Demystifying Door Dash: Empowering Local Economies

Last Friday, Door Dash the American food logistics company filed the form S-1 for their intention to list the shares on the NYSE. Door Dash was started by Tony Xu, Evan Moore, Andy Fang, Stanley Tang in 2013 with a mission to empower local economies. From inception, the company has come a long way to become the no.1 category leader in the US markets with 18 million+ consumers, 390,000+ merchants, and 1million+ dashers (delivery agents). Over time Door Dash aims to build three pillars to achieve its mission.

(a) An on-demand logistics platform to facilitate the local delivery of any item

(b) Merchant services to grow sales in the modern era

(c) A membership program for $9.99 monthly for unlimited deliveries

Business Model:

The business model of Door Dash works in a fashion that it unites three parties in the ecosystem- restaurants, users, dashers.

Restaurant: It is an important part of the Door Dash model and this is how the company gives the local restaurants an edge to conduct their business.

(a) Providing the restaurants with delivery support: Earlier, restaurants were not able to deliver the food to their customers and even if they did, were not able to meet the high demand and as a result, the restaurants need to cancel the orders for the limited bandwidth to fulfill the orders.

(b) Businesses also get the advantage of better visibility. With Door Dash, these restaurants are available to new audiences, popularity and wide range, and deliver to the existing set of users more efficiently.

(c) It has also helped micro-entrepreneurs to start their business with minimal capital. Business owners who couldn’t afford to set up a sitting area could now start their business with the delivery-only-model/cloud or ghost kitchen where Door Dash helps these restaurants deliver food.

Users: Customers get a superior experience with better efficiency and better pricing. Users can better compare the prices and options with multiple restaurants. Door Dash provides the option to track the delivery after placing an order. Users also get the benefit to select from the best menu in different restaurants thus increasing the experience in any restaurant.

Dashers: It is an option for people who are looking for a part-time job and also a full-time job. Dashers get a flat payment for their deliveries on a weekly basis and usually earn more than $600 (US). Dashers also get tips from customers and thus serves as a big motivation to make delivery more efficient and faster.

How does Door Dash make money?

The company has been growing strongly since its inception with reported revenue of $ 1916 Mn for September 2020 (nine months ended). The company earns its revenue in the following manner:

(a) Commission on each order: Door Dash serves by delivering the orders from restaurants to the doorstep of the users. Thus, the company usually takes a commission of 20% for each order delivered.

(b) Restaurants advertising on Door Dash platform: Restaurants pay charges for advertisement and marketing on the Door Dash app. This service allows restaurants to appear on top of the list for a limited time, pop up in the advanced search for which the company charges commission.

(c) Delivery Fees: DoorDash has its own delivery fleet to manage logistics. The delivery rate depends upon the distance of travel and Door Dash tie-ups with the restaurants in consideration, usually, the Door Dash delivery fee ranges from $5 to $8 per order.

(d) Dash Pass: It is a subscription service that helps customers to save money on delivery and service fees. It is tailored for customers who repeatedly use the DoorDash app for food deliveries.

Economics of a Market Place order

Key Business Metrics

(a) Total Orders on the platform accounts for 263 Million as of 31 December 2019 and 543 million as of 30 September 2020 (9 months ended).

(b) The Marketplace GOV stands at $16,485 Mn for 30 September 2020 with a contribution margin of 23%.

(c) As on Oct 2020, Door Dash accounts for 50% of the market share (S-1 Filings) with revenue of $885 Million and a net loss of $667 Million as on 31 December 2019.

Local logistics platform benefits from three powerful virtuous cycles that makes Door Dash a clear winner

Local Network Effects:

The platform gives the classic advantage of local networks, to attract more merchants, local favorites, and national brands, creates more selection in their marketplace, engagement, and as a result, it leads to more sales for the merchants. The strong national merchant footprint enables the company to launch into new markets and quickly establish a mass of merchants and dashers, thus driving adoption among customers.

Economies of Scale:

As more consumers join the local logistics platform and their engagement increases, the entire platform benefits from higher order volume, which means more revenue for local businesses and more opportunities for Dashers to work and increase their earnings. As a result of which, Dashers get attracted to the local logistics platform, which allows for better, faster, and more efficient fulfillment of orders.

Increasing Brand Affinity:

With network effects and economies of scale, it will result in more merchants, dashers, and consumers that can better utilize the local logistics platform. As the company will grow, they will continue to invest in improving their offerings for merchants, selections, value for customers, and improved earnings for dashers. By improving the platform and bringing value to the three constituents of the platform, it will increase brand awareness and brand affinity. The increased brand affinity will ultimately lead to lower acquisition costs for all three constituents.

While they are the category leader, they are significantly underpenetrated in their addressable market. U.S. consumers on their platform in September 2020 represented less than six percent of the U.S. population as of September 30, 2020. The company believes that they are in the early phases of broad market adoption and a massive untapped opportunity exists ahead of them. It will be really interesting to see how the IPO will play out for them and their expansion into Indian markets if it there on their list.

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