‘Creating an Amazon flywheel’: DoorDash’s S-1 annotated

DoorDash filed its S-1 on Friday, and we finally get a look under the hood of the delivery platform.

For years, the company has been duking it out with others like Grubhub and Uber Eats. Over the last year, however, its marketshare has grown significantly. The newly-released financials show the company is still losing a lot of money. Its growth has relied on deep marketing investments and merchant partners enmeshed in a precarious and low-margin industry.

While the company focused a great deal on its growth and scale, there were hints as to how it would diversify away from restaurants. “The economics of this industry are not great,” said eMarketer principal analyst Andrew Lipsman. “It comes down to, when you have scale, what other high-margin revenue streams you can lay on top of that.”

Here’s a look into DoorDash’s business fundamentals, as laid out in the filing.

The numbers
DoorDash is certainly hemorrhaging money. Its net loss in 2019 was $667 million from $885 million in revenue. That seems to have gone down this year, with net loss between January 2020 and September 2020 being $149 million on $1.9 billion of revenue (for comparison, losses hit $534 million on $587 million of revenue the same period the year before). The company touts more than 390,000 merchants currently and that its marketplace experienced 59% year-over-year growth. (It should be said that DoorDash admitted that some of these merchants were “non-partners,” meaning they never signed up for the service, but the company still offered delivery meals from their restaurants.)

It’s clear that 2020 was a big year for Doordash, as exhibited by the huge revenue growth and decreasing losses. But that may be coronavirus crisis-specific. “The context around the timing [of the S-1] is very fortuitous,” said Lipsman. “Because of the pandemic there was a demand tailwind that really helped accelerate their growth.”

Indeed, the financial filing states that DoorDash’s U.S. marketshare rose to 50% of the overall food delivery category in October 2020, with Uber Eats coming in second at 26% and Grubhub getting 16%. In January 2018, DoorDash had only 17%, with Grubhub leading the pack with 39% and Uber Eats getting 27%.

But much of this growth is built upon its marketing budget. The company spent $195 million in 2018 — $60 million of which went to promotions — and $776 million in 2019 — $182 million of which was considered promotions. The promotional cost, specifically, is how DoorDash acquires customers — by getting people to use its service over others because of lower prices. The company did say 85% of its gross order value in the third quarter came from existing customers, compared to 77% the same period the year before.

“Even if we successfully increase revenue as a result of our paid marketing efforts, it may not offset the additional marketing expenses we incur,” the company wrote in its section outlining business risks.

The business model
But it’s not enough to simply deliver food from restaurants. It’s a known low-margin industry, and the restaurant industry is in the midst of a coronavirus-induced nose-dive. DoorDash, in its mission statement, described its platform as something that “enables local brick-and-mortar businesses to thrive in today’s convenience economy by addressing consumers’ expectations of ease and immediacy.” In short, the real play isn’t just delivery, but efficiency services for merchants.

In that sense, the company is trying to describe itself as an Amazon-like platform. Much of the financial document outlines how it’s building out its logistics capabilities, while growing offerings for merchants as well as a consumer membership option. “They’re creating a flywheel effect,” said Lipsman, “it’s a direct parallel to Amazon [with its] delivery, FBA and Prime.”

But that’s a longterm prospect. For one, while DoorDash is building out media offerings, like a merchant marketing program, these revenue streams have yet to really work. “As part of our Marketplace, we also offer partner merchants certain business enablement services, the revenue from which is not material,” the company reported.

Still, the possibility exists — so long as DoorDash increases its scope. “The upsides I’m thinking about are that DoorDash has said they are moving into grocery,” said Lipsman. Indeed, the company announced a pilot program with Walgreens last summer. But by expanding beyond restaurants — in an attempt to get more merchants with better margins — the competition only gets fiercer. And it adds players like Instacart and even Shopify into the calculation.

Keeping growth apace
The big question mark for DoorDash is whether it can continue to grow at its current rate. While e-commerce and delivery penetrations are certainly accelerating, there’s no telling what will happen post-pandemic. “The circumstances that have accelerated the growth of our business stemming from the effects of the COVID-19 pandemic may not continue in the future, and we expect the growth rates in revenue, Total Orders and Marketplace GOV to decline in future periods,” the company wrote.

Meanwhile, the big issue is lowering DoorDash’s margins — and that may require historical feats of strength. For example, the company nodded to the fact that robotics and autonomous devices may be the only hope for cheap delivery. “If we or our partners fail to develop and successfully commercialize autonomous or drone delivery technologies or fail to develop such technologies before our competitors,” the S-1 stated, “our business, financial condition, and results of operations could be adversely affected.”

There are legal issues to take into account too.

While platforms like DoorDash scored a big victory with California’s Proposition 22, which made gig workers exempt from certain labor protections, other cases loom. “Our pay model for Dashers, particularly with respect to tips for Dashers, has previously led, and may continue to lead, to negative publicity, lawsuits and government inquiries,” DoorDash said.

If the status of delivery workers changed, it would hurt DoorDash’s business, the company said. “A reclassification of Dashers or delivery service providers using a local logistics platform as employees could require us to revise our pricing methodologies and pay model to account for such a change to Dasher classification, and to make other substantive internal adjustments to account for any transition of a Dasher to an employment position, which would have an adverse impact on our business, financial condition, and results of operations.”

The big questions hidden in the text are whether or not the company can make a feasible business model and grow to the size it needs to make the business model work. It has big plans to operate an Amazon-like structure, but it’s a long road to build such a beast.

For DoorDash, it’s about having many engines running in concert. “The unit economics are not great, but there are opportunities out there if it reaches a level of scale.” said Lipsman. “The big question mark is how it gets there.”