The DoorDash IPO: Darling or Dud?


We have written much on these pages about the local delivery world.  In particular, we’ve watched this space carefully as the pandemic set in and radically changed the way consumers interact with local restaurants. DoorDash has been on the front lines of this transformation.

As a refresher, San Francisco-based DoorDash launched in 2013 as a food delivery app. It has since raised nearly $3 billion in venture capital money. When the company raised another $400 million last summer, PitchBook valued the company at $15.6 billion. Earlier this week, DoorDash formally shared its S-1 statement in advance of an initial public offering. These opportunities for a look under the hood of a business are always fun. 

We’ve taken some time to pour through the hundreds of pages in the S-1 statement. We’ve reviewed the key metrics and strategic implications that the offering document outlines. And we’ll provide our point of view on the overall opportunity and risk DoorDash faces as it seeks to cash in on a frothy public market.

Kicking the Tires

Let’s start, as always, with the numbers. Here are the metrics that matter, in our view. 

390,000. The number of merchants on the platform 

18 million. The number of consumers on the platform

1 million. The number of “Dashers” (delivery drivers)

These three numbers fuel the company’s “Flywheel”. This is the mechanism that DoorDash believes is the reason the company has grown significantly to date. And why it has a considerable opportunity going forward. The “Flywheel” relies on the notion that local network effects and economies of scale will propel the company forward at an increasing rate of speed.

At the center of the “Flywheel” are the 18 million consumers on the platform. This is the number of users who placed an order on the platform during September 2020. The company believes that by growing the number of consumer users, it can logically add more merchants to the platform. And by having more consumers generating more orders, DoorDash can drive higher efficiencies across the platform. At the heart of DoorDash’s flywheel is the ability to reduce friction. In other words, offer faster deliveries and more selection.

Shown on a slide, the flywheel appears elegant. Yet in reality, there are thousands of moving parts driving the flywheel. And all these parts require highly sophisticated integrations and connections to make the flywheel work for the company and not against it. Next, we’ll explore these three driving metrics in depth. And we will evaluate the company’s strategy in the following section. 

As an aside, this article in the Harvard Business Review by HubSpot CEO Brian Halligan offers an interesting discussion of the sales funnel and flywheel. One of Halligan’s key points is that the flywheel gains momentum when friction is removed from the flywheel. The less friction, the faster the flywheel can spin.

Flywheel Part I: Merchants

Page 163 of the S-1 includes the phrase, “DoorDash is a merchant-first business.” It takes very little effort to find thousands of restaurant operators who would take exception to this statement. There are efforts around the country to cap the fees delivery app companies like DoorDash can charge merchants. At least for as long as indoor dining is curtailed by the pandemic.

This is happening in real-time in Chicago, according to this Eater article from November 16. As the article states, the Chicago City Council is looking to impose a 15% cap on delivery app charges. This would be cutting the standard 30% fee in half. And this article in GrubStreet is even more pointed. It urges readers to call restaurants directly and help them weather the pandemic by by-passing the delivery apps’ steep transaction charges. 

But let’s face it, 390,000 merchants is not a number to be ignored. True, it may pale in comparison to the number of merchants sitting on the Mastercard or Visa platforms. And it’s a fraction of businesses using QuickBooks or Freshbooks or even of Shopify’s 600,000 merchants. Still, it’s a lot of local merchants. And the company has plans to add additional value to its existing merchants (typically restaurants) while adding new local merchants. The company calls out some key areas where they add value to the merchant. 

What Does ‘Merchant-First’ Mean?

First, DoorDash talks about demand generation. It asserts that the platform with its 18 million active consumers can play an integral role in delivering incremental demand to restaurants. The DoorDash Marketplace offers those 18 million consumers breadth and depth of local food options, from independent and national brands.

As part of the Marketplace offering, merchants can offer pick-up options. And DoorDash for Work to respond to the office lunch or the large family gathering (when they return). And not unlike what Yelp does when it highlights a local establishment, DoorDash too can illuminate a particular local restaurant via its “Local Picks”. This can help deliver new customers to the featured business.

We tried this today in our local area. An excellent local bakery and lunch spot near us is listed as a “Local Pick”. All well and good. The only problem is that free delivery is available but not where we live, which is fewer than four miles away. So now we wonder what the benefit is to the restaurant of my ordering through the DoorDash app versus just calling in my order for pick-up. As the business owner, would I prefer to let DoorDash maintain the customer relationship? Or would I rather? I think we all know the answer. 

National Brand Partnerships

As we read on in the filing, we note with interest the company’s mention of its partnering with some of the nation’s largest restaurant brands. The filing says that in 2015, they partnered with California Pizza Kitchen,  a brand going through restructuring. The company claims partnership agreements with 175 of the 200 largest national restaurant brands. To us, this feels a little duplicitous. On the one hand,  the company positions itself as “merchant first”. Yet few would label Chipolte as a “merchant”.

Another of the company’s goals in the merchant area is to deploy additional solutions that help merchants run their operations. There is a vast array of services the company is already delivering to its merchants. And DoorDash plans to roll out additional solutions to meet the operational demands of its merchants. 

Finally, DoorDash points to its “operational excellence”. And how it uses the challenges merchants face to build additional services and solutions. We have no doubt that DoorDash, and the other delivery apps, have a front-row seat to observe the opportunities technology can bring to the restaurant industry. To the extent they can turn those observations into tools that help merchants make more money, we expect merchants would welcome this. 

Flywheel Part II: Consumers

DoorDash and other delivery apps offer consumers tremendous convenience. With 18 million consumers, which amounts to just 14 percent of U.S. households, on the platform today, there is considerable runway ahead for the company. 

Despite their controversial nature, the food delivery apps have delivered real social benefits during the pandemic. The convenience these apps have provided consumers during this crazy period cannot be minimized. Independent of the pandemic, the apps offer consumers a chance to win back time. And that is perhaps the consumer’s most precious asset. 

DoorDash specifically focuses on delivering the best end-to-end experience to consumers. This includes a breadth of selection, ease of use, speed of delivery, quality, and value.  In the offering memo, it is interesting that the company reinforces the notion of wide selection by pointing to the 175 largest restaurant brands. 

Following the lead of AmazonPrime, the company now offers consumers the DashPass, a $9.99 per month subscription service. This gives consumers unlimited deliveries during the month. While the company has a “list” price of $9.99 per month, we can assume few DashPass holders are actually paying anything. The company presumably uses the DashPass as a perk for its best consumers. We say that because if the company was in fact charging $9.99 per month, they’d be booking $600 million in annual subscription revenue. We couldn’t find this in the prospectus.

Flywheel Part III: Dashers

Dashers, like Uber drivers, value the flexibility and autonomy of choosing when to work. By not being bound to a traditional job with pre-determined hours, Dashers can pick and choose the times that work best for them. That said, consumer demand is very likely tied to dayparts, i.e., breakfast, lunch, dinner. And as such Dashers are in high demand during those meal hours. The company suggests that its national footprint offers Dashers a wide range of opportunities so they’re able to move from market to market. 

The offering memo makes it clear that the company has fixed an earlier issue related to its “tip” policy by writing this. “Additionally, we remit 100% of the tip provided by the consumer to the Dasher.” To that end, the company stresses earnings transparency so that Dashers have a full view of their earning opportunity. 

The Lesson for DoorDash? Transparency is Inevitable

Our View of the Opportunity Ahead

DoorDash, like its competitors, is well-positioned to take advantage of changing consumer behavior patterns that have been building for years and have now been pushed into warp speed since early 2020. As the noted NYU Professor Scott Galloway described in his recent keynote address at Thryv Connect20, eCommerce adoption advanced in six months of 2020 what had been expected to take another 10 years. Had the pandemic been short-lived, the behavioral patterns might have snapped back to pre-pandemic levels quickly. Now that we’re approaching 10 months, many new habits have been formed that will stick. 

There are some looming clouds that may put a damper on DoorDash’s prospects. First, let’s assume that a widely administered vaccine becomes available in the next six months. Say by May or June 2021. We would then expect DoorDash’s operating metrics to slide as consumers resume some of their pre-pandemic patterns. This would mean fewer orders per consumer by mid-2021. And after being homebound or locked up for nearly 18 months, there may be a wholesale flip back to earlier patterns.

Risky Move into Non-Food Delivery 

Also, DoorDash’s explicit growth vector of adding non-food local merchants to their flywheel is, in our view, risky. Companies like Shopify have a head-start in addressing eCommerce for small local businesses. We can look no further than a local ski shop here in the Bay Area. A year ago, it had zero eCommerce capacity. Today, it’s powered by Shopify. And of course, there is Amazon making it easier and easier for small local businesses to leverage its massive logistics and delivery platforms. We wonder where and how DoorDash offers the local merchant a more compelling proposition. 

And in the broader food arena, you have Instacart — another huge beneficiary of the pandemic — on the verge of releasing its own S-1 to go public in early 2021 at a $30 billion valuation. While DoorDash inked a deal in the summer of 2020 with CVS to deliver groceries, non-food and non-prescription drug orders, we see little of that driving DoorDash’s flywheel as Instacart and Walmart build positions in that space.

Instacart is building on a different flywheel mechanism. The grocery delivery app is building an advertising business alongside its delivery business. Like Amazon, which has built a $17 billion advertising platform, InstaCart is following the same playbook. Because a company like Instacart can tap into the advertising vaults at the likes of P&G, Colgate, and Kraft, it positions the company to use those margins to add momentum to its flywheel. We don’t see the local restaurant industry having the same capacity to push huge amounts of advertising dollars to DoorDash. 

And of course, you have Grubhub, which is now owned by JustEatTakeaway. And then there was Uber’s acquisition of the smaller PostMates all makes for a very competitive local food delivery business. Underneath these very visible competitive activities, you have local co-op delivery models sprouting up to offer independent local restaurants a kinder, cheaper alternative to the big delivery apps. 

Uber Eats Its Competitor Postmates

The Verdict: Darling or Dud?

Our guess is neither. Perhaps that’s a dodge. But there are so many dynamics at play that DoorDash could well turn out to be a huge success. It has certainly been a huge success in terms of driving consumer convenience during these tough times. Perhaps this is a necessary evil for the moment. And once things return to semi-normal, will DoorDash’s hopes be, dare I say it, dashed? That is certainly a possible outcome.

Could DoorDash find a more permanent place at the local food delivery table? Indeed it could. But its ambitions to broaden its merchant coverage gives us concern, as they’ll be facing some giant established competitors and emerging companies that could quickly thwart DoorDash’s ambitions. Which side of this food fight do you come out on? We’d love to hear from you.

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