A DoorDash Inc. delivery person arranges an order in the back of a vehicle outside of a DoorDash Kitchens location in Redwood City, California, U.S., on Friday, Nov. 29, 2019.
David Paul Morris | Bloomberg | Getty Images
The coronavirus pandemic has upended the U.S. economy and wreaked havoc on businesses ranging from global shipping to cruise lines to restaurants. But food-delivery companies are thriving, with DoorDash looking to be the rare winner in its niche.
Since Covid-19 lockdown orders were issued across the U.S. in mid-March and consumers shifted to ordering delivery for dinner, DoorDash’s sales have surged, according to data from Edison Trends, which studies anonymized and aggregated e-receipts from millions of U.S. consumers.
The food-delivery service, which earned the No. 12 spot on the 2020 CNBC Disruptor 50 list, grabbed 45% of third-party delivery orders, followed by rivals UberEats at 28%, Grubhub at 17% and Postmates at 7%.
DoorDash on Thursday confirmed that it raised $400 million in equity capital, selling shares to mutual fund companies T. Rowe Price and Fidelity, along with other investors. This new funding round was led by led by Durable Capital Partners and Fidelity. It raises the company’s valuation to nearly $16 billion, up from the $13 billion value Bloomberg reported in November after the company raised $700 million in a Series G funding round.
This funding deal could push off the meal-delivery giant’s move to go public. In February, DoorDash confidentially submitted a draft S-1 filing in February, the first step toward an initial public offering, to join rivals Uber Eats and Grubhub on the public markets. (DoorDash declined to comment, citing SEC rules governing the quiet period.)
The race to the top of the food chain
The race to become the top delivery provider — and then to maintain that position — has weighed on the SoftBank-backed company, which reportedly lost $450 million last year. In a bid for more market share, DoorDash bought Caviar from Square in 2019 in a $410 million deal.
But then came the pandemic, accelerating consumers’ shift to third-party delivery apps. The NPD Group found that delivery orders soared 67% in March, even as overall restaurant traffic fell 22%.
“For some restaurants, that was their only means of being in business,” said Douglass Miller, a lecturer at Cornell University’s School of Hotel Administration. “The only other option was to physically close.”
The company implemented a number of measures to help its delivery drivers and restaurants struggling with the pandemic. For example, eligible delivery drivers in the U.S., Australia, Canada and Puerto Rico who are quarantined or diagnosed with Covid-19 are receiving up to two weeks of financial assistance. The company waived or reduced commission fees for local restaurants and added more than 100,000 independent eateries to its subscription program for free to generate sales.
Monica Challingsworth, head of global relationships for Synergy Restaurant Consultants, said that DoorDash’s tech savvy has helped the company keep up as the restaurants responded to new conditions under lockdown.
“They were sending out automated robocalls to operators to ask if they were open, what their hours of operation were,” Challingsworth said. “Because of that, I think that they really quickly found a way to execute all of these things and get in front of all of these brands in a really strategic way.”
DoorDash also recently introduced Storefront to help restaurants create their own websites to take pick-up and delivery orders. The service also allows restaurants access to customer data, which third-party delivery aggregators do not share on orders placed through their apps. DoorDash’s chief operating officer told Reuters that restaurants won’t have to pay most fees for Storefront through the end of the year.
The company is also shifting to delivering more than just food. On Monday, DoorDash announced CVS Health will be the first pharmacy retailer to join its platform. Delivery drivers will now drop off non-prescription household essentials, like shampoo or over-the-counter cold medicine.
Challenges amid pandemic
But DoorDash, like others in the food-delivery industry, has also come under increased scrutiny during the pandemic for the fees it charges restaurants, which take a chunk of the industry’s already razor-thin profit margins. Restaurant owners can pay up to 30% in commission fees for every delivery order, and some chefs, like San Francisco chef Christian Ciscle, have called out delivery apps for just deferring or reducing fees.
In response, cities across the country, including New York City, San Francisco and Jersey City, placed caps on how much delivery apps could charge restaurants for their services. DoorDash has said that fee caps will hurt the quality of its service for consumers, lower its drivers’ earnings and lower restaurants’ sales volumes. While those restrictions are meant to last for the duration of the pandemic, regulatory scrutiny will likely continue even after restaurants resume normal operations.
“Delivery companies’ margins are also small, because they spend so much money on technology and marketing,” Miller said.
And some consumers have even filed lawsuits against DoorDash and its rivals for their commission fees. A lawsuit filed by New Yorkers in April alleges that the delivery companies violated antitrust laws by requiring restaurants to charge delivery and dine-in customers the same price, even though restaurants have to pay a percentage of revenue on delivery orders.
Fierce competition spurring consolidation
The fierce competition among food-delivery services has spurred consolidation within the industry. Netherlands-based Just Eat Takeaway.com was formed earlier this year through an $11.1 billion merger between the U.K.-based Just Eat and Takeaway, a Dutch company.
Now Just Eat Takeaway and Grubhub have announced that the two companies plan to merge, a deal that could topple DoorDash’s dominance. The all-stock deal with the European company, which is expected to close in the first quarter of 2021, will likely sidestep any scrutiny from regulators and could give Grubhub the ammunition to regain its status as the market leader.
“Grubhub being acquired by a larger competitor will only embolden the market share battle just at the same time that the regulatory environment around delivery fees across cities is becoming a larger headwind,” Wedbush analysts Dan Ives and Ygal Arounian wrote in a note to clients.
Uber had previously courted Grubhub on and off for more than year, but talks fell through amid concerns over antitrust scrutiny. The deal would have brought two of the largest food-delivery companies in the U.S. together, pushing DoorDash back to second place for market share.
Staying supreme post-Covid
Experts say it’s too early to tell if consumer behaviors formed during the pandemic will last after restaurants fully reopen.
For now, states across the country are limiting restaurants’ dine-in capacity, meaning that some will still have to rely on pick-up and delivery for the bulk of sales. About 68% of U.S. restaurants are allowed to reopen in some capacity, according to the NPD Group.
According to Miller, as some consumers look to circumnavigate some locales’ restrictions on large parties dining at restaurants, dinner parties are coming back in fashion — this time with restaurant meals ordered from a third-party delivery platform.
And while DoorDash has 340,000 restaurants on its marketplace, as much as 30% of independent restaurants are not expected to reopen their doors.
“One of the strengths that they push is diversity of restaurants,” Miller said. “If restaurants close and their portfolio shrinks, that hurts their business model because they don’t have that diversity of restaurants for consumers to choose from.”
The pandemic has also pushed large restaurant chains that were previously signed to exclusive delivery contracts to work with other delivery providers as a way of driving sales growth.
“If I’m a consumer who wouldn’t go onto Grubhub, and Grubhub is the only way I can get McDonald’s, for example, I would just go to the next fast-food burger place because I wouldn’t want to download a whole new platform,” Challingsworth said.
The U.S. economy has also entered a recession, and stay-at-home orders and lower consumer spending has left millions of Americans out of work. Consumers typically spend less during economic crises and may be less willing to pay the premium just for convenience.
“I think it will be a tale of two cities,” Miller said. “Recessions do not impact everyone equally.”