The public markets are out of control. DoorDash, a food delivery company that continues to lose money on a business model that its customers (supply side) despise, has doubled in valuation since its public offering, giving DoorDash a market value of over $50B.
DoorDash might very well win the delivery wars, and the most recent data does look like it’s been taking market share from Uber and Grubhub (see below from SecondMeasure). We find this surprising as Uber has a much larger logistics business than DoorDash, which would make a reasonably intelligent person believe that if anyone could make the last-mile economics work it would be them, but maybe this is another example of the “you can’t do everything well” mantra that everyone in tech takes as gospel but few in brick and mortar (ie POS companies) care to accept as reality.
We suspect the biggest problem DoorDash will now have is keeping its investors happy, which means growing at ~10% a year as a public company, and ~20% if it’s to keep itself in the upper echelon of tech winners. That means every year they’re going to need to add $5B in enterprise value, or about a Micros (in 2015 terms) every time the calendar makes a lap. And doing that with a customer base that not only despises them but has little money to give is going to be really challenging.
As far as we’ve thought about it, there are really only three options, and some of these are coincidentally referenced in DoorDash’s S-1.
Dominate restaurant delivery
While DoorDash is the category leader their numbers show that U.S. consumers on their platform in September 2020 represented less than six percent of the U.S. population as of September 30, 2020. In 2019, DoorDash generated $8B billion of gross food sales while they point to $302B spent off-premises at US restaurants and other food services. Assuming DoorDash captures all that domestic market share, DoorDash wants you to believe that they’d roughly 20X the company, making it worth $1T. Including international numbers only makes the figures look more absurd.
We don’t think the economics for DoorDash and other 3PDs hold up. In fact, that’s why DoorDash (and their competitors) have started offering APIs for businesses to facilitate their own deliveries and avoid the high commissions. Under these models the operators license the delivery infrastructure (i.e. drivers) of a 3PD but source their own consumer. More and more operators are leaning into these models as they recognize the carnage on their balance sheets when having more than a few percentage points of their orders emanating from 3PDs.
Move into other verticals
If we can make possible the delivery of ice cream before it melts, or pizza before it gets cold, or groceries in an hour, we can make the on-demand delivery of anything within a city a reality. We started with restaurants because of the potential to build the most efficient logistics network with the highest node density, based on the large number of restaurants and the high frequency of use for delivery. We believe that by starting with food, we have created the most sophisticated and reliable logistics platform for local businesses. And, while food itself is a category that has a long runway for growth, we believe the network we have built ideally positions us to fulfill our vision of empowering all local businesses to compete in the convenience economy.
DoorDash S-1
DoorDash will need to find other verticals where they can charge merchants hefty commissions for deliveries. These industries, lacking the delivery operating history that restaurant operators have suffered through, might not be as attuned to the punitive delivery commissions and could be more likely to sign up. Of course some industries – like grocery – already have delivery partners like Instacart and are notoriously low margin as it is. In fact, many years-long partners of Instacart are heavily questioning the value of delivery given the costs and growing threat of data/customer ownership.
Further, if DoorDash is betting that it can beat Uber in restaurant logistics doesn’t it also stand to reason that Instacart is the DoorDash of grocery while DoorDash is the Uber? Meaning that Instacart has deeper domain knowledge of grocery while DoorDash would only have scale? As DoorDash has shown in the restaurant vertical, a tight focus on an industry seems to be the better way to win.
Yet that hasn’t stopped DoorDash from forming partnerships with CVS and other grocers to provide themselves some optionality.
Get deeper into the merchant stack
DoorDash is much more than an application that connects merchants, consumers, and Dashers by facilitating delivery. We provide a broad array of services that enable merchants to solve mission-critical challenges such as customer acquisition, delivery, insights and analytics, merchandising, payment processing, and customer support, and to fulfill demand generated through their own channels. This is just the beginning—we strive to become a merchant’s first call when they want to grow their business.
DoorDash S-1
If we were to place our bets this is where we expect DoorDash to go in the near term: further integrating into the restaurant stack. This could look a lot more like acquisition than fresh builds since markets aren’t exactly patient. A good strategy for DoorDash would be to buy a payments-locked POS (like Toast) and just charge their delivery commissions in the payments stream, where merchants will never look and even if they did they’d never understand it.
As we’ve talked about for years (see here, here, and here for the we-told-you-so’s), the 3PDs have the capital, scale, and data to own the entire stack. Labor. Inventory. Marketing. Ordering. You name it, they could do it. But we feel this is still a short layover on their way to operating ghost kitchens, either pimping out operators in DoorDash kitchens or ultimately verticalizing the entirety of food production with autonomous delivery to get the food to your belly.
We don’t know when markets come crashing back to reality, but in the meantime DoorDash (and other tech companies) are on the hook to produce a lot of growth. We just don’t think DoorDash can deliver on market expectations with delivery, if that makes sense.
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