DoorDash: three-pronged strategy reflects weakening market power
DoorDash is cutting fees for restaurants. Its motives are not entirely altruistic.
The San Francisco-based food-delivery app said restaurants could opt for three separate delivery plans providing different levels of support. Commissions will vary from 15 per cent, 25 per cent or 30 per cent per order. Previously, many smaller restaurants paid up to 30 per cent of every order.
The move may seem counterintuitive. The pandemic has been a boon for the food-delivery industry. DoorDash, led by Tony Xu, saw lockdown-fuelled revenue more than triple to $2.9bn last year. Customers were happy to pay a premium to avoid going out. Restaurants, forced to adopt a takeaway-only model, had no choice but to absorb hefty delivery fees.
The balance of power is shifting. The pandemic is waning in the US as people are vaccinated. With restaurants reopening across the US, expect a big slowdown in delivery volume growth this year.
To avoid going from feast to famine, DoorDash, which now controls over half of the US food-delivery market, needs to keep restaurants happy as well as customers.
Legislators are another key constituency. Dozens of cities, including New York and Seattle, have imposed temporary caps on the commissions that delivery companies can charge restaurants. There have been calls in some places to make them permanent.
Reworking its price structure now could save DoorDash from stiffer regulations down the road. Price controls in 73 of its markets meted out a $36m hit in the fourth quarter. The impact is expected to almost double in the first quarter.
DoorDash shares have shed a quarter of their value since February. However, at $162 a share, the stock remains well above its flotation price of $102, implying an enterprise value of 12 times 2021 sales. That is generous considering the weak economics of food delivery.
Despite the surge in revenue, DoorDash still racked up a net loss of $461m in 2020. If the company cannot serve up a profit during a pandemic-fuelled boom, investors should wonder whether it can deliver a decent payback at any level of commission.
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