Capital Markets Market Trends

Investor Appetite: DoorDash fills consumer’s hunger, will its IPO fill investors’ hunger too?

DoorDash, America’s biggest food-delivery company, is due to be listed on the New York Stock Exchange under the symbol “DASH” next month, aiming to be valued at more than $20bn in the IPO and begin trading in December. Its financial documents filed on November 13th reveal it booked orders worth $16bn from January to September, earning revenues of $1.9bn for the first 9 months of the year, which is up from $587m in the same period in 2019 — almost a 198% increase on the previous year. With growth rates of revenues at 100-200% year-on-year, DoorDash is aiming for a valuation of $25bn, up from previous $16bn at a private-market funding round in June. SoftBank’s Vision Fund owns nearly one-quarter of DoorDash’s class A common stock, while the venture firm Sequoia Capital owns more than one-fifth, placing them in line for big paydays once the company goes public.

North America’s technology startups have brought in $10bn so far this year — and there is more to come as DoorDash’s IPO joins alongside other large venture-backed “unicorns,” which include vacation rental marketplace Airbnb, video game platform Roblox, Instacart, which delivers groceries, as well as ecommerce platform Wish, who are also preparing to go public before the end of the year, making this quarter one of the busiest periods for new US listings.

Empowering mission

DoorDash is generating cash and is profitable after accounting for changes in value on an adjusted basis. Its in-app advertising also generates a stable revenue stream. The company has set itself ambitions loftier than its humble start as a mere food delivery service, pitching itself as a burgeoning digital hub for the convenience-driven economy which connects merchants, consumers and “Dashers.”  In a letter in the IPO filing with the SEC, DoorDash CEO Tony Xu cited his inspiration from his immigrant parents’ humble journey towards being eventual business-owners and his continued desire to unlock local merchant’s entrepreneurial desires and empowering them through helping them unlock a wide, online customer base. Their mission is, “to grow and empower local economies” and the word “platform” appeared roughly 646 times in the filing with the SEC.

Consolidation and competition

Currently operating in the US, as well as in Canada and Australia, the company reported it now has 18 million active users of the platform, along with 1 million workers providing its service, and serves 390,000 American restaurants in the US market, meaning the majority of America’s approximately 700,000 eateries now distribute via an online delivery service. DoorDash leapfrogs over its rivals this year,as data from Edison Trends shows DoorDash’s market share rising to 48% of the US food delivery market in October, up from 34% a year prior and surpassing a combined Uber and Postmates, which makes DoorDash the market leader in the US.

Despite growing consumer demand over the pandemic period, companies within the online food-delivery sector cannot succeed solely through their own rapid growth. As product differentiation is limited and only a finite amount of promotionary concessions can be offered to consumers and merchants before the business model becomes unstable, there is a lack of obvious economies of scale or barriers to entry to be made. This risks little loyalty from consumers, as they can easily switch between services, seeking out whoever offers a cheaper and faster service with a better range of offering. Instead, companies within this sector must adopt a consolidation strategy, whereby a series of consolidations can help to spread its presence and network across regions. The consolidation strategy renders a race between companies to outgrow its competitors and become a more dominant, unbeatable force within the market once stronger and wider links between its merchants, consumers and couriers become established. Several food order companies have consolidated this year in the US, notably Uber’s’ $2.7bn acquisition of Postmates which just received regulatory approval in the US this week and is expected to bolster Uber’s position in the Los Angeles market and hedge against its drastic drop in taxi rides in its other business line over the pandemic.

Low margins and regulation

The new “third-party logistics” firms have to divide the revenue, which average around $30 per online order, three ways. Once drivers and restaurant merchants take their share, not much is left. By offering diners generous discounts and free trial periods as incentives, the business’ revenues are thinned even further. Flat-fee, monthly subscription services incentivize take-ups to its services however if the subscriptions later become well-used by the consumer, this comes at a cost to the firm. As news of a possible vaccine as panacea to COVID-19 emerged, the share prices of many listed digital firms that benefited from lockdowns and self-isolating consumers, such as Amazon and Zoom, dropped slightly. With rising unemployment from the pandemic, these companies face plentiful supply of willing workers wishing to earn extra cash at flexible hours. The question remains whether this will be met by sustained increase in demand from consumers as lockdown rules and social-distancing measures relax. The desire of consumers to socialise face-to-face again comes against an economic backdrop of high unemployment and high public spending.  

Another risk factor for DoorDash is the regulation it faces against aspects of its operating activities.  Last year, California passed a law that required DoorDash, Uber and other “gig-economy” companies to treat app-based workers as full employees. This was later overturned, but this criticism of exploitation is likely to resurface as firms’ profits thrive against the majority employment of low-paid, low-skilled workers on tenuous contracts. The consequences of sudden regulatory changes include potentially higher labour costs at short notice and need to be prioritised and addressed sharply, disrupting the ongoing business plan. Regulation poses as a constant risk-factor, increasing potential volatility in their ongoing performance. DoorDash has already contributed to funds worth $200m to support the ballot which overturned the law, legalising the independent contractor status for “gig economy” workers and has also agreed to pay $89m to settle a class-action lawsuit involving workers in California and Massachusetts — up from the initial proposed settlement of $41m.

Given that these firms offer their consumers maximum convenience, this comes at a cost of its corporate responsibilities, such as possible labour exploitations, increased wastage, and inefficient emissions.  For example Ocado recently came under fire for opening a pollution-intensive logistics center adjacent to a local primary school in order to offer its consumers a one-hour lunch delivery service. With immediate product offerings to meet immediate consumer needs, DoorDash and its tech rivals must take note of agency costs associated, post-IPO, with making rash, possibly irresponsible corporate decisions which may tarnish their reputation and more importantly, alienate themselves from their public shareholders.


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