DoorDash: Winning the restaurant food delivery war?
Amongst all the food delivery platforms benefitting from the COVID-19 induced growth spurt, DoorDash seems to be winning basis its strong platform strategy.
DoorDash is a restaurant food delivery platform founded in 2013 in Palo Alto, California. For the year 2020, it reported $2.9B in revenues[1] and is currently a market leader among other food delivery apps such as Uber Eats, GrubHub, Postmates etc, in terms of US market share.
In this blogpost, I would evaluate the key platform strategies of DoorDash that have contributed to its success and argue whether it seems to have a sustainable competitive edge over other food delivery platforms.
Why is DoorDash succeeding?
As per certain estimates, DoorDash currently has about 56% market share in the US food delivery segment.[2] Despite entering the market almost ten years after its major competitor, GrubHub and having to build scale from scratch, unlike Uber Eats, DoorDash overtook both in 2019 to occupy the leader’s position.
While COVID-19 pandemic has facilitated exponential growth for all food delivery platforms, DoorDash seems to have taken major share of that growth.
Taking inspiration from the course note and Harvard Business Review article by Feng Zhu and Marco Iansiti, Why Some Platforms Thrive and Others Don’t, I will evaluate DoorDash basis five fundamental properties of networks: strength of network effects, network clustering, risk of disintermediation, vulnerability to multi-homing and network bridging.
Strength of Network Effects: restaurant food delivery segment seems to be highly conducive for cross-side network effects. The more the number of customers on a platform, the more incentivized restaurants would be to be present on it and vice versa.
DoorDash’s early strategy entailed acquiring as many customers and restaurants on its platform as possible. For example, in late 2019, DoorDash partnered with Chase to give free Doordash Pass memberships to millions of its card holders. During COVID, the company waived or reduced commission fees for local restaurants, resulting in addition of over 100,000 independent eateries to its subscription program. DoorDash also aggressively deploys technology solutions and leverages customer data to provide value to its partner restaurants, hence prompting them to join the platform.
In December 2020, DoorDash launched its IPO to arm the platform with more capital to continue its network expansion strategy.
Network Clustering: DoorDash has been very strategic about building its footprint. While GrubHub’s early entry allowed it a foothold in north-eastern US, DoorDash has quickly expanded to over 50 cities (vs 17 of GrubHub). DoorDash has more than 50% share of sales in the two biggest Texas metro areas and almost 75% in Bay Area. As the food delivery market is more favorable to local cluster networks vs global clusters, this strategy has worked well for DoorDash.
Risk of Disintermediation: There is low but existent risk of disintermediation in food delivery sector. While direct ordering would allow both parties to bypass platform fees, low delivery costs (due to high economies of scale) are attractive to restaurants.
To retain restaurants on its platform, DoorDash has also lowered commissions and launched value added services such as Storefront to help restaurants create their own websites to take pick-up and delivery orders. The service also provides restaurants with customer data, which other third-party delivery aggregators do not typically share.
Vulnerability to Multi-homing: food delivery sector is highly susceptible to multi-homing as switching costs are low and high competition among delivery apps leads to high customer offers. In fact, all major platforms post return rates below the 30% (except Uber Eats driven by cross-selling with its ride-share platform). To minimize loss of customers to other platforms, DoorDash is aggressively building exclusive partnerships with popular food chains such as Little Ceaser’s Pizza, Wendy’s, Chick-fil-A and McDonald’s.
However, owing to nature of sector, multi-homing will continue to be a major challenge for DoorDash.
Network Bridging: realizing the opportunity for leveraging network effects in adjoining sectors (like in case of UberEats and Instacart), DoorDash recently announced partnership with CVS to enter grocery delivery. While, it is still in its nascent stage, the company’s future growth plans rely heavily on leveraging its current network to build leadership in other segments.
What does the future look like?
Despite the growth spurt, profitability remains a challenge for all major food delivery apps, including DoorDash. The margins are quite thin and while DoorDash turned a $23 million profit in Q2 2020, it returned to a loss in Q3.
The customers and restaurants equally seem to be getting frustrated with high platform costs, as indicated by the increasing trend in pickups and drive-through orders. DoorDash will have to make active efforts to drive up merchant profitability, to retain them on its platform (the biggest driver of customer uptake). It has recently forayed in the concept of ‘ghost-kitchens’ that are delivery-only restaurants with low operating costs.
It remains to be seen if DoorDash will be able to sustain its leadership position in this highly competitive market with competitors either burning cash to expand their network base or new entrants leveraging their existing network to enter food delivery segment.
[1] https://www.businessofapps.com/data/doordash-statistics/
[2] https://secondmeasure.com/datapoints/food-delivery-services-grubhub-uber-eats-doordash-postmates/
[3] https://www.fastcompany.com/90604082/future-of-on-demand-meal-delivery-ghost-kitchens-postmates-doordash-uber-eats
[4] https://www.cnbc.com/2020/06/19/doordash-scores-16-billion-valuation-now-top-of-food-delivery-chain.html
Thank you so much for this great article Surabhi! Very thorough analysis of the key characteristics behind the growth of DoorDash. It is interesting to note that they are looking for opportunity to expand into adjacent sectors. Looking deeper, it looks like the company has also recently acquired Chowbotics, an automated food preparation company. The acquisition will definitely allow them to build up its presence in the adjacent segments. https://www.pymnts.com/news/partnerships-acquisitions/2021/doordash-acquires-robotic-food-prep-company/
Ah, I did not know that. Thank you for sharing Max. I do know some of my friends have started using automated food preparation services. Fascinating!
Wow, I had no idea DoorDash as so successful. I typically only use Uber Eats for ease of use being a long time Uber user. This got me thinking about my decision not to multi-home my food delivery services. There is no rational reason why I wouldn’t other than laziness and UberEats’ random and very generous promos they pass along from time to time. I’d be curious to know if DoorDash similarly uses 15-40% off promotions to entice user the same way UberEats does. I may give it a try after reading this. Regardless, I really hope that DoorDash and the food deliver sector in general finds ways to be mutually profitable with their local restaurants becuase these are excellent convenient services. I personally feel a lot of guilt when I order food because it erodes the restaurants margins.
Thanks for sharing that Omar. Yes, DoorDash also uses extensive promotions – free or subsidized memberships, free delivery, $$ off on minimum order value etc. However, I have rarely seen promotions of the order of 40%. I found this article as a good comparative of prices across platforms https://www.moneyunder30.com/food-delivery-comparison. I also hope that the sector either consolidates or re-structures to protect interests of delivery workers and local restaurants.
Great post! Do you see DoorDash expanding outside of the Food Delivery business in the future? Is there an opportunity for them to scale the model for other “jobs to be done.” There have been rumblings in the industry that gig economy driven delivery services may adopt more of a “task rabbit” like approach – but it does not seem like any of the big food players have made a move yet.
Thanks for your comment Kyle. Yes, I do believe that market leaders in food delivery will move to adjacent businesses (grocery delivery being the lowest hanging fruit as it uses more or less the same operational infrastructure). It may be more about defending their turf from incumbents (Instacart, Amazon etc) than ambition to grow. It looks like the adjacent sectors might be consolidating with logistical efficiency being the primary advantage. I would be curious to see if Amazon would enter this space and delivery workers would move from multi-homing to just having a separate delivery platform. Interesting idea!
As mentioned by Max, DoorDash also seems to be moving in food preparation which can help improve their bottom line.
this reminds me of our first blog assignment on covid as well. grocery and social distancing will allow doordash to continue to kill it. great post!
I agree! But I do see future consolidations and focus on efficiencies. Thanks!