Sector

Online GroceryTechnologyConsumer

Background

Matt Newberg is the founder of hngry.tv. We cover the unit economics of a DoorDash order, the challenges of running a three-sided marketplace, and how it is attempting to integrate vertically.

Cover

Date

December 14, 2022

Episode Number

88

DoorDash Business Breakdown

Background / Overview

DoorDash, founded in 2013 by four Stanford students, emerged from a class project aimed at solving real-world problems through customer discovery. Initially launched as paloaltodelivery.com, the company began with a crude website and Google Voice number, fulfilling orders manually in Palo Alto. The business has since grown into a leading three-sided marketplace connecting customers, restaurants, and Dashers (drivers) across 27 countries, following its acquisition of Wolt in 2022. DoorDash operates primarily in food delivery but has expanded into convenience, grocery, and non-food categories like pet food. Its mission is to enable local commerce through technology, positioning itself as a logistics platform rather than a food company. The company serves millions of customers and partners with hundreds of thousands of restaurants, processing over $50 billion in gross merchandise value (GMV) annually.

Ownership / Fundraising / Recent Valuation

Publicly traded since its IPO in December 2020, DoorDash operates without private equity sponsors. Specific enterprise values (EVs) or transaction multiples are not detailed in the provided information, but the company’s scale and market position suggest a significant valuation, likely aligned with its $53 billion GMV run rate. For precise valuation details, investors would need to refer to market data or company filings.

Key Products / Services / Value Proposition

DoorDash’s core offering is its three-sided marketplace, facilitating food delivery from restaurants to customers via Dashers. Beyond this, the company has introduced several innovative services:

1. Marketplace Delivery: Connects customers with restaurants, charging restaurants 20-30% commissions per order. The value proposition is convenience for customers and incremental sales for restaurants.
2. DashMart: A first-party convenience store model where DoorDash owns inventory, capturing full gross profit. DashMart operates in major cities, ranking among top merchants, and addresses issues like out-of-stock items in third-party stores.
3. White-Label Logistics (DoorDash Drive): Allows merchants to fulfill orders through their own websites using DoorDash’s delivery network, enabling restaurants to retain customer data and avoid high marketplace commissions.
4. Advertising: Offers restaurants and CPG companies opportunities to promote products within the app, such as sponsored listings or product placements (e.g., Pepsi ads with burger orders).
5. Virtual Brands: Partners with existing restaurants to fulfill orders for brands like MrBeast Burger, leveraging excess kitchen capacity for incremental revenue.

Segments and Revenue Model

DoorDash operates two primary segments:

1. Restaurant Delivery: The core business, generating revenue through commissions (20-30%) on orders placed via the marketplace. This segment accounts for the majority of GMV and revenue.
2. Non-Restaurant Delivery: Includes convenience (DashMart), grocery, and non-food items. This segment is growing faster year-over-year but is less profitable, with estimated losses of ~10% per order compared to ~5% profit on restaurant orders.

The revenue model is a mix of:

• Commission-Based: Restaurants pay 20-30% per order, with an average take rate of ~13%.
• Delivery Fees: Charged to customers, though often subsidized by merchants in white-label models.
• Advertising Revenue: Emerging from restaurant promotions and CPG ads, with potential for significant growth.
• First-Party Sales: DashMart captures full gross profit by owning inventory.

Splits and Mix

• Channel Mix: Predominantly marketplace-driven, with growing white-label logistics (DoorDash Drive) and first-party DashMart sales. White-label allows restaurants to bypass commissions, reducing DoorDash’s take but increasing order density.
• Geo Mix: Operates in 27 countries, with the U.S. as the primary market ($1.6T TAM). Key international markets include Australia, Canada, Japan, and Germany ($1.1T TAM combined).
• Customer Mix: Broad consumer base, with average order value (AOV) of $31 for restaurant orders, significantly lower than competitors like Instacart (~$90-100).
• Product/Segment Mix: Restaurant delivery dominates, but non-restaurant (convenience, grocery) is growing faster. Non-restaurant orders lose ~10%, while restaurant orders yield ~5% contribution profit, blending to 3.1%.
• End-Market Mix: Primarily food delivery, expanding into convenience, grocery, pet food, and seasonal items (e.g., Christmas trees).
• Revenue vs. EBITDA Split: Restaurant delivery contributes positively to EBITDA, while non-restaurant drags margins due to higher losses. The blended contribution margin is 3.1%, excluding corporate overhead.

Historical Mix Shifts:

• Non-restaurant and international GMV grew faster than restaurant marketplace in 2022, reflecting a strategic push into new verticals.
• DashMart expansion (from 38 to ~100 locations) signals a shift toward first-party models to capture higher margins.

KPIs

• GMV Growth: Tripled during the pandemic (2020: $25B; 2021: $42B; 2022 est.: $53B), with 70% YoY growth in 2021 and 26% in 2022, indicating deceleration.
• Revenue Growth: ~$7.5B in LTM revenue, driven by GMV growth and take rate.
• Contribution Margin: 3.1% blended, with restaurant orders at ~5% and non-restaurant at ~-10%.
• AOV: $31 for restaurant orders, limiting profitability due to fixed delivery costs.
• Dasher Efficiency: 2-3 deliveries per hour, constrained by time and distance.
• Order Density: Improved through batching and white-label logistics, but capped by physical constraints.

Headline Financials

• Revenue Trajectory: Revenue scales with GMV, driven by a ~13% take rate. Growth decelerated from 70% (2021) to 26% (2022), reflecting market saturation and macro pressures.
• EBITDA: Contribution profit (3.1% of GMV) excludes corporate overhead, which has risen with scale, contrary to expected efficiencies. Recent 6% layoffs aim to curb overhead.
• FCF: Not explicitly stated, but low contribution margins and high fixed costs (e.g., international expansion, marketing) suggest limited FCF. Capex is minimal, as DoorDash is asset-light except for DashMart warehouses.

Long-Term Financials: Revenue and GMV growth are robust, but margin expansion is constrained by rising labor costs (e.g., Prop 22, $22/hour minimum wage in NYC by 2024) and low AOV. The shift to non-restaurant verticals may improve margins long-term if advertising scales.

Value Chain Position

DoorDash operates midstream in the local commerce value chain, connecting merchants (restaurants, retailers) with customers via logistics. Its primary activities include:

• Inbound Logistics: Minimal, as DoorDash relies on merchant inventory (except DashMart).
• Operations: Order aggregation, Dasher coordination, and delivery fulfillment.
• Outbound Logistics: Last-mile delivery by Dashers.
• Marketing/Sales: Customer acquisition through promotions and restaurant partnerships.
• Service: Customer support and Dasher management.

GTM Strategy: DoorDash employs a dual GTM approach:

1. Marketplace: Attracts customers with convenience and variety, charging restaurants commissions.
2. White-Label: Targets merchants seeking to retain customer data, offering delivery services for a fee.

Competitive Advantage: DoorDash’s value-add lies in its network density, enabling efficient batching and order fulfillment. Its data on customer preferences and merchant performance supports targeted advertising and virtual brands.

Customers and Suppliers

• Customers: Millions of consumers, primarily urban, seeking convenience. AOV is $31, reflecting price sensitivity and limiting profitability.
• Suppliers: Restaurants (hundreds of thousands), CPG companies (75,000 non-restaurant merchants), and Dashers (gig workers). Restaurants face thin margins (high teens for well-operated, lower for average), making commission costs a challenge. Dashers are a critical supply, with retention improved recently, reducing incentive costs.

Pricing

• Contract Structure: Restaurants pay 20-30% commissions per order, with flexibility in white-label models. Delivery fees vary, often passed to customers or subsidized by merchants.
• Pricing Drivers:
• Industry Fundamentals: Commissions are standard in food delivery, but high relative to restaurant margins.
• Customer Type: Price-sensitive consumers limit delivery fee increases.
• Mission-Criticality: Convenience drives demand, but elasticity is rising with cost pressures.
• Blended Price: Take rate (~13%) balances commissions, fees, and subsidies.

Bottoms-Up Drivers

Revenue Model & Drivers

DoorDash generates revenue through:

1. Commissions: 20-30% per order, averaging ~13% take rate. A $100 order yields $25 to DoorDash, while a $31 order yields ~$1 after Dasher costs.
2. Delivery Fees: Charged to customers, often covering Dasher wages ($20/hour minimum, 2-3 orders/hour).
3. Advertising: Nascent, targeting CPGs for product placements and restaurants for sponsored listings.
4. First-Party Sales: DashMart captures full gross profit, bypassing commissions.

Volume Drivers:

• End-Market Growth: $1.6T U.S. TAM for restaurant, convenience, and grocery, plus $1.1T in key international markets.
• Switching Costs: Low for customers, high for restaurants reliant on DoorDash’s network.
• Network Effects: Higher order density improves efficiency, attracting more merchants and customers.
• Growth Levers: New verticals (grocery, convenience), international expansion (Wolt), and advertising.

Mix Drivers:

• Product Mix: Restaurant delivery (mature, 5% margin) vs. non-restaurant (10% margin). Shift to non-restaurant aims for long-term ad revenue.
• Geo Mix: U.S.-centric, with international growth via Wolt.
• Customer Mix: Broad, price-sensitive consumer base.
• Channel Mix: Marketplace dominates, but white-label and DashMart are growing.

Cost Structure & Drivers

Variable Costs:

• Dasher Wages: Primary cost, ~$10 per order ($20/hour, 2 orders/hour). Prop 22 and NYC’s $22/hour minimum wage (2024) increase costs.
• Merchant Commissions: Paid to restaurants in white-label models, reducing DoorDash’s take.
• Inflation: Rising labor and food costs pressure margins.

Fixed Costs:

• Corporate Overhead: Marketing, R&D, and international expansion. Overhead rose with scale, prompting 6% layoffs.
• DashMart Warehouses: Leases and staffing for ~100 locations, a shift toward asset-heavy operations.
• Operating Leverage: Limited due to low AOV and regulatory costs. Batching and density improve efficiency but face physical limits.

Contribution Margin: 3.1% blended, with restaurant orders at ~5% and non-restaurant at ~-10%. Excludes overhead, which erodes profitability.

EBITDA Margin: Not stated, but low due to high fixed costs and thin contribution margins. Margin expansion hinges on advertising and DashMart scaling.

FCF Drivers

• Net Income: Likely negative due to low contribution margins and high overhead.
• Capex: Minimal for marketplace, higher for DashMart warehouses. No specific figures provided.
• NWC: Not detailed, but gig economy model suggests low inventory and receivables, with payables to Dashers as primary liability.
• Cash Conversion Cycle: Short, as DoorDash collects from customers and merchants quickly, paying Dashers on a regular cadence.

Capital Deployment

• M&A: Acquisition of Wolt (2022) expanded international presence. No multiples provided.
• Organic Growth: Investments in DashMart, advertising, and new verticals.
• Buybacks: Not mentioned, likely limited given profitability challenges.

Market, Competitive Landscape, Strategy

Market Size and Growth

• TAM: $1.6T in the U.S. (restaurant, convenience, grocery) plus $1.1T in Australia, Canada, Japan, and Germany. Non-food categories (e.g., pet food) expand TAM further.
• Growth: Driven by volume (online penetration) and price (inflation). Industry growth stacks include population growth, GDP, and digital adoption.
• 3 KDs: Convenience demand, urban density, and regulatory environment.

Market Structure

• Competitors: Uber Eats, Instacart, Gopuff, Gorillas, Getir. Market is consolidating into a 2-3 player oligopoly.
• MES: High due to network density requirements, favoring large players like DoorDash.
• Cycle: Post-pandemic normalization, with rising costs and regulatory pressures.

Competitive Positioning

DoorDash leads in restaurant delivery, with a strong U.S. presence and growing international footprint. It differentiates through:

• Network Density: Enables batching and cost efficiency.
• Data Advantage: Powers advertising and virtual brands.
• First-Party Shift: DashMart and white-label logistics reduce reliance on low-margin restaurant commissions.

Risks:

• Disintermediation: Restaurants may bypass marketplaces via direct channels.
• Regulation: Gig worker laws (e.g., Prop 22, NYC minimum wage) increase costs.

Market Share & Relative Growth

DoorDash’s GMV growth (70% in 2021, 26% in 2022) outpaces market growth, driven by pandemic tailwinds and Wolt. Specific market share is not provided, but its scale suggests leadership in U.S. food delivery.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: High MES due to network density. DoorDash’s scale enables batching, but overhead growth offsets efficiencies.
2. Network Effects: More orders attract more merchants and Dashers, improving efficiency and selection.
3. Branding: Moderate, as DoorDash is synonymous with delivery but competes on price/convenience.
4. Counter-Positioning: White-label logistics and DashMart differentiate from pure marketplace models.
5. Cornered Resource: Proprietary data on customer preferences and merchant performance.
6. Process Power: Batching algorithms and Dasher coordination optimize logistics.
7. Switching Costs: Low for customers, moderate for restaurants due to reliance on DoorDash’s network.

Porter’s Five Forces:

• New Entrants: High barriers due to scale, network effects, and capital requirements.
• Substitutes: Cooking at home or in-store pickup, with rising delivery costs increasing substitution risk.
• Supplier Power: Moderate; restaurants are fragmented, but Dashers have bargaining power via regulations.
• Buyer Power: High due to price-sensitive consumers and low switching costs.
• Rivalry: Intense, with Uber Eats and Instacart competing on price and verticals.

Strategic Logic

• Capex Bets: Defensive investments in DashMart and Wolt to stay competitive in new verticals and markets.
• Vertical Integration: DashMart and virtual brands aim to capture higher margins, but ghost kitchens and automation (e.g., Chowbotics) were scaled back due to complexity.
• Horizontal Expansion: Non-restaurant verticals (grocery, convenience) and advertising target new revenue streams.
• M&A: Wolt acquisition enhances international scale, but synergies are unclear.
• BCG Matrix: Restaurant delivery is a cash cow, funding question marks like DashMart and advertising. Ghost kitchens and automation are dogs, deprioritized.

Key Dynamics and Unique Aspects

DoorDash’s business model is unique due to its evolution from a restaurant delivery platform to a broader local commerce infrastructure. Key dynamics include:

1. Three-Sided Marketplace: Balancing customers, restaurants, and Dashers is complex. Restaurants face thin margins, making 20-30% commissions burdensome, while Dashers require competitive wages (e.g., $20/hour). Customers demand low fees, but rising costs (labor, food, regulation) pressure profitability. DoorDash’s ability to optimize this balance through batching and density is critical.
2. White-Label Logistics: DoorDash Drive allows restaurants to retain customer data and avoid commissions, a counter-positioning strategy that differentiates it from competitors. This reduces DoorDash’s take but increases order density, improving Dasher efficiency.
3. DashMart’s First-Party Model: By owning inventory, DoorDash captures full gross profit, addressing the low-margin restaurant model. DashMart’s rapid growth (~100 locations) and top-10 merchant status in major cities highlight its potential to shift mix toward higher-margin sales.
4. Advertising as a Profit Lever: The nascent CPG advertising business ($250B U.S. opportunity) could transform profitability, mirroring Instacart’s model of breakeven contribution profit with ad-driven margins. DoorDash’s data on purchase behavior positions it to capture this pool.
5. Regulatory Headwinds: Prop 22 and NYC’s $22/hour minimum wage (2024) increase Dasher costs, potentially adding $7 per order in fees. This threatens sustainability, as $31 AOV limits fee absorption. DoorDash’s shift to asset-heavy models (DashMart) hedges against gig economy regulations.
6. Virtual Brands and Excess Capacity: Leveraging restaurant kitchens for incremental orders (e.g., MrBeast Burger) is innovative but faces challenges as dining rooms reopen. The pivot to asset-light “host kitchens” for brands like Milk Bar reflects DoorDash’s adaptability.
7. Execution Excellence: DoorDash’s history of rapid experimentation (DashMart, Wolt, virtual brands) and willingness to kill unprofitable initiatives (ghost kitchens, Chowbotics) demonstrate operational agility, a key competitive advantage.

What Jumps Out:

• Low AOV ($31) constrains profitability, as fixed delivery costs (~$10/order) erode margins. Higher AOV orders ($100) are far more profitable, highlighting the importance of mix shift.
• DashMart’s Potential: Its first-party model and rapid expansion signal a strategic pivot to capture higher margins, addressing the restaurant segment’s structural challenges.
• Regulatory Risk: Rising labor costs and gig worker laws are existential threats, forcing DoorDash upstream into asset-heavy models outside its core competency.
• Advertising Opportunity: The $250B CPG ad market is a game-changer, but execution is nascent and unproven.
• Customer Acquisition Tax: Restaurants paying 20-30% commissions on existing customers is unsustainable, pushing DoorDash to innovate with white-label and virtual brands.

Conclusion

DoorDash’s business model is a fascinating case of scaling a low-margin, high-volume marketplace while navigating structural and regulatory challenges. Its core restaurant delivery segment is mature but constrained by thin margins (3.1% blended) and rising costs. Strategic pivots to DashMart, white-label logistics, and advertising aim to improve profitability, but execution risks remain. The company’s data advantage, network density, and experimentation culture position it to lead in local commerce, but sustainable profitability hinges on scaling high-margin verticals and navigating regulatory headwinds. Investors should monitor AOV trends, ad revenue growth, and regulatory developments to assess DoorDash’s long-term viability.

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