@IVEY | Publishing pe Oka 2 ak 9B21M039 DOORDASH: IN SEARCH OF PROFITABILITY* sara anit ard Sarah Bnatecharya rt hs coe sl to provide all doa Gacason Th or aa land meee ovaceveeiaia itetie ara Geral staton, Th utorsmay have depuis cea aoe ard cer rig oA se as ee “ pit tn nee oyna i Fae tari Sl ha Steers core yoy ms nn Ee eo i angen tats hah cn sno ey sn ty ens chery cero er hmnaee OE right © 2021, wey Business Schoo! Foundetion Version: 2021-0414 ‘On December 9, 2020, DoorDash Inc. (DoorDash) launched its initial public offering (IPO). The start-up ‘was based in San Francisco, California, and led by Tony Xu, its chief executive officer and co-founder. DoorDash was the market leader in the US food delivery services industry.? Shortly after the IPO launch, DoorDash reported an 86 per cent rise in its stock price—it opened at US$102° and closed at $190.* With 2 total valuation of $72 billion, DoorDash’s market capitalization exceeded that of Domino’s Pizza and Chipotle Mexican Grill combined, making it the United States? largest IPO of 20203 DoorDash had launched a blockbuster IPO despite heavy losses and an intensely competitive industry (see Exhibit 1). David Hsu, professor of management at the University of Pennsylvania, cautioned about the enthusiasm around DoorDash’s IPO: “At some point, we do have to look at some fundamentals.”* Restaurants often cela ‘bout food delivery digital applications (apps). Their concems were based on the shrinking of already in profits. However, during the COVID-19 pandemic, apps like DoorDash helped many restaurants remain in business.7 Rick Cama, dean of restaurant and culinary management at ee Institute of Culinary Education, suggested thet auras fod delivery companis neste to work ext e economics of delivery services.*— Matt Maloney, the chief executive officer of Grubhub food services in the United States, claimed that the commodity, with limited potential to generate any. for the second quarter of 2020," raising the potential to become profitable./# DoorDash co: with the mission of growing and empowering | only squeezed profit margins from restaurants by 40 per cent. While expanding rapidly, with a surge in fun and 2020, DoorDash was still incurring losses ‘commented on the effects of venture capital as they've been built, just seem like the wre been subsidized into market dominance.” Amid such criticism, could Xu prove © fundamentals? How would he manage 10 g g 3 i Use oulsie these parameters is @copyr ‘Authorized for use only in educationalSB2tMoae D a aeee tom in the fall of 2012, when Xu od ed oO eae Universi oorDash was born in the 12° in the San Francise a, most of yj pee “tervewed several small Dus ne co-founders realized that there was a fea jnformed the students ina vale vrom big cities where food delivery was a comnton The Bara They explained, “We: ae Pana yrnone ofthe restaurants delivered. 27013, DoosDash was founded under the company name Palo Alto Delivery, which was ch rae eae months later, The co-founders developed 2 prototype app and posted local mens online, Within a few hours, they theic first order- Pad Thai with prawns and a side of springrollg”— | jn suburban and smaller citi, rather than major metropolitan areas, where "iS rivals were concenttated. Skeptics at food delivery economics would not work in ess dense areas because of poor demand. However, the co-founders discovered that families in suburban regions tended to place larger orders than patrons in urban centres; these regions hiad fed benefit less tgaffig and fewer parting. challenges for their drivers to deliver food more efficiently.'° In Septe; 2 P g mb 221, DeotDath bad 3279 employes Ins June 2020 financial quarter, DoorDash reported aon, $23 lion. However, inthe third quarter of 2920, the company was again reporting a loss, despite an increase in revenues (seé Exhibit2)7 Py | 2 a mG Theta se Saf Lo V5 OHA ling FUNDING 2020, which helped S10 bilo for Somos Sa f i zs valuation to approxi 2019 (over two rounds), and aacther 30 milf = mae 2p li ture Tilo Ssted $280 nj (See Ex POORDASH'S CHALLENG; ES 3 : : 8page 3 ey outsource delivery and which service to choose.* and their customer base: “ Ea oes eee eee a aaa businesses coupe sisted eal nee reduced its primary fees for independent restaurants, wach coe arene ee oe DoorDash temporarily DoorDash also announced a $200 million pledge to hip Xu believed that deliv ich cost the start-uy 1p approximately $120 milli restaurants and delivery drivers ae costs Borne by Customers ‘After paying a tip and the DoorDash delivery fee, ose or the nea enee ofa peor order, compared to picking up food themselves.* In other , such ast lustry, the convenience fee was approximately 3 : 5, i v er cent of the transacti value.” In addition, some restaurants raised ther food prices when the food was ordered through a delivery app (see Exhibit 3). Some delivery apps, such as Cl i soe Gea ahi PPS, such as ChowNow, charged a monthly fee instead of a customers paid approximately 40 per cent more on Consumers tended to shift their preference of food order service based on the lowest cost. Others used various different platforms or independent delivery services to look for the lowest commission fee." ‘According to Nat Schindler of Bank of America Memrill Lynch, “The food delivery market is increasingly irrational as competitors flood the market with rewards and incentives, making online diners less loyal. A Food & Wine article reported that current DoorDash customers were so loyal that they used the DoorDash app for 85 per cent of their orders. In fact, the company reported that it was able to increase revenues in 2020 and yet lower its marketing expenses for attracting new customers: ‘The decrease in sales and marketing expenses as @ percentage of revenue was driven by increased operating leverage as existing consumers generated a greater proportion of revenue, as well a increased efficiency in our consumer and Dasher [DoorDash driver] acquisition efforts® (see Exhibit). Treatment of Dashers ‘were playfully referred to as “Dashers”) as DoorDash categorized its delivery employees (which re contractors, cath lowered the company's responsibilities but raised a considerable amount ae for public groups. However, after the ballot initiative nsition 22 was passed in 2020, 3 aes California, the start-up was clearly exempt from having 1 treat drivers as employees. Dashers lose their employee status, they were Senator Diane Savino strongly objected to: ‘They're coming in and allowing food to your customers, and yo decency —we shouldn't have On average, DoorDash paid Dashers cent of the order). The minimum ¥ $12.50 for employees who received tips. However, most Dashers used the d - » Various: er DoorDash competitors acquired “ghost kitchens,” which referred to dedicated cooking facilities, enabling these companies to both Lain ave the rectly to © During this ti food directly to consumers. During this time, many restaurants decided to cancel exclusive partnerships they had signed with individual delivery a imiti iit i i n ir apps, thereby limiting the ability of food delivery service providers io alte aunique service.” For example, in 2019, McDonald’s Corporation ended its cael SE eechiy with Uber and added both DoorDash and Grubhub as delivery partners. ‘This meant that Uber could no Jonger claim the McDonald's brand as its unique delivery service.” Backed by SoftBank’s capital, DoorDash was competing aggressively on pricing against Grubhub, which cone analysts saw as a problem”? According to Roy, “You have insanely large Pools of capital creating an. cGedibly inefficient money-losing business model.”” In 2019, DootDash Yost $450 million on $900 million of revenue. In the fourth quarter of 2019, Uber Bais lost S461 ‘million on $734 million of revenue. Inthe first quarter of 2020, Grubhub lost $33 million on $360 million of revenue.”* THE ROAD AHEAD xu intended to expand into what he saw “all lcs! ‘business? in the “convenience economy.” He 7 eve that “if we can make possible the delivery of 6s or itmelis orpizza before it ges cold, velleVoeries in an hour, we can take tie on deere 2 ors erding to Tom White, an analyst at D-A Dev ssn & 0° possibilities of ing i very awaiting the compan complaints about delivery opportunities for food delivery Jn June 2019, Amazon exited ‘were acquiring food delivery so much skepticism assoc! his venture profitable. g-‘wou-sysepi00p/20/z /0zOz/suoneinoedsyeei8/seysjwoo'sequoyawwn ‘Qz0z ‘Oz Jequieneq ‘MON s4seqH00G, ‘J2UIeLL piAeQ_‘sejeu}sOd-ysep.oop-sye0-Iogn-qnjqnib-seo|Ales-Aln ‘0202 '9} seqweoaq ‘ainseay puoses LM Alenyog poo jueine\sey oy) Buu) S| e ‘Ozoz ‘2 equieseq pesseose “ozoz ‘0¢ JeqoII0 ‘sddy jo sseulsng (ozoz) 8 ze ue Be OID. wz ae 6E Mb bp URI ce 0g ee ab ov igo ve ec es ge 9% Ab or ‘XIUBOU eh 05 | “i ve 6 +S ‘seyreq g OL | Fo jianaus 1S b. ez so | endiepenyg s ie og shoz 6 8 io uoysnoH 0z Ss @- |useaiooa) gy or 69 —_oosjouesy ueg} ve e10z eee ‘723 4eqN| qnygnig, |Ysequoog)| SOND, $13 4eqn| qnyqnig, Ysequoog seni gn 1) wikibaeidoin| _sesnaannsbansatateetny | means omsiouen eters iets maior aa eee SHO1MadNOO SNSUAA ‘ONI HSVaNOON :1 LiGIHXS 6eonizas 9 ebeq.-ezozyawo nun AB—ouL!aL IP ira toa Bisineee eo mien gr tas nonin Srecensnit 18 é sun spsocounccnzzgzeh ane Ml ‘eanz “t} soquoron ‘orestutieg ebueunra PIP ROIS is pawn «aul "Neel ‘peot '0@ s8qweo0g pessaa0e ae ape | re Tee ae Spo SO [ee | = [OO a TT BrO=_Lero= | avo | aaom | OE 460 soo | 8¥O pro ovo veo | eco | soz | LOT og | 0970 | zo | eo | evo |. 200 Seem fe | yoo | roo | coo | 200 qo | coo |eevom| bron||= 20 a ana a a TS 00} 150] sro oso | eo seo | ceo | sro | ZrO evo | zro. | oo. | Oadayimeed 20 wo we _| seo [080 Oo | ro eer | oro | ae ero | eso | ezo | sh0 zro | 10 ut aig iced loco) || Zeon) | Brce lt com ans =} Saal oth ovo | ge ost ore coy | ost | svar | veg | s08 | 12 Seno aes i 70 | 0eo_|_ovo | B00 oc a OT A) ‘s19pi0 TEOL| eae wane oe ozoz'e | soz "ve | eroz "oe | er0z 0c | GCE S| ozo see [omar | “ten. 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