DoorDash files for IPO amid ongoing food delivery wars

DoorDash shares rise 80% in one of the hottest IPOs of 2020

DoorDash files for IPO amid ongoing food delivery wars

Shares of DoorDash shot up 80% when they began trading for the first time on Wednesday afternoon. 

The initial public offering, one of the hottest of 2020, caps a year of explosive growth for the food delivery company. It also defies critics who warned that the company was overvalued and may have trouble keeping its momentum going if demand for food delivery eases in a post-pandemic world.

David Trainer, CEO of investment research firm New Constructs, called DoorDash the “most ridiculous” IPO of 2020. “DoorDash's IPO holds no value and the company may never be profitable,” Trainer said in a note to clients last week.

DoorDash, which is based in San Francisco, raised $3.4 billion in its Wednesday offering. The shares were priced at $102 each late Tuesday, but rose sharply to $185 when they began trading on Wednesday. At that price, the company has a market value of $62 billion, about 10 times that of food delivery app GrubHub, and more than four times the pizza chain Domino's.

DoorDash was born in 2013, when CEO Tony Xu and some classmates at Stanford University set up a website and posted local menus. After a few hours, they got their first order: pad thai with prawns and a side of spring rolls.

Customers have placed more than 900 million orders since then. DoorDash now offers delivery from 390,000 merchants in the U.S., Canada and Australia. Powering that service are 1 million delivery drivers, who are classified as independent workers and not considered DoorDash employees.

DoorDash was already growing before the pandemic thanks to customers' growing preference for dining at home. Between 2018 and 2019, its revenue more than tripled to $885 million.

Pandemic revives this 1950s brand 01:04

But lockdown orders and the closure of indoor dining have made DoorDash indispensable for many restaurants and diners this year. DoorDash reported revenue of $1.9 billion in the first nine months of 2020 alone.

A history of losses

The company's growth hasn't come without headaches. DoorDash has lost money in every year since its founding, citing the cost of developing its platform and expanding into new markets. Last year, for example, it spent $410 million to acquire Caviar, an upscale rival.

DoorDash reported a net loss of $667 million in 2019 and lost $149 million in the first nine months of 2020. The company said it turned a profit of $23 million in the second quarter this year, but followed that with a $43 million loss in the third quarter.

In a government securities filing, DoorDash said it expects to continue to spend heavily as it tries to expand internationally and add non-food businesses to its platform. DoorDash is also candid about the impact of the coronavirus, saying it expects its growth rate to slow in the coming quarters as the pandemic ends.

Before the pandemic, 63% of U.S. restaurant traffic — including visits to fast food outlets and food trucks — consisted of picking up food to eat elsewhere. In the second and third quarters of this year, that had jumped to 90%, and it may stay elevated even when the pandemic ends, according to Hudson Riehle, a senior vice president with the National Restaurant Association.

DoorDash now controls 50% of the U.S. food delivery market. Its chief rival, Uber Eats, holds 26%, while GrubHub has 16%. That's a change from 2018, when GrubHub was the market leader with 39% share and DoorDash held 17%.

DoorDash pulled ahead by concentrating on suburbs and smaller cities while its rivals stayed mainly in big cities, said Mark Shmulik, an analyst with Bernstein.

Skeptics thought the economics of food delivery would fall apart in less dense areas, because there was lower demand.

But suburban families put in larger orders and drivers encountered more predictable traffic and parking so they could deliver more efficiently, Shmulik said.

Restaurants struggle to survive amid pandemic… 01:50

Davidson analyst Tom White, who has a “buy” rating on DoorDash's stock, said the company's strong market share gains and future possibilities, including grocery and retail delivery, outweigh the risk of slower growth once the pandemic subsides. White says DoorDash also has the most variety in its menu listings, giving it less exposure to any one restaurant chain's fortunes.

Restaurants grouse over commissions

Some independent restaurants have been vocal critics of the company, saying its commissions — which can approach 30% — are being promised. DoorDash says it reduced commissions for the smallest restaurants during the pandemic, but the fees will ly remain an issue.

Several cities, including New York and Chicago, and the states of New Jersey and Washington have temporarily capped fees that delivery companies can charge restaurants. DoorDash says those caps simply force it to charge consumers more.

Some restaurants are banding together to provide their own delivery. Around 25 restaurants have signed up with DC To-Gogo, one such effort in Washington, D.C. But other restaurants have created virtual kitchens or “ghost kitchens,” succumbing fully to the delivery economy.

Xu, who washed dishes in a Chinese restaurant when he was growing up, insists DoorDash is trying to help small businesses compete in a world where consumers want the convenience of app-based delivery.

“Helping brick-and-mortar businesses compete, succeed and flourish in these rapidly changing times is the core problem we are trying to solve,” Xu wrote in a filing ahead of the IPO.

Rick Camac, dean of restaurant and culinary management at the Institute of Culinary Education, said restaurants and food delivery companies are still trying to work out the economics of delivery.

“They haven't figured out how to make money in this world, either, and yet we're pressuring them to charge less,” he said.

DoorDash has also taken some heat from drivers. Last month, it agreed to pay $2.5 million — most of it to drivers in Washington — to settle a lawsuit alleging that it misled customers about its tipping policy. Under a previous pay model, tips offset the base pay DoorDash offered driver.

But the company won a victory in November when California voters passed a ballot measure, bankrolled by DoorDash, Uber and Lyft, that said the platforms' workers should continue to be classified as independent contractors. The state's lawmakers had tried to force companies to treat those workers as full employees and pay them benefits such as minimum wage, sick pay, workers' compensation and unemployment insurance.


DoorDash IPO: 5 things to know about the app-based food-delivery company

DoorDash files for IPO amid ongoing food delivery wars

DoorDash Inc. is poised to seize a unique moment for its business with a long-awaited initial public offering.

The top app-based food-delivery platform in the U.S., which said in its prospectus that it has raised $2.

5 billion from investors including SoftBank’s Vision Fund since being founded in 2013, is now seeking to raise about $3.36 billion in its IPO. DoorDash DASH, +1.72% now commands 50% of U.S.

market share, according to Edison Trends, and also operates in Canada and Australia and has plans to expand elsewhere.

The San Francisco, Calif., company competes with Uber Technologies Inc.’s UBER, +1.52% Uber Eats offering and Postmates (which is being acquired by Uber) at 33% and GrubHub GRUB, +0.72% at 16%, Edison Trends reported. DoorDash notes in its prospectus that its market share in suburban markets, which traditionally have not developed delivery infrastructures cities, is actually 58%.

See also: The pandemic turned Postmates’ IPO plans into a bidding war between Uber and Wall Street

DoorDash publicly filed for an IPO on Nov. 13, after announcing that it had started the process with the Securities and Exchange Commission in February, just before the spread of COVID-19 forced shelter-in-place orders that led to a dramatic increase in food delivery.

The company will have about 317.7 million shares outstanding after its IPO, which will give it a valuation of $32.4 billion at the $102-a-share IPO price it announced Dec. 8. That’s well above the most recent price range of $90 to $95 a share it had announced Dec. 4, up from a previously expected range of $75 to $85 a share.

The company intends to trade on the New York Stock Exchange under the ticker “DASH.” The listing will be led by Goldman Sachs and JPMorgan, two of 12 underwriters listed in the filing.

Here are five things to know about DoorDash from its SEC filing.

It got a pandemic boost, but …

The app-based platform, which partners with restaurants and depends on on-demand couriers to deliver takeout meals, said it was already seeing an increase in restaurant-food delivery in the past couple of years. The coronavirus pandemic sped that up, and DoorDash saw tremendous growth.

The company’s revenue for the first nine months of the year rose to $1.92 billion, compared with $587 million in the same period last year, according to its prospectus. It had 543 million total orders in the first nine months of 2020, compared with 181 million in the year-ago period. 

But other delivery businesses, DoorDash is losing money. Although it turned a quarterly profit once this year, the company lost $149 million through the first nine months of this year, compared with a $534 million loss in the same period in 2019.

“Although we generated net income of $23 million for the three months ended June 30, 2020, we have incurred net losses in each year since our founding, we anticipate increasing expenses in the future, and we may not be able to maintain or increase profitability in the future,” the company stated.

See also: These are most popular pandemic food delivery orders by state

In addition, the pandemic poses risks to the company’s business. It has already had a devastating effect on many of the restaurant partners DoorDash needs — the National Restaurant Association said in September that 100,000 restaurants had closed down either temporarily or permanently since March — and could further weigh on the economy.

Among the other possible pandemic risk factors to the company’s business: possible travel restrictions and business closures, capital and financial market impact, regulatory actions and new outbreaks or information related to the virus.

Yes, it’s using that stock structure

The company, launched by three former Stanford students in Silicon Valley, will remain very much under the founders’ control after its IPO.

That’s because DoorDash will have a dual-class stock structure that has largely become the norm for tech companies that have gone public since another company started by Stanford students embraced the structure when it IPO’d in 2004: Google GOOG, -0.43% GOOGL, -0.38%.

Each share of DoorDash’s Class A stock is worth one vote, while each share of Class B stock is worth 20 votes. Company founder and Chief Executive Tony Xu holds the plurality of Class B shares at 41.6%, while co-founders Andy Fang and Stanley Tang hold 39.3% and 39.1%, respectively.

From 2017: Founder-friendly stock structures aren’t going anywhere

It is unclear from the first prospectus exactly how much of the company they will own after the IPO. But Xu — who will be able to vote the shares held by Fang and Tang — is set to join the club of ultra powerful founders who are hard to hold accountable, such as Google co-founders Larry Page and Sergey Brin, and Inc. , +1.54% CEO Mark Zuckerberg.

Worker classification and Proposition 22

Xu included a founder’s letter in the filing and mentioned his journey as an immigrant who moved to to this country from China at age 5. He became a dishwasher at a restaurant where his mother was a server while she saved up to go back to school because her medical license was not recognized in this country.

“DoorDash exists today to empower those my Mom who came here with a dream to make it on their own,” Xu wrote. “Fighting for the underdog is part of who I am and what we stand for as a company.”

However, DoorDash just spent $48.1 million to help pass Proposition 22 in California, which will exempt it and other gig companies from a state law that would’ve required them to treat their couriers and drivers as employees.

The state initiative promises gig workers guaranteed wages and health care stipends for the first time, but their continued independent contractor status means they will not have access to sick pay, unemployment insurance and other worker protections to which employees are entitled.

For more: How the gig-economy business model will change with Prop. 22

The filing mentions DoorDash initiatives meant to help immigrant and refugee restaurant owners, but does not mention that there are many immigrants among the 1 million couriers who have delivered for DoorDash. Gig workers are largely nonwhite and immigrants, according to numerous studies and the gig companies themselves.

Despite the success of Prop. 22, DoorDash said it expects to continue to face challenges on the classification issue.

“Even with the passage of the 2020 California ballot initiative and similar legislation, such initiatives could still be challenged and subject to litigation,” the company said in its filing.

“To the extent Dashers are determined to be employees under other state or federal law, we would be required to significantly alter our existing business model and operations, which would have an adverse impact on our business, financial condition, and results of operations.”

Read: Uber brands gig companies’ efforts to reshape labor laws as ‘IC+’

Despite DoorDash avoiding paying into unemployment insurance and other employee-related costs, the company will have increased expenses associated with fulfilling the promises of Prop.

22: minimum guaranteed earnings and health care subsidies for the couriers who work enough hours to qualify.

If the company’s push to expand similar measures elsewhere is successful, it will face additional costs.

Other regulatory concerns

The company also faces other regulatory concerns, such as a law in California that will, starting Jan. 1, prohibit the company from delivering food from restaurants that it has not asked for permission.

In addition, DoorDash warned of weakness in its reporting and accounting controls, which is not entirely uncommon among companies seeking to go public.

The audit of its 2018 and 2019 financial statements revealed the company did not have adequate processes and controls when it came to revenue to cash reconciliation, and it said it is trying to remedy that by hiring additional accounting, engineering and business intelligence personnel.

Then there’s competition. There’s a lot of it, and DoorDash’s most formidable rival, Uber, is bigger and has deeper pockets.

From 2019: DoorDash made a U-turn on tipping after uproar

Still, DoorDash may well protect its top spot in the space.

Besides enabling deliveries of prepared restaurant food, DoorDash has also made a foray into delivery of other items with DashMart, a convenience-store concept it recently rolled out in eight cities.

Its couriers pick up items ranging from local barbecue sauce to Advil to cleaning supplies from fulfillment centers run by DoorDash and deliver them to customers who pay a monthly membership fee.

With DashMart, DoorDash is competing with grocery-delivery app Instacart as well as Postmates (the delivery app that Uber is buying), plus Inc. AMZN, +0.19%, Walmart Inc. WMT, +0.84% and other retailers.

DoorDash also has partnerships galore, from being the official app of the NBA to working with retail chains such as 7-Eleven, CVS Health Corp. CVS, +2.55%, Walgreens Boots Alliance Inc. WBA, +0.62% and others. And it has rolled out a subscription service called DashPass.

The company’s position as market leader in the app-based delivery space seems secure, said Pete Flint, managing director of NFX Ventures in San Francisco, which does not have a direct investment in DoorDash.

“People have been gravitating to known brands,” he said, adding that it would be tough for other companies to replicate the “incredible flywheel” of customers, drivers, restaurants and partners that the company has amassed.

Autonomous vehicles and drones

DoorDash is exploring long-term possibilities for delivery, including autonomous vehicles. It has a testing partnership with General Motors’ Cruise, and bought AV startup Scotty Labs for $5 million last year. It said it is also investing in research and development for drone delivery.

AV-enabled delivery would affect the need for DoorDash couriers, but it could be a while before it’s feasible.

“While we believe that autonomous and drone delivery could present substantial opportunities, the development of such technologies is expensive and time-consuming and may not be successful,” the company said in its filing.

For more: Uber says its drone delivery will cost the same as Uber Eats

That said, other startups are currently experimenting with AV delivery, and companies such as Amazon and Walmart are testing delivery by drones. Meanwhile, Uber is reportedly in talks to sell its self-driving unit to AV startup Aurora Innovation.


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