# DoorDash & The Myth of Profitable Food Delivery

Channel: Modern MBA
Video: https://www.youtube.com/watch?v=IlZ51zeabhM
Duration: 27 min
Language: English (United States)
Words: 4527
Transcript page: https://viewrankai.com/tools/youtube-transcript/IlZ51zeabhM

---

[0:00] Food delivery is a simple business. While the market today is dominated by DoorDash, Uber Eats, Delivery Hero, and a few others, back in 2014, food delivery and the gig economy were just emerging in Silicon Valley. Back then, the barriers to entry were so low that anyone could open up their own food delivery business in a matter of weeks with just a few thousand dollars and a website. Food delivery seemed such a simple and obvious million dollar business that as a starry-eyed 20 year old at the time, I left college to start a food delivery company, joining many others in the gold rush. The market in 2014 was wide open for the taking. DoorDash had not yet become a household name, UberEats

[0:39] was just spinning up, and GrubHub was primarily used for looking up restaurant menus online. Food delivery is a marketplace business. On the supply-side are the restaurants - what dishes and cuisines do you offer, are they fast food, chains, mom-and-pops, bakeries, dessert shops, cafes, or fine dining? The more diverse, the greater, the more reputable, and the more exclusive your restaurants are, the stronger the supply of your marketplace. Back in 2014, not many restaurant owners were thrilled with the idea of entrusting their food delivery to a pair of 20 year olds. We quickly realized that to deliver for big players like McDonald’s or Cheesecake Factory, you need

[1:16] the capital and connections - neither of which we had. But most of all, you need order volume. Consumers are the demand-side of your marketplace - the number, amount, and frequency in which they order determine your overall order volume. There are 3 ways to win consumers. One, you can compete on speed. In order to be the fastest to deliver food to customers, you need lots of drivers and are making a bet that you can assign pickups, route deliveries, and pay out higher earnings to drivers more efficiently than the competition. You’re also betting that consumers are willing to pay the highest premium for guaranteed convenience. Two, you can compete

[1:53] on price. By undercutting the competition as the cheapest delivery in town, you’re betting that the greater order volume over time will make up for the loss that you’re swallowing on every order. Three, you can compete on supply. If you can become the exclusive delivery partner for restaurants like McDonald’s, then customers will have no other choice but to order from your

[2:14] marketplace - no matter how expensive or slow your actual delivery service might be. Today’s giants like DoorDash, UberEats, and Delivery Hero all have the economical, technical, and operational means to balance between speed, price, and supply. But the barriers for entry continue to remain low, with new delivery startups popping up every year. These startups simply can’t afford to compete on speed and price. No investor or board member would approve the significant operational risk and cash burn involved with such an investment. As a result, these startups tend to specialize on supply, trying to monopolize delivery for a specific restaurant type like

[2:54] Chinese or fine dining, but these niches are just too narrow to sustain over time. If you don’t have enough customers, you won’t have sufficient order volume. If you don’t have sufficient order volume, then restaurants won’t partner with you for delivery. If you don’t have restaurants on your marketplace, then you won’t have customers. This balancing act between supply and demand is the fundamental chicken-or-the-egg dilemma that all food delivery businesses grapple with. For each additional restaurant you bring onto your marketplace,

[3:22] you improve supply and demand with greater diversity and consumer choice. But there are downsides - the more restaurants you bring on, the greater variance in orders, and the more diluted the average restaurant’s sales and returns become. There are diminishing returns with scale - when consumers are given too many options, browsing and ordering can turn overwhelming and exhausting. When your marketplace scales to hundreds of restaurants, discovery becomes a challenge as it’s impossible for the restaurants buried at the bottom to stand out. And if those restaurant owners feel like their returns aren’t good enough, they may leave your marketplace and

[4:02] sign on with a competitor who can offer them better order volume, reach, and terms. Here’s how we approached this problem back in 2014 as two naive 20 year olds. VC-backed players like DoorDash and Uber were opening up their war chests to recruit as many drivers as possible through relentless job postings and sign-on bonuses that we could never match. For our startup, competing on speed was out of the question. Without restaurants, we couldn’t pull in

[4:27] customers. Since we didn’t have customers, we couldn’t pull in reputable restaurants. For the few restaurants that were interested, it was meaningless to work with them as they were already available on Postmates, DoorDash, and UberEats. Our strategy was to specialize in supply by exclusively targeting food trucks, street vendors, food stands - mobile food businesses who generally had more unique foods and been neglected by delivery apps for not having dedicated brick-and-mortar locations. Since mobile food vendors are transient businesses with weak online presence beyond Instagram, we focused on centralizing the experience. The goal was to provide consumers with one curated menu of multiple cuisines made up of the best dishes

[5:10] from credible vendors who had been vetted by us as the delivery company. This meant customers could combine dishes from many vendors into one order - they weren’t locked into ordering delivery from one vendor at a time. Before any vendor could sell on our marketplace, we would painstakingly work with the owners to figure out what specific dishes were worth selling. To ensure quality and prevent menu bloat, no vendor was allowed to sell every item on their menu. For these mobile food businesses, e-commerce, enabling customers to place orders online, paying with a credit card, offering delivery were all new ways to expand their business that they never had before. They

[5:48] were excited to work with us as a delivery company who would take professional photos of their food, handle e-commerce, credit card processing, online marketing, and delivery all for free. In exchange, we would take 30% and they would keep 70% of net sales. Since many of these mobile food businesses had no reputation and needed to build up credibility, we leveraged price

[6:11] to pull in customers by offering free delivery and satisfaction guarantees on all orders. This heavy-handed, strict curation approach that we took was extremely labor-intensive. It would take us 10-20 hours to onboard a single vendor onto our marketplace but we stubbornly believed that our relentless focus on quality would pay off long-term. But after operating for a year,

[6:33] we ultimately concluded that there was no way to make money from delivery. In 7 months, we had delivered over 3,400 orders and grossed $35,000 off our initial bootstrapped budget of $2,500. For two 20 year olds, this felt great but in reality, the margins were never sufficient enough for us to pay ourselves or hire a single person. We were doing everything ourselves, from taking the food photos to handing out flyers and giving out samples at events to packing orders at 4AM and delivering to customers in our own cars. During the day, we would do marketing to build up the demand and into the night, we would push website updates and

[7:10] process orders. On the supply-side, retention was difficult with inconsistent order volume. Vendors would unleash their frustrations on us whenever they weren’t making enough sales and threaten to quit. And some actually would, making all the hours spent curating their food and taking photos a total waste. The other issue was that there were only so many mobile food businesses. At one point, we had onboarded every possible supplier to our marketplace within 75 miles of

[7:37] every direction. And whenever our menu became stale, consumers would stop ordering. Caught in between supply and demand of our own marketplace to the point where our own friendship had completely deteriorated, it was a no-brainer for us to shut down our startup. With food delivery, there’s cash flow but no profit. It’s easy to get started but impossible to make money. To sustain, you need a ridiculous burn rate to pull in consumers and generate order volume to keep suppliers and drivers happy. Fundraising from investors would just be robbing Peter to pay Paul - having millions of dollars in a bank doesn’t change the reality that you only make cents on every order. Six years after our startup, it’s been

[8:20] interesting to see the continued hype of food delivery companies around the world even though everyone knows that the unit economics just don’t work. When you have to rely on tips to pay a livable wage to drivers, it’s obvious that there is something fundamentally broken with the business model. If none of them could make money during this once-in-a-lifetime global pandemic, how could any of them turn a profit in this environment where gas is going up, inflation is rising, and a recession is materializing? In this episode, we’re going to look at the four biggest food delivery companies around the world from DoorDash, UberEats, Delivery Hero,

[8:52] and Just Eat. What are the strategies that these companies believe will lead them to profitability? Are these just fantasies spun for investors and which companies have made the most progress? The current industry leader is DoorDash who holds the highest valuation and largest share of the food delivery market in the United States. The company’s vision is that if they can build their logistics to deliver ice cream before it melts or pizza before it gets cold or groceries within an hour, DoorDash can become the on-demand delivery provider for everything else like clothes and medicine. This same ambition is rooted in the design of DashPass, which is DoorDash’s membership program where consumers can pay a flat monthly fee at $9.99

[9:31] for unlimited free deliveries and lower service fees from eligible restaurants. Over time, the company’s leadership hopes that they can turn DashPass into a quote wallet for the physical world where consumers can get delivery and special perks from all the local businesses in their community whether they’re shopping in-store or at home. DoorDash’s rise to the top has been fueled by its strategy of winning suburban markets and small metropolitan areas. While food delivery is most visible in large dense cities like Manhattan, Chicago, and Los Angeles, DoorDash focused on the smaller markets that had been traditionally underserved. Suburban and small metropolitan consumers have much fewer options when it comes

[10:12] to delivery, which meant the DoorDash could win meaningful customers at manageable acquisition costs. As annoying as it is for people in NYC to suffer on the packed subway during rush hour, the reality is the distance that big city dwellers travel is still significantly shorter than the many miles that suburban residents have to drive in their own cars to buy something. DoorDash’s fundamental belief is that suburban and small metro residents derive greater benefit from on-demand deliveries than those living in big cities. In addition, suburban consumers tend to be families and not individuals, which results in larger order sizes and higher spend. The lighter traffic and easier parking

[10:42] in suburbs and small metro areas also benefits the drivers, who can do pickup and delivery more efficiently than in cities where they have to double park in bike lanes and fire lanes. When it comes to driver earnings, DoorDash makes no attempt to hide that the tip is the most significant element to making its economics work. The current pay model for DoorDash drivers is made up of three elements. The first is the base pay for each order, which is calculated based on estimated time, distance, and desirability of the order. The second is the tip from consumers, which drivers keep 100% of. There third is promotions where if drivers meet specified

[11:17] conditions and goals, then they can get a bonus payout for that order. But these promotions are generally too non-transparent and inconsistent to be considered regular earnings. Not every driver is offered promotions and the conditions to achieve such bonuses can vary for each driver, depending on when they started delivering for DoorDash, what sign-up codes they may have used, and what region they are in. If we look at the pay model for drivers, the base pay is really the only stable element that DoorDash pays out to its drivers. The tip is entirely funded by the consumer. Let’s look at DoorDash’s own breakdown of an example delivery, how much is given to the restaurant, how much is kept by DoorDash as the middleman, and how much is

[11:58] given to the driver. For a $33 order of which the food costs $22, service fees make up $6, tax is $2, the customer adds a $3 tip. The driver earns $8, the restaurant gets $20, and DoorDash pockets $5. In Doordash’s own example, the customer tip makes up almost 50% of the driver’s earnings. Tipping is so central to DoorDash’s economics that the company itself calls out the risk that if customers consistently provide low tips or simply don’t tip at all,

[12:29] then there would be material harm in DoorDash’s ability to provide delivery and retain drivers. Earning on base pay alone is inadequate. But rather than directly educating or requiring tips from customers, DoorDash opts for a hands-off approach, letting drivers and consumers socialize amongst themselves how to be successful on its marketplace. This dog-eat-dog mentality is most visible in DoorDash communities where seasoned Dashers shame no-tip customers and fellow drivers who take no-tip orders. New customers who assume that tipping is optional or don’t

[13:01] understand how significant the tip is learn the hard way why their food never gets delivered. To put into perspective just how favorable COVID has been for food delivery, DoorDash’s annual revenue grew at an astounding 1580% in the past three years. In 2018, DoorDash was grossing $290M in overall revenue with 83 million orders placed on its marketplace that year. Fast forward to 2019, DoorDash had grown 200% to $890M on 263 million orders and 18 million monthly active users. At the height of the pandemic in 2020, DoorDash grew another 200% to a record 2.8 billion dollars on 816 million orders and 20 million monthly active users. In 2021, DoorDash’s

[13:48] top-line increased by another 2 billion dollars to hit 4.8 billion dollars on 1.3 billion orders and 25 million monthly active users. Despite this historic growth, DoorDash continues to post a loss of 500 million dollars every year with an average negative operating margin of -42%. While DoorDash can’t escape the losses under traditional business accounting, the company pushes a set of operational metrics to investors that it believes more accurately captures how profitability is just around the corner. That first operational metric is called Marketplace gross order value, which is simply the total amount that users pay on DoorDash. It combines the cost of food, taxes, tips, service fees, DashPass membership fees of all DoorDash orders

[14:35] placed that year. Marketplace gross order value is the closest public metric to order volume. DoorDash’s revenue itself is just a slice of marketplace gross order value, made up of the 15-30% commission it charges restaurants and the service fees it charges consumers. The rest of the pie is remitted to restaurants and drivers. In 2018, marketplace gross order value was $2.8 billion dollars with $290M being DoorDash revenue. In 2019, GOV had grown 4 times to $8 billion dollars with $890M being revenue. In 2020, GOV had grown to 24 billion dollars with 2.8 billion

[15:16] being revenue. In 2021, GOV hit $42 billion with 4.8 billion of that being revenue. DoorDash’s second operational metric is called Net Revenue Margin or Take Rate, which is the percentage of gross order value that the company can pocket as its own revenue. The question this metric answers is that as the total amount of money that people spend on DoorDash’s marketplace increases, as this pie grows every year, is DoorDash able to take a bigger slice for themselves? There are several reasons why Net Revenue Margin is so significant. One is that it determines DoorDash’s elasticity as a middleman. Delivery itself is a commoditized service - there is nothing particularly special about how DoorDash delivers or charges its customers

[16:02] and restaurants. If DoorDash increased its commission and decreased the amount it pays out to restaurants to pocket more of the pie for itself, how many restaurants would exit its marketplace? If DoorDash increased the service fees it charges consumers, how many of those customers would leave in favor of a cheaper competitor? If DoorDash decreased the amount it pays out to drivers, whether through taking a portion of tips, reducing base pay

[16:26] or removing promotions and keeping those savings for itself, how many drivers would stay on? An increasing Net Revenue Margin or Take Rate would suggest that DoorDash has the loyalty, leverage, and strength with its restaurants, drivers, and consumers to demand a bigger slice of the pie for itself. But the results indicate that it’s not really there. In 2018, DoorDash took 10.35% of the pie for itself. In 2019, it slowly increased that rate to 11%, in 2020, to 11.7%, and then in 2021, slightly down to 11.65%. There is clearly something very fragile about DoorDash even during its rocketship growth, where the company continues to be extremely cautious about upsetting the balance on its marketplace between the price-sensitive

[17:10] customers, the commission-sensitive restaurants, and earnings-sensitive drivers. If you know you’re not getting another pandemic with guaranteed growth where customers are compelled to use your service - yet you still aren’t comfortable demanding a bigger slice as a middleman, at what time could you actually do so? The last operational metric that DoorDash pushes is contribution margin. Contribution margin is simply the money left when you deduct all the direct expenses - sales, marketing, delivery, payment processing, insurance, customer support, and platform operations - involved in generating and fulfilling orders on DoorDash. But to play through DoorDash’s logic, the company’s contribution margin had been negative 20% in 2018 and 2019. That means for every $10 order that was placed on DoorDash, the

[17:57] company was losing at least $2.00 on every order those years. In 2020 onwards, the contribution margin turned green, meaning DoorDash had finally achieved positive unit economics. For every $10 order, DoorDash makes $2.22. But contribution margin doesn’t include R&D and G&A, which are critical expenses and strategic investments that can’t be ignored. DoorDash calls itself a tech company and prides itself on building proprietary technology to enable operational efficiency above its competition. If we include R&D and G&A expenses which combined make up over a billion dollars of expenses every year, then we arrive at DoorDash’s net losses of half a billion dollars. Could DoorDash’s logistics and technology really reach a point of maturity where drivers and deliveries are so optimized that a high enough

[18:46] contribution margin would offset these billion dollar investments? If you have to spend half a billion dollars on software R&D every year to squeeze out a higher margin of literally $1-3 more on every delivery order, is that really worth it? Even if the contribution margin one day reaches 50%, how many more orders and customers do you need to turn a profit

[19:10] when you’re already at 25 million monthly active users and 1.3 billion orders? DoorDash’s leaders have been consistent in that they want to get the unit economics and profitability right in America before scaling and expanding internationally. When it comes to labor supply, the company seems to favor having a large, replaceable, flexible pool of on-demand

[19:29] couriers that jump in whenever they want versus a committed, dedicated, reliable, growing group. DoorDash executives proudly highlighted that in 2021 even though there were 6 million Dashers that year, they worked on average less than four active hours per week. Of course, there is nuance here in that active hours is time spent from when a courier accepts to complete an order. The time a DoorDash courier spends waiting for orders to come in or declining orders can be much longer and is not highlighted. DoorDash believes that acquiring couriers isn’t difficult as Dashers are an entirely different type of gig workers than Uber drivers, Instacart shoppers, and Lyft drivers. With DoorDash, you can deliver orders on a scooter,

[20:11] bike, or car, and the company believes that this “safer working experience” allows them to target a unique audience of drivers and couriers who aren’t contested by or interested in other gig economy apps. Despite the positive contribution margins of the past two years, DoorDash leadership continues to push that the path to profitability is not

[20:30] really in growing margins point by point but in generating higher order frequency. While the company acknowledges that are still areas to optimize for its couriers, like giving better predictions on kitchen prep times to reduce the time a Dasher has to spend waiting at a restaurant for the food to be ready, I think DoorDash realizes that these remaining inefficiencies are too complex and expensive to rabbit hole into in the pursuit of saving a couple of cents. I sense DoorDash also recognizes there is little they can do to influence order sizes but a lot they can do to influence frequency. Driving adoption and

[21:08] penetration of DashPass amongst DoorDash users is the company’s biggest current focus. With DashPass, the company is making the tradeoff to accept lower unit margins in exchange for higher order frequency. So while DoorDash makes less money on DashPass orders, but if DashPass unlocks higher order frequency and greater cumulative spend from customers, then that’s the path to profitability. DashPass reminds me of Costco where membership fees only make up 2% of the company’s overall revenue but it does wonders in encouraging consumers to spend large orders at a regular frequency which then drives up the company’s overall order volume despite the minimal markup per item. Newer company initiatives like DashMart further

[21:50] reinforce DoorDash’s goal of achieving high order frequency to reach profitability. DashMart is a relatively new rollout that brings an inventory of grocery and convenience essentials into geographies where such stores didn’t physically exist or have 24/7 hours of operations. However, the latest economic conditions have exposed the underlying fragility of food delivery marketplaces when it comes to price elasticity on both the supply and demand side. To offset the rise of gas prices, DoorDash started out two programs for driver retention - one was a 10% cashback on fuel expenses and the other paid out a bonus if the driver drove a certain distance. For both these programs, DoorDash chose to absorb these programs entirely

[22:32] rather than pass the costs onto customers in order to preserve order volume and growth. To quote, “if we keep consumer prices unchanged and if we ensure Dasher earnings are preserved, that enables us to maximize growth because having adequate supply ensures that the customer quality is preserved, which then drives the growth flywheel.” But with inflation, higher gas prices, and a recession, it’s impossible to keep consumer prices unchanged. Even if DoorDash doesn’t increase its service fees, the restaurants will increase their prices on their platform to offset their own higher ingredient and labor costs. And if DoorDash increases its cut,

[23:09] the restaurant will more likely than not pass those costs onto customers. When we look at other food delivery companies like Uber Eats, Delivery Hero, and Just Eat, we see the same story but with differences. Despite also enjoying rocketship growth during the pandemic, none of these companies have come close to turning a profit. UberEats is possibly the most amusing one. Buried deep in their financials is this horrifying line - quote, cumulative payments to drivers for Uber Eat deliveries historically have exceeded the cumulative delivery fees paid by customers. End quote. This is basically Uber admitting that the service and delivery fees that they charge customers for Uber Eats orders has never been

[23:49] enough to offset the costs of delivery. Uber Eats from 2018 to 2021 grew from 1.4 billion to 8.3 billion dollars in revenue, much higher than that of DoorDash due to Uber’s greater international presence. Consequently, UberEats marketplace GOV is higher than that of DoorDash with $51.6 billion dollars for the most recent year. Despite burning money on every Eats delivery with a -2% contribution margin, Uber offsets the per-order loss by demanding a much greater slice of the pie from its restaurants and drivers with a 16% Take Rate, 5% more than DoorDash. Perhaps Uber is able to command a higher premium by offering more consistent business and

[24:25] earning flexibility to its labor supply as both rideshare drivers and delivery couriers. Delivery Hero also enjoyed spectacular growth during the pandemic in Europe going from 687 million euros in 2018 to 5.8 billion euros in 2021 but still ended with annual losses of 1 billion euros. Thankfully in Europe and Asia, tipping is not the same cultural or business requirement like it is in the United States. With stricter labor laws,

[24:47] Delivery Hero employs its own drivers and hires additional couriers through agencies. However despite the company’s impressive international presence and scale, Delivery Hero is doing the worst of all when it comes to margins. Even with 20% of the pie, the company is still losing 14-20% on every order with no light at the end of the tunnel. Its fellow European competitor, the Netherlands-based Just Eat seems to be in the same boat. While Just Eat grew from 2.7 to 5.3 billion euros from 2018 to 2021 due to its acquisition of GrubHub, the company has continued to post annual losses of 200-300 million euros. The only time Just Eat has been able to not lose money on every order was when they hiked their Take Rate

[25:32] during the pandemic, taking a 30% slice of the pie from its restaurants. Now that the pandemic is ending, Just Eat has been forced to lower its Take Rate to a more tolerable 19% - and the company has swiftly returned to negative contribution margins, losing 7% on every order. It’s no surprise that its investors are revolting, calling for Just Eat’s CFO and board to be fired in an open letter

[25:56] for quote on quote torpedoeding the company’s future amidst a 75% drop in valuation. When I see the payouts for the CEOs of these unprofitable food delivery companies, I can’t help but wonder what could have been in a different universe had we stuck to our startup and joined the parade. But ultimately, if a company has to spend hundreds of millions every year to squeeze out one dollar of profit off a $10 transaction or rely on consumer tips to pay drivers a livable wage, I think that’s a good case that perhaps that business isn’t worth it. Profitable

[26:29] food delivery is a myth - value creation is meaningless without sufficient value capture.

---

About this transcript
Read from YouTube's own caption track and laid out by ViewRank AI (https://viewrankai.com).
ViewRank AI finds the videos already beating a creator's own average on Instagram, TikTok and YouTube Shorts, transcribes them from the audio itself in more than 60 languages, and turns what worked into new ideas and scripts.
Free transcript tools, no account needed: https://viewrankai.com/tools
How to read any video this way: https://viewrankai.com/llms.txt