DoorDash & The Myth of Profitable Food Delivery – Transcript

00:00Food delivery is a simple business. While the market today is dominated by DoorDash, Uber Eats, Delivery Hero, and a few others, back in 2014, food delivery and the gig economy were just emerging in Silicon Valley. Back then, the barriers to entry were so low that anyone could open up their own food delivery business in a matter of weeks with just a few thousand dollars and a website. Food delivery seemed such a simple and obvious million dollar business that as a starry-eyed 20 year old at the time,

00:27I left college to start a food delivery company, joining many others in the gold rush. The market in 2014 was wide open for the taking. DoorDash had not yet become a household name, UberEats was just spinning up, and GrubHub was primarily used for looking up restaurant menus online.

00:44Food delivery is a marketplace business. On the supply-side are the restaurants - what dishes and cuisines do you offer, are they fast food, chains, mom-and-pops, bakeries, dessert shops, cafes, or fine dining? The more diverse, the greater, the more reputable, and the more exclusive your restaurants are, the stronger the supply of your marketplace. Back in 2014, not many restaurant owners were thrilled with the idea of entrusting their food delivery to a pair of 20 year olds. We

01:12quickly realized that to deliver for big players like McDonald’s or Cheesecake Factory, you need the capital and connections - neither of which we had. But most of all, you need order volume. Consumers are the demand-side of your marketplace - the number, amount, and frequency in which they order determine your overall order volume. There are 3 ways to win consumers. One, you can compete on speed. In order to be the fastest to deliver food to customers, you need

01:38lots of drivers and are making a bet that you can assign pickups, route deliveries, and pay out higher earnings to drivers more efficiently than the competition. You’re also betting that consumers are willing to pay the highest premium for guaranteed convenience. Two, you can compete on price. By undercutting the competition as the cheapest delivery in town, you’re betting that the greater order volume over time will make up for the loss that you’re swallowing on

02:04every order. Three, you can compete on supply. If you can become the exclusive delivery partner for restaurants like McDonald’s, then customers will have no other choice but to order from your marketplace - no matter how expensive or slow your actual delivery service might be. Today’s giants like DoorDash, UberEats, and Delivery Hero all have the economical, technical, and operational means to balance between speed, price, and supply. But the barriers for entry

02:31continue to remain low, with new delivery startups popping up every year. These startups simply can’t afford to compete on speed and price. No investor or board member would approve the significant operational risk and cash burn involved with such an investment. As a result, these startups tend to specialize on supply, trying to monopolize delivery for a specific restaurant type like Chinese or fine dining, but these niches are just too narrow to sustain over time.

03:00If you don’t have enough customers, you won’t have sufficient order volume. If you don’t have sufficient order volume, then restaurants won’t partner with you for delivery. If you don’t have restaurants on your marketplace, then you won’t have customers. This balancing act between supply and demand is the fundamental chicken-or-the-egg dilemma that all food delivery businesses grapple with. For each additional restaurant you bring onto your marketplace, you improve supply and demand with greater diversity and consumer choice.

03:26But there are downsides - the more restaurants you bring on, the greater variance in orders, and the more diluted the average restaurant’s sales and returns become. There are diminishing returns with scale - when consumers are given too many options, browsing and ordering can turn overwhelming and exhausting. When your marketplace scales to hundreds of restaurants, discovery becomes a

03:51challenge as it’s impossible for the restaurants buried at the bottom to stand out. And if those restaurant owners feel like their returns aren’t good enough, they may leave your marketplace and sign on with a competitor who can offer them better order volume, reach, and terms.

04:08Here’s how we approached this problem back in 2014 as two naive 20 year olds. VC-backed players like DoorDash and Uber were opening up their war chests to recruit as many drivers as possible through relentless job postings and sign-on bonuses that we could never match. For our startup, competing on speed was out of the question. Without restaurants, we couldn’t pull in customers. Since we didn’t have customers, we couldn’t pull in reputable restaurants.

04:30For the few restaurants that were interested, it was meaningless to work with them as they were already available on Postmates, DoorDash, and UberEats. Our strategy was to specialize in supply by exclusively targeting food trucks, street vendors, food stands - mobile food businesses who generally had more unique foods and been neglected by delivery apps for not having dedicated brick-and-mortar locations.Since mobile food vendors are transient businesses

04:59with weak online presence beyond Instagram, we focused on centralizing the experience. The goal was to provide consumers with one curated menu of multiple cuisines made up of the best dishes from credible vendors who had been vetted by us as the delivery company. This meant customers could combine dishes from many vendors into one order - they weren’t locked into ordering delivery from one vendor at a time. Before any vendor could sell on our marketplace, we would painstakingly

05:26work with the owners to figure out what specific dishes were worth selling. To ensure quality and prevent menu bloat, no vendor was allowed to sell every item on their menu. For these mobile food businesses, e-commerce, enabling customers to place orders online, paying with a credit card, offering delivery were all new ways to expand their business that they never had before. They were excited to work with us as a delivery company who would take professional photos of their food,

05:53handle e-commerce, credit card processing, online marketing, and delivery all for free. In exchange, we would take 30% and they would keep 70% of net sales. Since many of these mobile food businesses had no reputation and needed to build up credibility, we leveraged price to pull in customers by offering free delivery and satisfaction guarantees on all orders.

06:18This heavy-handed, strict curation approach that we took was extremely labor-intensive. It would take us 10-20 hours to onboard a single vendor onto our marketplace but we stubbornly believed that our relentless focus on quality would pay off long-term. But after operating for a year, we ultimately concluded that there was no way to make money from delivery.

06:37In 7 months, we had delivered over 3,400 orders and grossed $35,000 off our initial bootstrapped budget of $2,500. For two 20 year olds, this felt great but in reality, the margins were never sufficient enough for us to pay ourselves or hire a single person. We were doing everything ourselves, from taking the food photos to handing out flyers and giving out samples at events to packing orders at 4AM and delivering to customers in our own cars. During the day,

07:04we would do marketing to build up the demand and into the night, we would push website updates and process orders. On the supply-side, retention was difficult with inconsistent order volume. Vendors would unleash their frustrations on us whenever they weren’t making enough sales and threaten to quit. And some actually would, making all the hours spent curating their food and taking photos a total waste. The other issue was that there were only so many mobile food businesses. At one point,

07:32we had onboarded every possible supplier to our marketplace within 75 miles of every direction. And whenever our menu became stale, consumers would stop ordering. Caught in between supply and demand of our own marketplace to the point where our own friendship had completely deteriorated, it was a no-brainer for us to shut down our startup.

07:53With food delivery, there’s cash flow but no profit. It’s easy to get started but impossible to make money. To sustain, you need a ridiculous burn rate to pull in consumers and generate order volume to keep suppliers and drivers happy. Fundraising from investors would just be robbing Peter to pay Paul - having millions of dollars in a bank doesn’t change the reality that you only make cents on every order. Six years after our startup, it’s been

08:20interesting to see the continued hype of food delivery companies around the world even though everyone knows that the unit economics just don’t work. When you have to rely on tips to pay a livable wage to drivers, it’s obvious that there is something fundamentally broken with the business model. If none of them could make money during this once-in-a-lifetime global pandemic, how could any of them turn a profit in this environment where gas is going up, inflation is rising, and a recession is materializing? In this episode, we’re going to look at the

08:47four biggest food delivery companies around the world from DoorDash, UberEats, Delivery Hero, and Just Eat. What are the strategies that these companies believe will lead them to profitability? Are these just fantasies spun for investors and which companies have made the most progress? The current industry leader is DoorDash who holds the highest valuation and largest share of the food delivery market in the United States. The company’s vision is that if they can build their logistics to deliver ice cream before it melts or pizza before it gets cold

09:17or groceries within an hour, DoorDash can become the on-demand delivery provider for everything else like clothes and medicine. This same ambition is rooted in the design of DashPass, which is DoorDash’s membership program where consumers can pay a flat monthly fee at $9.99 for unlimited free deliveries and lower service fees from eligible restaurants.

09:36Over time, the company’s leadership hopes that they can turn DashPass into a quote wallet for the physical world where consumers can get delivery and special perks from all the local businesses in their community whether they’re shopping in-store or at home.

09:52DoorDash’s rise to the top has been fueled by its strategy of winning suburban markets and small metropolitan areas. While food delivery is most visible in large dense cities like Manhattan, Chicago, and Los Angeles, DoorDash focused on the smaller markets that had been traditionally underserved. Suburban and small metropolitan consumers have much fewer options when it comes to delivery, which meant the DoorDash could win meaningful customers at manageable acquisition costs. As annoying as it is for people in NYC to suffer on the packed subway during rush hour,

10:22the reality is the distance that big city dwellers travel is still significantly shorter than the many miles that suburban residents have to drive in their own cars to buy something. DoorDash’s fundamental belief is that suburban and small metro residents derive greater benefit from on-demand deliveries than those living in big cities. In addition, suburban consumers tend to be families and not individuals, which results in larger order sizes and higher spend. The lighter traffic and easier parking in suburbs and small metro areas also benefits the drivers, who can do pickup and delivery more

10:47efficiently than in cities where they have to double park in bike lanes and fire lanes. When it comes to driver earnings, DoorDash makes no attempt to hide that the tip is the most significant element to making its economics work. The current pay model for DoorDash drivers is made up of three elements. The first is the base pay for each order, which is calculated based on estimated time, distance, and desirability of the order. The second is the tip from consumers, which drivers keep 100% of. There third is promotions where if drivers meet specified

11:17conditions and goals, then they can get a bonus payout for that order. But these promotions are generally too non-transparent and inconsistent to be considered regular earnings. Not every driver is offered promotions and the conditions to achieve such bonuses can vary for each driver, depending on when they started delivering for DoorDash, what sign-up codes they may have used, and what region they are in.If we look at the pay model for drivers, the base pay is really the only stable element that DoorDash pays out to its drivers. The tip

11:47is entirely funded by the consumer. Let’s look at DoorDash’s own breakdown of an example delivery, how much is given to the restaurant, how much is kept by DoorDash as the middleman, and how much is given to the driver. For a $33 order of which the food costs $22, service fees make up $6, tax is $2, the customer adds a $3 tip. The driver earns $8, the restaurant gets $20, and DoorDash pockets

12:13$5. In Doordash’s own example, the customer tip makes up almost 50% of the driver’s earnings. Tipping is so central to DoorDash’s economics that the company itself calls out the risk that if customers consistently provide low tips or simply don’t tip at all, then there would be material harm in DoorDash’s ability to provide delivery and retain drivers.