build. Especially in sectors which require mass recruitment of gig economy workers and marketplace supply (restaurants). 

Second, there isn’t room for more than a few providers to be sustainable in each market. It’s a high cost, thin margin business, with revenue being split amongst three parties: the restaurant, the rider and the platform. That, combined with the high volume of human workers required, means each city will only accommodate two or maybe three food delivery services at scale.

Source: DoorDash S-1

So what can we learn about the food delivery business from DoorDash’s prospectus? Let’s start with a summary of the scale of DoorDash’s business today. 18 million customers, 390,000 merchants and over one million riders (or “Dashers” as they are called at DoorDash) - that’s what it takes to be number one in America. 18 million customers is the equivalent of every adult Australian being on your platform. This is why companies want to do business in America, everything is bigger!

But DoorDash should be applauded for their execution and growth. In January 2018 they believed they had only 17% market share in the US. Grubhub was considered the market leader with 39%, followed by Uber Eats with 27%. Grubhub is the industry veteran, founded in 2004 in Chicago as an online food ordering platform. In 2013 they merged with Seamless, which is a popular New York platform serving busy city finance workers who eat lunch at their desks. In 2014 Grubhub began offering their own delivery service for restaurants, alongside the online menu and order platform.

That same year Uber launched Eats. Leveraging five years of innovative technology and IP in logistics through their successful ride sharing business. Founder Travis Kalanik had a strong hypothesis that Uber could side step successfully into food delivery, and objectively you would say they have, with a strong business in America, Europe and APAC. Since leaving Uber, Kalanik has maintained an interest in the food business, with a new venture in “cloud kitchens” which allow restaurants to rent kitchens for the sole purpose of serving customers locally via online ordering platforms. 

What makes DoorDash so impressive is in the space of three years, they have grown from 17% market share to 50% across the US. Grubhub had a decade in market before DoorDash was founded, while Uber had spent five years building logistics technology and scaling their operational processes to onboard and manage hundreds of thousands of drivers from their ride sharing business, as well as millions of active Uber customers to cross sell Eats into. With all of this, DoorDash has still raced right past them both.

Source: DoorDash S-1

The challenge for all food delivery companies is building moats. Like many other marketplace businesses, supply is generally non-exclusive and customers can easily switch between services depending on the best deal at the time. This is already a tight margin business, so a race to the bottom pricing war helps no one, perhaps except the consumer. There are some known strategies to build moats as a food delivery business.

Subscription services

In 2016 Postmates launched “Postmates Unlimited”. For a monthly fee of $10 the consumer receives free delivery and other special offers from merchants. If you’re ordering once a week that’s enough to save you money, but importantly, this creates stickiness to a single platform. DoorDash, Uber and Deliveroo all have similar subscription products now in an effort to keep customers from being platform agnostic.

Cloud kitchens 

It’s not only Kalanik who is interested in the “kitchens as a service” business. Deliveroo, in an effort to win exclusive partnerships with restaurants, went on an operations mission to construct cloud kitchens all over the world. What makes this strategy clever is it gives Deliveroo a USP when pitching restaurants, offering the ability to serve customers in new regions with no upfront capital expenditure required. Deliveroo simply earns back the investment with higher commission and locks the restaurant into an exclusive partnership, meaning that restaurant can not also operate on Uber Eats. Deliveroo also brands these sites, so when you are ordering from Deliveroo Editions (which sounds enticing and selective), it’s food from a merchant residing in a Deliveroo managed cloud kitchen. DoorDash, Uber and others have all followed suit.

Virtual brands

And in an extension to the cloud kitchens concept, many food delivery platforms are partnering with restaurants to launch virtual brands. Virtual brands, often developed in cloud kitchens, use existing food and infrastructure costs to develop different menus to sit alongside the restaurant’s core menu in an effort to capture different tastes or price points in a particular area. Meaning a Mexican restaurant specialising in high cost family meals could also launch a lower cost taco only menu, expanding their customer base with the same use of staff, equipment and food costs. By nature of being in partnership with the food delivery platform in developing the virtual brand, it becomes exclusive to that platform.

“Promiscuous customers'', as coined by Grubhub’s CEO, is not the only challenge to growth for food delivery platforms. This industry is equally fronted by mounting attention from regulators. Gig economy workers would like to be treated like employees, not contractors. If DoorDash were required to provide full benefits to over one million “Dashers”, it would employ as many people as Amazon, and naturally this would change the economics of their business. In short, food would become more expensive for the consumer and potentially reduce the market. DoorDash contributed $48 million to the Prop 22 campaign, in efforts to block a new California law requiring gig economy workers, including Dashers, to be treated as employees. Prop 22 passed in November, with participating tech companies funding over $200 million to garner community support and fight the cause.

Another challenge is that local residents can sometimes be uncomfortable with cloud kitchens being installed in their local areas, with an increase of motorbike traffic. In the UK, Deliveroo has battled with counsels around licensing requirements when operating their “Deliveroo Editions” kitchens, with some sites now only able to support riders on bicycles to reduce noise.

So returning to DoorDash, what drove their acceleration to become number one in the United States? They did a couple of things really well. First, they are winning the American suburbs. Starting in the suburban neighbourhoods surrounding San Francisco, they have focussed on family demographics which were traditionally under-served by food delivery, and generally had higher order volume (more mouths to feed). They have since won important market share in large metro areas, such as San Francisco, Houston, Dallas, Fort Worth and Philadelphia, which all rank in the top 16 cities by population. 

Source: Second Measure, a data analytics firm

This aggressive geographical growth also enabled DoorDash to take advantage of the pandemic, where families turned away from dining in restaurants and turned to delivery platforms. From April to September, DoorDash processed 440 million orders, compared to 131 million in the same period last year, an impressive 336% increase. In terms of order volumes on the platform, DoorDash processed $7.3 billion GMV in Q3, operating in only the US and some parts of Canada. Meanwhile Uber Eats, which operates in 45 countries, globally processed $8.6 billion.

Source: DoorDash S-1

Also impressive has been the ability for DoorDash to grow order volume so aggressively, while decreasing relative sales and marketing costs. In the first nine months of 2019 sales and marketing costs made up 76% of total revenue for the period. In 2020, DoorDash has reduced that to 37%. DoorDash is enjoying repeat business from consumers, and delivering economies of scale in its business. This flywheel enabled DoorDash to report a profit in Q2 (while returning to a loss in Q3), a rarity for the food delivery sector. It points to signs that they might be able to build a sustainable business long term.

Source: DoorDash S-1

A big question for DoorDash considering its $55 billion valuation at the time of writing this piece, is how much more growth is there to be had in North America? And what happens when most of the population is vaccinated and dining in restaurants again? 

DoorDash quotes the opportunity for US restaurant and consumer food services as a $600 billion market. But people love restaurants, so one would think the TAM is a portion of that figure. If DoorDash needs to grow internationally to sustain its current value, let alone grow it, that requires big expenses either through M&A, or internal investment in new markets to hire riders and sign merchants, many of whom will already to served by providers like Deliveroo, Uber Eats and others. That being said, now might be the time to buy their way into a new market considering the cheap cost of capital available to them.