The coronavirus pandemic led to a U.S. economic upheaval and crippled businesses ranging from global transportation to cruise lines to restaurants. But food delivery companies are booming, and DoorDash is striving to be a rare winner in its niche.
Since Covid-19 lockout orders were issued in the United States in mid-March, and consumers switched to lunch delivery orders, DoorDash sales grew, according to data from Edison Trends, which studies anonymous and aggregated electronic receipts from millions of consumers in the United States.
Food delivery service, ranked 12th on the CNBC Disruptor 50, took 45% of third-party orders, followed by UberEats rivals – 28%, Grubhub – 17% and Postmates – 7%.
On Thursday, DoorDash confirmed that it raised $ 400 million in equity by selling shares to T. Rowe Price and Fidelity mutual funds along with other investors. This new round of funding was led by Durable Capital Partners and Fidelity. This raises the company’s valuation to nearly $ 16 billion, compared with a value of $ 13 billion. Bloomberg reported in November after the company raised $ 700 million through the G-Series financing cycle.
This financing deal could push the food delivery giant’s move forward to become public. In February, DoorDash privately introduced the draft S-1 in February, the first step to an initial public offering to join Uber Eats and Grubhub in open markets. (DoorDash declined to comment, citing SEC rules governing silence.)
Race to the top of the food chain
The race to become the main delivery service provider, and then to maintain this position, affected the company supported by SoftBank, which reportedly lost $ 450 million last year. To increase market share, DoorDash bought Caviar from Square in 2019 for $ 410 million.
But then a pandemic began, accelerating the transition of consumers to third-party delivery applications. The NPD group found that delivery orders rose 67% in March, although overall restaurant traffic fell 22%.
“For some restaurants, this was their only business tool,” said Douglas Miller, a professor at the Cornell University School of Hotel Administration. “The only other option was to physically close.”
The company has implemented a series of measures to help its drivers and restaurants fighting the pandemic. For example, drivers who qualify for delivery to the United States, Australia, Canada, and Puerto Rico who are quarantined or diagnosed with Covid-19 receive financial assistance for up to two weeks. The company refused or reduced fees for local restaurants and added more than 100,000 independent eateries to its subscription program to generate sales for free.
Monica Challingsworth, head of global relations at Synergy Restaurant Consultants, said DoorDash’s technical savvy helped keep the company up as the restaurants responded to the new conditions in a blocking environment.
“They sent automated robotic calls to operators to see if they were open, what were their opening hours,” Challingsworth said. “Because of this, I think that they really quickly found a way to accomplish all these things and appear before all these brands in a truly strategic way.”
DoorDash also recently introduced Storefront to help restaurants set up their own websites for orders and delivery. The service also provides restaurants with access to customer data that third-party delivery aggregators do not share when placing orders through their applications. DoorDash’s chief operating officer told Reuters that restaurants would not have to pay most of Storefront fees until the end of the year.
The company is also moving to the delivery of more than just food. DoorDash announced on Monday that CVS Health will be the first pharmacy retailer to join its platform. Drivers will now deliver over-the-counter household items such as shampoo or over-the-counter cold medicines.
Problems in a pandemic
But DoorDash, like others in the food delivery industry, also received increased attention during the pandemic due to fees that it charges restaurants that take a piece of the industry’s already subtle profit. Restaurant owners can pay up to 30% commission on each delivery order, and some chefs, such as San Francisco chef Christian Siscl, called delivery apps just because of a delay or a reduction in fees.
In response, cities across the country, including New York, San Francisco and Jersey City, have set limits on how many delivery apps can charge for their restaurant services. DoorDash said that limiting duties would hurt the quality of customer service, reduce driver revenue and reduce restaurant sales. Although these restrictions will be in effect throughout the pandemic, regulatory control is likely to continue even after restaurants resume normal operation.
“The margins of shipping companies are also low because they spend so much money on technology and marketing,” Miller said.
And some consumers even sued DoorDash and its competitors for their commissions. A lawsuit filed by New Yorkers in April alleges that supplier companies violated antitrust laws by requiring restaurants to charge shipping fees and serve customers at the same price, even if restaurants must pay a percentage of revenue for shipping orders.
Tough competition drives consolidation
Fierce competition between product delivery services has stimulated industry consolidation. Just Eat Takeaway.com, based in the Netherlands, was created earlier this year as a result of a $ 11.1 billion merger between Just Eat, an American company, and Takeaway, a Dutch company.
Now Just Eat Takeaway and Grubhub have announced that the two companies plan to merge, a deal that could overthrow the dominance of DoorDash. The deal with European companies, which is expected to close in the first quarter of 2021, is likely to go without any regulatory control and could give Grubhub ammunition to regain market leadership.
“Grubhub, acquired by a larger competitor, will only intensify the struggle for market share, while the regulatory environment around shipping fees for cities is becoming an increasingly serious obstacle,” Dan Ives and Igal Arunyan, analysts at Wedbush, write in a note to customers.
Uber had been courting Grubhub for over a year, but negotiations failed due to concerns over antitrust controls. This transaction would bring together the two largest food delivery companies in the United States, which would put DoorDash in second place in terms of market share.
Remain supreme post-covid
Experts say it is too early to talk about whether consumer behavior will continue during a pandemic after the restaurants are fully open.
At the moment, states across the country are restricting dining options, meaning some will still have to rely on receipt and delivery for most sales. According to the NPD Group, about 68% of US restaurants are allowed to open to one degree or another.
According to Miller, as some consumers seek to circumvent some countries’ restrictions on large parties dining at restaurants, parties are back in fashion – this time with restaurant dishes ordered from a third-party delivery platform.
Although DoorDash has 340,000 restaurants in its market, it is not expected that 30% of independent restaurants will open their doors.
“One of the strengths they are promoting is the variety of restaurants,” Miller said. “If restaurants close and their portfolio shrinks, it’s damaging their business model because they don’t have that many restaurants to choose from.”
The pandemic also pushed large restaurant chains that had previously been signed to exclusive supply contracts to work with other delivery providers as a way to drive sales growth.
“If I were a consumer who wouldn’t go to Grubhub, and Grubhub is the only way to get McDonald’s, for example, I would just go to the next fast food restaurant because I would not want to download a completely new platform,” said Challingsworth.
The US economy has also entered a recession, and home-based orders and lower consumer spending have left millions of Americans unemployed. Consumers tend to spend less during economic crises and may be less willing to pay a premium only for convenience.
“I think it will be a story about two cities,” Miller said. “Recessions do not affect everyone equally.”