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In the latest blockbuster IPO of 2020, DoorDash soared. Under the ticker DASH, the stock began trading at $182 per share, which valued the food delivery company at $41 billion, and closed at $189.51 after being initially priced at $102 per share on Tuesday night.
Like the rest of the industry’s major players, DoorDash has benefited from an increase in ordering from home during the coronavirus pandemic. Combined, the four leading companies in the industry (DoorDash, Uber, Grubhub, and Postmates) raked in roughly $5.5 billion in revenue from April through September, more than twice as much as their combined $2.5 billion in revenue during the same period last year.
DoorDash has set itself apart by focusing on an expansion into the suburbs as its rivals were focused on big cities. The food delivery market has largely been divided up on a geographic level – one individual service tends to monopolize local markets. As we noted last July, maps from the Wall Street Journal show that Postmates dominates a number of key neighborhoods in Los Angeles (a city where Uber Eats was noticeably lacking a serious presence). Postmates is also noticeably powerful throughout New York City, with its main competitor being Grubhub. Though Brooklyn is a Postmates stronghold, its northern neighbor, Queens, is solid Grubhub turf.
DoorDash, by contrast, focused on low-competition suburban markets with higher volumes of family-sized orders. DA Davidson analyst Tom White told Quartz that DoorDash’s share in suburban markets is estimated at 58%, up from 23% in January 2018. It also gave priority to expanding the number of restaurants on its app, while Uber Technologies Inc.’s Eats focused on restaurants with fast delivery.
DoorDash’s subscribers have more than tripled to more than 5 million in September, up from 1.5 million in January. The Wall Street Journal reports that they’ve also managed to succeed at retaining customers, since 86% of its orders came from existing customers in the three months ended September 30.
All told, DoorDash reported $1.9 billion in revenue in the first 3 quarters of 2020. That’s up from $587 million during the same period last year. As its revenue grew, DoorDash also narrowed its net loss to $149 million over the same period in 2020. In 2019, DoorDash had a net loss of $533 million over the nine-month period.
Additionally, the company did manage to record a $23 million profit in the second quarter of this year. CNBC reports that the company is now making money on every order, showing a path to bottom line profitability. Though a road to profits presents huge potential, the current valuation is undoubtedly extended. DoorDash is now valued at 17 times revenue, assuming you take the last quarter and extend it over a year. By the same metric, Uber is valued at less than 8 times revenue, and GrubHub agreed to be acquired earlier this year for under 4 times sales.
Profitability is as good as the holy grail to the major food delivery firms who make the bulk of their revenue through commission fees, charging restaurants anywhere from 15% to 30% on every order they fulfill to pay for connecting them with hungry customers. That cut is pretty steep, but not actually very lucrative when one considers the notoriously thin margins in the restaurant industry. Many believe the only path toward significant profits is a drastic drawdown on the fixed costs involved in the ride-share/delivery business.
As Forbes points out, venture capitalists and other investors continue to put capital into these money-losing businesses because they foresee a longer-term change in the environment. For a long time, Uber has lost money transporting us from one side of the city to the other, waiting for the main cost factor of those trips, the driver, to disappear from the equation. The autonomous vehicle, for instance could make 70% of the operating costs of a taxi service disappear with stroke of a pen one day. This same kind of technological discontinuity could flip the economics of food delivery on its head as well.
However, just this week, Uber, whose Uber Eats division has lost $183 million this year, decided to change course on their autonomous vehicle aspirations – selling off that part of their business to a startup called Aurora Innovations. Though Uber will take a stake in that company, this move was largely seen as throwing in the towel on an innovation that could have disrupted the entire industry.
On a brighter note, Uber did announce the official completion of its Postmates acquisition deal, which it initiated back in July. The all-stock deal, valued at around $2.65 billion at the time of its disclosure, sees Postmates join Uber, while continuing to operate as a separate service with its own branding and front end – while some back-end operations, including a shared pool of drivers, will merge.
Uber and Postmates’ combined delivery business is second only to DoorDash in the US. According to Edison Trends, DoorDash commanded 50% of the American market, as of October, while Uber and Postmates together had 33%, followed by GrubHub at 16%.
In the global market, however, DoorDash lags some of its international competition. David Trainer, the CEO and founder of New Constructs, recently told Business Insider that the company would need to grow its share of the competitive global food-delivery app market to over 56% from roughly 16% over the trailing 12 months to justify its titanic valuation. Trainer cautioned investors against expecting further growth, especially if a swiftly deployed coronavirus vaccine sends people back into restaurants.
For now, however, it does appear delivery is likely to remain the name of the game in food service – at least for the foreseeable future. Even after America manages to slog through the worst of COVID-19, it will take more time to re-acquaint a large portion of American consumers to indoor dining.
A Cowen & Co. survey of 2,500 consumers showed that, in July, 52% said they would avoid restaurants and bars even after they fully reopen, and a recent rise in COVID-19 cases nationwide means many restaurants are again facing onsite-dining restrictions. According to restaurant-reservation platform OpenTable, the number of seated diners in the U.S. decreased an average of 52% the week of November 19 – 23.
While the food delivery field has seen some consolidation, things are getting a little more crowded now that Lyft Inc has announced it is working on a new service to bite off a slice of the burgeoning market, working to make up for a 48% drop in quarterly revenue and a slow recovery of ride-hail demand.
Lyft President John Zimmer last month said the company was looking to enter what it considered an untapped market by offering delivery services for restaurants without launching a full-fledged consumer-facing platform for food delivery. In a sign that Lyft will look to undercut the typical high commission charges on food delivery, Zimmer told Reuters: “What we’re hearing from restaurants is they’re looking for a partner who will not charge 30% commission, but still offer delivery service”.
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