Summary
Food delivery is just table stakes, DoorDash wants to deliver eventually all things to its consumers.
DoorDash is EBITDA positive and is generating positive contribution profit per order.
In 2018 and 2019, growth is driven by existing consumers.
During COVID, DoorDash acquired the highest value consumers compared to the industry.
The Elevator Pitch
What a difference a year makes! In January 2020, Twitter asked which delivery company would be first to step their foot off the gas and rather than focus on growth, they focus on profitability. At that time, DoorDash was rumored to be burning close to $500M in cash per year and they had only $500M in the bank. Additionally, DoorDash confidentially filed to go public around that same timeframe and given the implosion of WeWork there was speculation if the public markets would be open to them (DoorDash: Initial Public Restructuring?). This growth at all costs model definitely benefitted DoorDash at the expense of one of their publicly traded competitors; however, there was a shock that no one anticipated – COVID-19. In this analysis of DoorDash’s S-1, I will lay out the subscriber economics and the delivery industry.
General Overview
Over two decades ago, the Internet (and Internet access) became commercially available and it was widely viewed as a new era since it enabled new companies to pursue business differently. While several companies such as Amazon (AMZN) and eBay (EBAY) to name a few were winners, the market place (and public markets) were littered with failures such as Pets.com (to learn more about Pets.com read my article Chewy: Improving Fundamentals And A Large Total Addressable Market Already Priced In (NYSE:CHWY) that presents an analysis as to why Pets.com failed) and Kozmo (Kozmo.com). But two decades later, the Internet is still transforming our way of life, but new technologies emerged such as faster mobile speeds (4G) and smartphones with location services. Where Kozmo, a delivery service during the dot com era, failed, these new technologies enabled bringing delivery to the consumer and helped these new companies become viable.
Venture Capitalists funded a new round of delivery companies and Doordash (DASHD) recently filed its S-1 intending to go public. Also, Doordash, Grubhub (GRUB), UBER eats (UBER) benefitted from COVID-19 as this pandemic provided the catalyst to change consumer behavior. The change in behavior was not driven by “takeout” food, but to have “takeout” delivered to your door by third parties offering a wide-range of “takeout” options other than pizza.
The delivery industry is hyperlocal (How GrubHub Got Its Start) and, while there are network effects, these network effects are located within cities and probably not scalable nationally or globally. In some ways, the economics could resemble a “winner take all” where the company with the dominant market share in a geography generates the excess returns. The key, however, is that at the local level, a network effect exists where increasing numbers of consumers, merchants and dashers will drive increasing returns.
Source: Company reports
Typically, many network effects are two sided such as eBay where more sellers drive more buyers or vice versa. However, with DoorDash and other delivery companies, there is a third element consisting of the party delivering the product, i.e. the Dashers. As a result, all three elements are essential and, also, drive the local network effect since for this to work all three must be in existence locally. Currently, over 390K merchants, 18M consumers and 1M Dashers use the service. Since being founded, merchants generated over $19B in sales via over 900M orders placed by consumers and over $7B paid to Dashers to deliver the orders. In 2019, merchants generated 59% in YoY same store sales growth using the platform.
Hence it is important to understand DoorDash’s local (or by city) market share compared to others. Moreover, it is important to note that market share in various locales drives profitability and returns, i.e. the higher the market share, the better. (Food Delivery Wars: 3 Takeaways From The UberEats, Postmates, Grubhub, DoorDash Ecosystem – How It…).
Business Overview
DoorDash is not just building a delivery infrastructure for restaurants, but also a localized delivery and logistics platform for other goods and services. In other words, food delivery is just “Act 1” of their long-term strategic plan. However, in order to move from “Act 1” to “Act 2” (T. Rowe Price New Horizons Fund), DoorDash needs to execute in “Act 1” in order for them to have an “Act 2”.
Source: Company reports
As discussed above, since competition is “localized”, it is important to reach scale and have the network effects at a local level. This is important as revenue is reported in the aggregate where DoorDash generated ~$1.9B in the first nine months of this year. With scale and network effects at a local level, profitability should occur. Using data from SecondMeasure, one can determine the level of scale via market share DoorDash possesses in Tier 1 and Tier 2 cities. From the chart above, DoorDash generates ~75% of their Food Sales from Tier 1 and Tier 2 cities. Market share statistics from SecondMeasure provides a different story where DoorDash has a dominant position in two Tier 1 cities (San Francisco and Philadelphia) and two Tier 2 cities in Texas (Houston and Dallas).
In two other Tier 1 cities (Washington, DC and Chicago), DoorDash has leading positions, but its competition has a comparable amount of market share. As a result, these locations are “battlegrounds” to gain share. Last but not least, three other Tier 1 Cities (Los Angeles, Boston and New York City), DoorDash is not in a leadership position and in two of these three cities, they lag behind both Grubhub and Uber Eats.
The change in marketshare table, however, tells a different story as DoorDash is taking share in all reported geographies. Some geographies are small, but it’s worthy to note that DoorDash gained 1400bps of market share in Tier 1 city Philadelphia at Grubhub’s expense.
Obviously, the Tier 2 cities provided by SecondMeasure are not exhaustive, but the tables above provide an indication of the market share DoorDash possesses and the share gains they generated since November 2019. DoorDash, in their S-1, provides an analysis of their aggregate market share in this space. The data (below) are confirmed by the tables above as DoorDash has gained share from its competitors and, more specifically, GrubHub. Moreover, consumers current represent ~6% of the US population and GrubHub estimates that with ~$8B of Merchandise GOV, GrubHub captured ~3% of total Merchandise GOV in the United States.
Source: Company reports
Business Economics
DoorDash generates revenue from their Merchants and consumers using the platform thus creating a two-sided platform. From Merchants, DoorDash charges one-time activation fees for onboarding and equipment and, additionally, collecting a per-order fee for use of the platform. Consumers, on the other hand, pay delivery fees to DoorDash on a per-order basis and, also, may subscribe to DoorDash’s DashPass allowing consumers to pay zero delivery fees and reduced service fees on orders in exchange for a monthly set fee.
DoorDash provides an illustrative example of their consumer economics using 2019 average order that is recreated below. DoorDash earns $4.90 per order processed by them. The collect $32.90 from the consumer and $20.10 is sent to the merchange and $7.90 is sent to the dasher. Based upon 2019 average over value, DoorDash earns $4.90 in contribution per order. While not as important at this time given that interest rates are close to zero, but DoorDash generates “float”. In other words, consumers pay DoorDash up front and DoorDash pays its Merchants and Dashers at a later date. This financial model ensures that working capital is not consuming cash during growth.
The illustrative example of consumer economics, also, shows the costs to the merchants as it recently came to light during the pandemic that these delivery services may be taking too much money from restaurants (Delivery Apps like Uber Eats and DoorDash Are Charging Restaurants Huge Fees). In this illustrative example, the cost of DoorDash to the merchant is almost 20% of the order value before sales taxes. However, DoorDash’s 20% take of the order may not be as extreme as other delivery services where restaurants claim that the service is taking as much as 30%. (The love-hate relationship between local restaurants, third-party delivery apps). Having used delivery services from DoorDash, Grubhub and Uber Eats, I know that the price of food is higher to the consumer for delivery, but it remains to be seen whether a 20% discount is sustainable over the longer term.
Obviously, the pandemic provided a boom for delivery services and DoorDash discloses the Marketplace GOV between new and existing consumers. From the chart below, while Marketplace GOV grew substantially during the pandemic, the majority of the growth was delivered by existing consumers and not new consumers.
Source: Company reports
Due to COVID-19, order volumes increased and DoorDash achieved adjusted EBITDA positive results for the past two Quarter.
Source: Company reports
While DoorDash is not disclosing the growth in their consumers, putting the economics of the business together, in 2Q’20 and 3Q’20, DoorDash is generating over $0.90 in contribution profit per order and, during this same timeframe, generated an adjusted EBITDA profit.
The number of consumers that are not disclosed may be driven by the fact that existing consumers are driving the growth of DoorDash (see Marketplace GOV From Existing Consumers & New Consumers above). However, it would be interesting to see metrics on the conversion to new consumers to existing consumers. At this time, when looking at consumers across 2016, 2017 and 2018 cohorts, Marketplace GOV is increasing across all cohorts in Years 2 and 3.
Source: Company reports
Delivery Through the Consumer Lens
It was a shot across the bow for the delivery industry when Grubhub announced that they were seeing a new trend emerge in the second half of 2019; the loyalty amongst their consumers appeared to be ending
[W]e believe online diners are becoming more promiscuous…[h]owever, our newer diners are increasingly coming to us already having ordered on a competing online platform, and our existing diners are increasingly ordering from multiple platforms. (Emphasis added)
Source: Grubhub 2Q’19 Shareholder Letter
Based upon data from SecondMeasure, in 3Q’20 only 49% of Grubhub’s consumers used Grubhub exclusively compared to 71% two years prior. While delivery services now need to expect to share their consumers, competitors to DoorDash are finding that 40% of their consumers are, also, using DoorDash for delivery and, from the data from SecondMeasure, DoorDash consumers are less likely to use other providers.
Source: Which company is winning the restaurant food delivery war? – Second Measure
The key to understand DoorDash is whether or not the growth in delivery will continue in the future. Obviously with the pandemic, consumers have stayed close to home and, as a result, have used delivery services (How long will the delivery boom last?). The key, however, lies in a presentation by Edison trends where DoorDash has the highest retention amongst consumers acquired during COVID-19 and the largest proportion of “high value” consumers where the value of consumer is determined by the number of orders two months after initial acquisition.
Source: Edison Trends
Source: Edison Trends
Valuation
In the S-1, DoorDash discloses that there are three classes of stock: A, B and C. Once Grubhub goes public, there will only be two classes of stock: A and B and the S-1 details the public offering for the Class A common stock. The main differences between Class A common stock and Class B common stock is voting rights where Class A common stockholders are entitled to one vote per share and Class B common stockholders are entitled to 20 votes per share. Class B common stockholders are owned by the co-founders of Grubhub. In June 2020, DoorDash raised an additional $400M from Durable Capital Partners and Fidelity and, at the time of that round of financing, DoorDash had a valuation of $16B. (DoorDash scores valuation of $16 billion as coronavirus pushes it to top of food-delivery chain)
If DoorDash goes public with the same valuation, it will trade on par with Uber and, perhaps paying over 6X revenue may seem a lofty premium, DoorDash has been a primary beneficiary of COVID-19 and, based upon research done by Edison & SecondMeasure, they have taken a leadership position in the delivery business. Perhaps “Act 2” is not too far away.
