The IPO frenzy of 2020 saw some mega-listings in the US capital markets. Among them, DoorDash made one of the most talked-about debuts. On day one, its shares rose by an eye-watering 85%. This is remarkable, especially considering that the popular food delivery service has never made a profit in nearly eight years in existence.
Until recently, DoorDash was an underdog. To them, life in the food delivery business was undeniably a struggle, with stiff competition from rivals like Grubhub and Uber Eats.
But 2020 became a phenomenal year for the company. By the time of its IPO in December, its 9-month revenue had shot up to $1.9 billion from $587 million the year before.
Of course, many people attribute this success to the COVID-led demand boom. But DoorDash posted remarkable growth even in 2019, way before the pandemic. Take a look at its pre-COVID market share growth based on Second Measure data.
In 2019, DoorDash surpassed Grubhub and became the market leader, claiming one-third of the total meal delivery market. And its sales marked triple-digit growth, rising by a staggering 143% YoY.
Evidently, DoorDash’s epic rise to fame is hardly by chance, thanks to a global health scare. So, needless to say, its success story demands more attention.
The rise of the underdog
DoorDash is the result of a class project by four Stanford students: Tony Xu, Stanley Tang, Andy Fang, and Evan Moore (who departed the team a year later). It started as Palo Alto Delivery in 2013 with a simple website that took food delivery orders from local students. There were just a handful of menus to choose from, and the founders made the food delivery rounds themselves.
Since then, it has aggressively expanded into new markets, had 11 funding rounds, acquired five tech startups, including Caviar and Rickshaw, and faced plenty of legislative pressure, lawsuits, and controversy, before gaining more than half the market share and listing itself on the NYSE.
Today, the Bay Area startup has more than 18 million customers, 390,000 partners, and over 1 million Dashers in the United States, Canada, and Australia.
What did DoorDash get right?
From day one, DoorDash focused on resolving a nagging problem for millions of consumers, including students at Stanford in 2013: They wanted convenience with their meals. Many were too busy to dine out, and some were just lazy. Others were looking to enjoy a restaurant-quality meal at the comfort of their home. And they wanted to browse menus, check authentic reviews, and have dinner and dessert from two different restaurants.
But many local eateries weren’t geared to serve these needs: Food delivery requires resources and expertise outside their core domain. Any inefficiencies could eat into their already slim profits. Besides, customer demand is never consistent. And an idling delivery team during off-peak hours or insufficient staff when demand peaks could both be detrimental to business. This created an opportunity for food delivery services to bridge the gap between restaurants and eat-at-home consumers.
But this is the premise all players in the food delivery business have based their business models on. So, what has helped DoorDash speed up growth and carve out a sizeable market share? Here’s what stands out when you map its 8-year journey.
Technology integration
DoorDash doesn’t describe itself as a food delivery business: It’s calling itself a technology company. That’s a far cry from its initial business model and goes to highlight how DoorDash is envisioning its future—one that’s heavily reliant on technology.
It’s using big data and machine learning to minimize errors, improve efficiency, cut down costs, and boost income for their restaurant partners and delivery team that they’re calling Dashers. For example, DoorDash is constantly collecting data and deploying predictive technology on a range of areas, from traffic to parking. It allows Dashers to quickly get the orders to the customer, run more deliveries within an hour, and increase earnings. The company is also using technology to remind restaurant staff of side dishes and extras to minimize mistakes when preparing and packing meals. This has enabled merchants to avoid disgruntled customers and cut down on refunds.
DoorDash’s affinity towards technology is evident even in its recent acquisitions like Scotty Lab, the autonomous driving startup, and Chowbotics, the fresh food-serving robot innovator.
Aggressive expansion
Backed by more than ten funding rounds, DoorDash has invested heavily in aggressive expansion plans. Scaling is essential in the food delivery industry that typically operates with low margins and a heavy reliance on efficiency-led cost reductions. Reaping the economies of scale is often the only way to transition from a loss-making business to one that delivers profit. According to COO Christopher Payne, the company is already seeing this in work in the markets it entered first.
So, DoorDash has been incessantly focused on scaling up. And the company’s 8-year loss-making streak seems unable to hamper its enthusiasm. It’s investing for the future, knowing very well of the losses it’ll need to endure in the near term.
The company seems to follow this strategy even outside its home market. Take, for instance, its recent expansion to Japan. “We’re talking about a multiyear, decade-plus kind of investment,” explained Tony Xu, DoorDash’s CEO, at an interview with Financial Times.
Betting on the suburbs
As competitors like Uber Eats and Grubhub focused on the big cities and urbanites, DoorDash turned to the suburbs. And this strategy seemed to have paid off pretty well.
The American suburbs host large swaths of underserved consumers, mainly families that would typically place larger orders. Small- and medium-sized local restaurants are also plenty, which often lacked delivery resources. Wages and operational costs in the suburbs are low, too, compared with urban cities. Besides, there’s much less traffic and better parking for Dashers, not to mention less walking without all the elevator trips up and down high rises. All these could translate into significant advantages if your goal is to scale up fast.
DoorDash is counting on this strategy in its overseas markets, too. It explains why Sendai, and not Tokyo, became its preferred choice to enter the Japanese market. Evidently, DoorDash is betting on the burbs to drive its growth in the crowded delivery space of Japan.
Thinking beyond food delivery
Meal delivery orders peaked during the pandemic. But this will most likely shrink over time as consumers regain confidence and step outdoors, buoyed by vaccination efforts. So, food delivery apps riding on the wave of pandemic-led demand will eventually need to brace themselves for the downhill slide when orders reach normalcy.
But DoorDash is already gearing up for this. It has expanded its mission to “grow and empower local economies“, not just “local eateries”. The recent tie-up with Rite Aid to offer last-mile logistics for non-prescription health and wellness products is a good example of this. And it’s also delivering PCR test kits for Everlywell and grocery and household items on behalf of local convenience stores. DoorDash has even taken on the last-mile logistics of the retail giant Walmart for its online orders.
Apart from hedging against dips in food delivery demand, these partnerships have another advantage. Restaurant meal deliveries have lower margins per order. But when combined with a local grocery store run, profitability per order could be much higher. Besides, unlike restaurant meals, grocery store purchases, for instance, involve fewer refunds and require less advertising.
So, DoorDash’s transition from food delivery to local commerce is hardly a surprise. And it’s also expanding its reach through new initiatives like DashMart stores. There will undoubtedly be more in the pipeline as it cuts down dependency on food delivery sales.
Merchant-first approach
According to DoorDash, 65% of customers have tried a restaurant they otherwise would not have, all thanks to its platform. That’s a huge boon for small and medium-sized eateries struggling to gain new customers without hefty marketing budgets.
Delivery apps have made it easier for local restaurants to reach a wider audience, build an online presence, and get more business. DoorDash understands this very well. So it’s listening to vendor partners and coming up with different service models and fee structures to fit the unique needs of each business.
For example, DoorDash designed Storefront as a zero-commission service for restaurants that take orders and deliver with their own teams. It helps them by simply setting up customized online order-taking platforms. Then DoorDash Drive is for eateries with their own marketing and order-taking facilities but with no delivery fleet. It allows them to make use of Dashers at a flat fee. And with Marketplace, businesses could count on DoorDash to take over the entire advertising, order taking, and delivery functions at a commission.
So, in short, DoorDash is doing much more than delivering meals from point A to B on behalf of their vendor partners. It’s taking care of customer support, helping merchants keep their delivery promises, offering them data insights to become more profitable, and providing promotional tools like First Order, $0 Delivery Fee to boost revenue. These are all part of its merchant-first approach.
What does the future look like for DoorDash?
So, what could the future unfold for DoorDash? There are certainly a few hurdles it must cross on its way to profitability.
Regulatory threats
Short-term and permanent moves by states to protect gig economy workers and the restaurant industry could continue to threaten the delivery app business model. For companies like DoorDash, these might put extra pressure on their delicately balanced cost structures. So, working closely with legislators, merchants, and local communities would be critical for DoorDash to create a sustainable ecosystem for all.
Intensifying competition
Delivery app competitors will, no doubt, give DoorDash a run for its money. With minimal entry barriers, there’s nothing much keeping new entrants from coming into the market. We’ve already seen Uber gearing up its expansion plans with the acquisition of Postmates late last year. And the Dutch company Just Eat Takeaway is already planning its US entry with the purchase of Grubhub. So, DoorDash must gear up for the intense competition it could face in the years to come if it’s to maintain market dominance.
Rising demand for delivery people
Food delivery businesses have played a major role in the gig economy. They’ve allowed many individuals to work and earn at their own pace, whether to make a living or earn an extra income. With rising financial hardships, DoorDash alone has seen 1.9 million new gig workers signing up for delivery work within just six months into the pandemic. And Dashers earned $3.5 billion during this period, with most of it going into communities with higher Black and Latinx representation.
But as competition gets stiff, demand for delivery workers would inevitably soar. So, strategies to attract and retain a robust Dasher community would be even more pivotal for DoorDash’s future growth.
Unforeseen middlemen
Companies like FoodBoss and MealMe have introduced a brand new service to online food ordering by comparing delivery times and service fees. They’re trying to influence the consumer ordering decision by assuming the role of a middleman between customers and apps like DoorDash.
Of course, whether their value proposition will take off with customers is yet to be seen. But they could certainly add extra pressure on delivery businesses to run leaner and more efficient operations.
Reduced demand for food delivery
As the pandemic threats dissipate, eating-out habits will inevitably return. And eateries will likely focus more on dine-in services that have better profit margins than deliveries. This could spell bad news for delivery apps, although to what extent is left for debate. Of course, their ability to reach bigger audiences and boost overall revenue for eateries is undeniable. After all, DoorDash has helped almost two-thirds of its restaurants to increase revenue during the pandemic. But a robust strategy to avoid a possible hit from declining food orders would determine its post-COVID sustainability.
DoorDash’s journey has been short but steady, and during the recent few years, purposefully driven and aggressive. It’s certainly got a few more hoops to jump before it gets to profitability. But one thing is for sure; It’s had an impressive stint so far, marking incredible growth to rattle competition and stir up investor interest. Now, let’s see how it delivers in the years ahead.
