DoorDash’s much anticipated IPO Wednesday exceeded expectations and most certainly turned heads, generating a nearly 80% gain on volume within its first few hours.
The company’s expectations were high to begin with. This year’s Covid-19 crisis has shifted consumer behaviors toward foodservice delivery as it provides a safe alternative to closed or reduced-capacity dining rooms. Consumer spending in the channel has grown by triple digits this year, no doubt fueling even more interest in DoorDash’s plans to go public.
Still, that foodservice delivery model is imperfect. Profitability has been elusive for DoorDash and its peers—namely Uber Eats and Grubhub GRUB -3%—while commission fees hovering around 30% have come under fire for eroding already-thin restaurant margins.
These factors could make DoorDash’s initial valuation of $39 billion a bit perplexing, and one analyst even called the debut the “most ridiculous IPO of 2020.” For context, Chipotle’s market capitalization is about $37 billion, while Yum! Brands’ is about $31 billion. In fact, in the restaurant space, only McDonald’s and Starbucks SBUX +5% have higher market caps than DoorDash.
Clearly Wall Street likes this underdog story—the company founded by a group of college students seven years ago didn’t reach a 50-state penetration until last year and then swiftly moved its way past Uber Eats and Grubhub to a commanding 51% share of the market.
But if DoorDash struggled to achieve a profit prior to its IPO, how did it woo investors to create such a staggering market debut? More importantly, how will it be a good steward those investors’ money going forward?
COO Christopher Payne said it comes down to growth—in markets and in services. In its short existence, DoorDash has evolved well beyond just delivery logistics, adding services like Storefront, which enables merchants to set up digital ordering directly from their native channels, and Self-Delivery, which allows restaurants to leverage DoorDash’s giant marketplace while using their own in-house delivery fleets (winning over even the biggest third-party critics like Jimmy John’s).
DoorDash has also gained a strong market position by focusing on the suburbs, a particularly advantageous strategy as the pandemic dissipated urban office crowds. In fact, the pandemic caused restaurants to re-think their delivery approach all together, and many giants, including McDonald’s MCD -0.3% and Yum Brands YUM -0.1%, moved away from exclusive partnerships, to DoorDash’s benefit.
But its the underpenetration of e-commerce in the foodservice space that provides the biggest tailwind for the company, according to Payne. He has relevant experience here, coming to DoorDash five years ago after stints at Amazon AMZN -0.1% and eBay. He touts DoorDash’s focus on local commerce in particular and calls it a “massive opportunity.”
“That is restaurants, grocery, convenience, retail—most commerce happens locally. What you’re going to see out of us and what has enabled us to take the lead in this category, we’ve been a merchant-first company,” he said.
DoorDash has done this by adding those services, like Storefront.
“I was blow away that 40% of our restaurants didn’t have their own website at the beginning of this pandemic. That’s essential,” Payne said.
There are “many, many, many, many” more merchant services to come from the company as it settles into a post-pandemic growth cadence. DoorDash is also eyeing other verticals, like convenience, grocery and more, as well as international growth, expanding beyond the U.S., Canada and Australia.
That said, the restaurant space remains a priority, and Payne points out the “10% or less” of restaurants that have a viable e-commerce presence. Indeed, food delivery has been called the last frontier of e-commerce.
“It’s still very underpenetrated. I think there’s a ton of growth driven in helping these local merchants, not just in this era, but beyond,” Payne said.
Laid out in succinct terms, DoorDash’s plan sounds reasonably ambitious. But there is still that profitability question. If DoorDash hasn’t done it yet, and its peers haven’t done it yet, why should new investors be optimistic that it will happen?
“It’s a valid question. This is the type of business where you always have to make the math work. The more scale we get and more efficient we are, the better we can make the overall math work,” Payne said. “While we were expanding across the United States, it takes a while for those markets to scale up. But the markets we entered in earlier, those are generating profit—contribution margin. DoorDash knows what the formula is. As you scale up, you get economies of scale and that can drive improved profitability. While we’re not there yet, there are signs that show the history here that gave investors confidence. This is going to be a very profitable business in time.”
Until that “in time” is reached, DoorDash will focus on growth and also in the near term helping restaurants survive the pandemic. According to DoorDash data, restaurants that partner with the company have been six times more likely to remain open during the Covid-19 pandemic than those that do not. Independent research shows that 81% of operators believe third-party delivery has helped them prevent layoffs during the early months of the pandemic.
DoorDash has also launched a number of initiatives to help restaurants, like its Main Street Strong initiative, Reopen for Delivery program, cold weather grants and more.
“To me, that’s the main event right now. I know today is a day of celebration but we also acknowledge that we’re in this together with our Dashers and partners,” Payne said.
This begs the question: What happens when we get out of “this?” Will the allure of delivery fade as consumers comfortably return to pre-Covid dine-in levels? Payne believes in the sustained viability of the channel.
“Consumer habits don’t break easily and people now are habituated to this and their expectations are that they’re going to be able to get more delivered immediately. Nobody’s going to wait two days for anything anymore and DoorDash is designed to do that,” Payne said.
He adds that the services DoorDash has built during the pandemic—pickup, order ahead, curbside—will also be relevant in a post-pandemic world.
On the question of commission fees, Payne states simply that DoorDash gives restaurants a wide range of programs to choose from, and will continue to do so in an effort to achieve mutual profitability with its partners.
“My strategy has been to offer services like pickup, which are lower commission rates, Storefront, which is lower commission rates … Our recent Self Delivery announcement—they have their own drivers and they choose to do that for profitability reasons,” Payne said. “My strategy is to let the restaurants choose and keep marching on services. We get bigger, we can get mutually more profitable and then we can build more services together with merchants that drive incremental profitability.”
“By no means are we saying we’re perfect,” he adds. “But DoorDash is about being a merchant-first company and evolving services so we both can benefit.”
With Wednesday’s debut, DoorDash became the last of the “big three” delivery companies to go public, which certainly adds intrigue to the space. It was competitive before any of them even thought about ringing the bell and it will continue to be so long after.
“We’re in a space that’s in very early phases. This is all brand new,” Payne said. “This isn’t about the IPO moment. This is about a wave of convenience driving consumer expectation and merchants needing platform capabilities to compete and thrive in this environment–not just waiting for consumers to come into the store, but using all the tools of e-commerce to bring business in. You’re going to see immense innovation in the next five years. Our strategy will be to work with the merchants to unlock it.”