[I own DoorDash stocks.  This is not investment advice.  Please do your own due diligence.]

DoorDash impressed investors by its continued strength in consumer engagement.  It continues to demonstrate strong growth, gaining market shares in most of the markets it operates, both within and outside of the U.S.  But DoorDash’s growing losses have raised concerns among investors. 

“Under-earning” As A Strategy

In contrast to other delivery services that have recently driven up consumer fees to improve platform profitability, DoorDash consistently drives down consumer fees.  I track the consumer fees on DoorDash, using publicly available data and my own algorithm.  The resulting chart shows a clear trend:  as time passes, consumers pay less and less for each order they place on DoorDash. 

So how does DoorDash manage to drive down its consumer fees? The primary driver is its increasingly popular DashPass program, which offers members a 5% service fee and $0 delivery fee on each order, compared to the 25% fee that non-members pay on average (my calculation; service fee plus delivery fee). First launched in 2018, DashPass is now estimated to account for over 60% of DoorDash’s business (source link), contributing to the continued decline in consumer fees over time.

What’s particularly noteworthy is that, despite the efforts of competitors like Uber and Grubhub that are pushing bundled offerings and free memberships, DashPass has continued to grow at a steady pace. New members are mostly acquired organically; payback periods have been stable (source: earnings call). 

Is this strategy voluntary?  Some may argue that DoorDash has no pricing power: it had no choice but to lower its consumer fees in response to competition.  However, I believe that DoorDash made a conscious decision to set its consumer fees low.  Firstly, it’s worth noting that many food delivery companies in Europe have actually increased their consumer fees in recent quarters. At least, they show that raising prices are possible.  Secondly, unlike in the ridesharing space where price is easily comparable between apps (it takes 10 seconds to key in a destination address and compare prices between apps), comparing prices in food delivery apps requires multiple steps (imagine the time it takes to select multiple items and accompanying sides/apps/drinks, deciding on a tip, and leaving a note for delivery instruction) and can be a hassle for hungry consumers. So, “price competition” is much less of a factor in the food delivery space than in other spaces.  Combining these two points, it is not difficult to argue that DoorDash can raise prices if it decides to and DoorDash is not facing downward price pressure because of overwhelming “price competition.” This “under-earning” strategy is a strategic decision made by DoorDash, not a reaction to external pressure.

Why is it a good strategy?  I believe from the management’s perspective, pursuing an “under-earning” strategy is an attractive idea due to the following dynamics:

Lower consumer fees → more consumers can afford delivery → more consumers are willing to try delivery for the first time → overall delivery market grows (i.e., growing the pie) → As DoorDash has the lowest price, DoorDash attracts the biggest share of new consumers joining the industry → DoorDash’s market share increases (i.e., growing its share of the pie) → The combination of a growing pie and DoorDash’s expanding share of the pie leads to an even faster rate of growth in DoorDash’s top line → As operating leverage kicks in over the long run, DoorDash’s bottom line is maximized, ultimately leading to its success.

These dynamics are made possible by the relatively underpenetrated delivery market. However, for a mature market, the dynamics are quite the opposite: lowering prices by one party can lead to a general price war by all parties; the market has long been saturated so lowering prices attract few new customers; market shares are changing little; therefore, top lines will likely shrink for almost all players. 

DoorDash has been steadfast in its pursuit of an “under-earning” strategy, as emphasized in its IPO Prospectus (keyword: “enhancing affordability”) and reiterated in its 2022 Q4 letter, which quantified the company’s success in reducing average transaction fees per order by over 8% YoY.  In the same letter, DoorDash also provided a chart that shows that the delivery market is relatively underpenetrated in most countries where it operates, supporting the rationale behind this strategy.

In contrast, failure to pursue such a strategy in an underpenetrated market can have dire consequences, as exemplified by Grubhub’s decline due in part to its emphasis on protecting profit margins, leading the company to miss out on the third-party food delivery boom between 2014 and 2018. This in turn allowed DoorDash to overtake Grubhub’s market share in 2019, leading to the latter’s delisting and difficulty finding a buyer today (news link).

Today, delivery companies face a choice between raising prices to satisfy investors and provide an immediate boost to stock prices, with the long-term potential cost of shrinking the pie and the player’s own market share, versus lowering prices to grow the pie and expand market share, maximizing long-term benefits at the short-term cost of disappointing investors who expect immediate profits. DoorDash has clearly chosen the latter path.

Timeline to “Profitability”

I feel that it is important to express my strong belief that DoorDash’s core business has already been profitable and has been generating cash.  This is a significant point, because if this turns out to be untrue, all bets are off.  

There are three reasons why I believe DoorDash’s core business is profitable.  One, the company management has repeatedly confirmed this during earnings calls.  Two, if you do not believe the company management, believe the auditors.  Despite DoorDash’s aggressive investments in international markets and new verticals (which are currently loss-making), as well as repurchasing $400 million of its own stock and paying a $100 million litigation settlement, the company’s cash balance has remained relatively stable for over two years.  This suggests to me that DoorDash’s core business must be generating cash to sustain the company’s cash balance.  Three, my own modeling has also confirmed that DoorDash’s core business is profitable.

Unfortunately, today’s investors tend to penalize companies that do not show an immediate accounting profit.  And in this regard, DoorDash’s stock is currently “not working.”  Based on its 2022 Q4 numbers, my calculation indicates that DoorDash will likely not turn GAAP profitable until 2024, with the help of cohort maturity and efficiency gains.  

Nevertheless, I have to acknowledge that the market may have a valid point, as there are real risks in waiting too long: we cannot predict perfectly what may happen between now and 2024, nor can DoorDash’s management guarantee exact future results.  But still, it is ironic to observe that even though most investors claim to be long-term investors, apparently, waiting a year or two is too long for them.  

No risk, no return.  That is the risk investors have to take. 

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