Along with Airbnb, DoorDash is planning one of the most anticipated IPOs of 2020. Its anticipated valuation is also similar to Airbnb’s at around US$32 billion. While we have a positive outlook for Airbnb, our evaluation of DoorDash is more negative.
In short, DoorDash’s tremendous growth and market share gains, particularly during the COVID-19 pandemic, don’t seem defensible in the long run.
A closer look at the facts and similar industries around the globe actually just makes Uber look more attractive as an investment since there’s nothing structurally that prevents Uber from making DoorDash into a Lyft of food delivery industry.
DoorDash’s growth is purely due to suburban focus
The most prominent bull thesis on DoorDash is that it is, and will continue to be the market leader in a growing market. For instance, its market share in meal delivery has reached 51 per cent as of October 2020, a very impressive feat for a company that has been competing against giants such as GrubHub and Uber Eats.
DoorDash’s secret sauce has mostly been its focus on suburban areas. While GrubHub, Uber Eats and Postmates have been competing fiercely for market share in urban markets, DoorDash simply casted a wider net on areas that its competitors weren’t paying much attention to.
And the COVID-19 pandemic boosted its market share even further as consumers and their wallets moved away from cities to suburbs. Competitors such as GrubHub and Uber Eats that had a much bigger exposure to markets such as New York City (NYC) suffered due to this transition.
Certainly, DoorDash and its management team deserve all the credit for making such a strategic decision and successfully executing on their plan. Even in NYC, where GrubHub has enjoyed a massive market share, we actually see more restaurants on DoorDash in suburban areas outside of Manhattan such as Queens and Brooklyn. However, their success doesn’t seem defensible for a few reasons.
First, aside from their geographic focus, their product isn’t inherently different from those of competitors. They all offer deliveries from restaurants, and charge similar levels of fees. And more importantly, the global travel industry, food delivery industry in China and global ride hailing industry have all proven that merchants who are already using an online marketplace want to be on others in order to maximise their business.
Just like hotels and airlines, most restaurants and drivers that are already on DoorDash are highly motivated to get on Uber Eats and Grubhub to get more business as long as these platforms provide similar treatments, especially during a pandemic driven recession.
Uber Eats had thus far chosen not to focus on suburbs because it was prioritising bigger markets while controlling their cost. Now that DoorDash has proven how attractive suburban markets have become due to COVID-19, there’s nothing structural that prevents Uber Eats from aggressively expanding in DoorDash’s home turf.
Uber’s structural advantage
And Uber has every motivation to grow its delivery business aggressively because its main ride-sharing business has been suffering due to the pandemic. This is where Uber’s structural advantage comes into play. First, unlike its rivals, Uber can make money from the same user and rider in two different ways, rides and food delivery.
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This means that Uber could potentially acquire customers more efficiently, shown by its lower S&M marketing expense historically (prior to COVID-19). This also means that Uber could potentially afford to spend more than its competitors to acquire customers (i.e. marketing and promotions) to or to simply charge them slightly less. Secondly, Uber’s war chest of US$8 billion of cash sitting in its bank account (compared to roughly US$4.5 billion DoorDash is about to have after its IPO) means it can indeed do exactly this.
Uber already has drivers and riders in many suburban markets. All it has to do is to call restaurants that are already on DoorDash in those areas, and spend some money on marketing and promotions to get consumers to use Uber Eats in those areas.
When DoorDash was private, it could afford to spend aggressively because it didn’t have investors who care about profit. Now that it’s publicly listed, it will be playing on the same field as Uber under public scrutiny. With a smaller war chest, and a structural disadvantage of just playing in food delivery (as opposed to delivery and rides), DoorDash starts to look a lot like Lyft. On the flip side, Uber starts to look more attractive because its potential to grow its food delivery business seems more sure than ever.
A tale of two IPOs
Airbnb and DoorDash may seem similar at first glance. Both are hot consumer technology companies valued at around US$30 billion, competing against larger companies valued at around US$85 billion.
However, there’s a big difference between the two companies. Airbnb has a distinctive competitive advantage in being the trusted network of travellers and single-home owners who aren’t motivated solely by money. The travel leader Booking.com has been trying to compete against it for several years with limited success.
| Company | Valuation |
|---|---|
| ABNB | $35bn |
| BKNG | $86bn |
| DASH | $32bn |
| UBER | $90bn |
This doesn’t bode well for pure online delivery companies in Asia such as Foodpanda and Deliveroo that have to compete with rides + delivery companies such as Grab, even more so if the rumoured merger between Grab and Gojek actually occurs.
Structurally, pure delivery companies with smaller budgets are disadvantaged against bundlers who not only can monetise their users and riders more efficiently, but also tend to have a bigger war chest to spend on marketing. And given that Asian markets tend to be a lot more urban than suburban, the geographic distinction and advantage DoorDash has been enjoying will be even less available in Asia as well.
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