[I own DoorDash stocks and I may change my opinion anytime. This is not investment advice and please do your own due diligence.]

DoorDash announced its 2023 Q3 results a few weeks ago. Growth is solid and profitability is rising. Management team said on the earnings call that “every line of business has accelerated in growth and improved in its unit economics.”

In GAAP terms, net loss has shrunken to ($75M) for the quarter. In cash terms, annualizing this quarter’s number, DoorDash is now generating well over $1B of Free Cash Flow a year.

Behind these solid numbers is the DoorDash management team’s constant focus on doing the difficult but right thing. And this point is particularly salient because in the delivery industry, like in some other industries, companies can show short-term results by taking shortcuts. Ultimately, in the long run, those who chase short-term results by taking shortcuts will likely diminish and perish. Those who do the difficult but right thing will likely survive and thrive.

Local Delivery Is A Difficult Business

I am increasingly convinced that local delivery is a materially more difficult business than general e-commerce and ridesharing. Most e-commerce businesses operate on a two-sided network (i.e., buyers and sellers). And most e-commerce businesses appear to sit on a seller base that is somewhat shared — a large percentage of sellers on these platforms are the same ones from Asia. The delivery infrastructure is also somewhat shared — USPS, UPS, FedEx, everyone can use them. In light of these conditions, new entrants can quickly gather and combine resources to launch a new platform to compete with established e-commerce players. Think Pinduoduo’s Temu and the threat it poses to established e-commerce players in the U.S., who, no matter how established they are, simply cannot stop Temu from contacting Asian sellers to build up Temu’s selection, cannot stop Temu from using USPS and UPS to ship packages. For these reasons, e-commerce is an industry vulnerable to the threat of new entrants. Just listen to the CEO of Etsy, “there’s been an onslaught of competition” (source: Etsy’s 2023 Q2 earnings call).

Ridesharing businesses also run on a two-sided network (i.e., riders and drivers). As long as a platform can attract and retain a moderate number of drivers on its network, the platform will be able to offer ridesharing services. And by leveraging brand loyalty (such as the Lyft brand), price discounting (many players do that), or other means, a platform will be able to generate demand. That is why it is not extraordinarily hard to create another ridesharing platform and it is not unusual to see multiple ridesharing platforms coexist in the same market. For example, in China, aside from the well-known DiDi Global, there is a long list of alternative ridesharing platforms, such as CAOCAO Mobility and T3 Mobility.

Local delivery, however, is a different animal. Versus general e-commerce and ridesharing, local delivery is a much more difficult business and thus a much more defensible business. There are two main reasons why I think so. One, instead of being a two-sided network, local delivery is a three-sided network (i.e., consumers, drivers, and merchants). In physics, the famous “three-body problem” tells us that, unlike a two-body system that is well-defined and predictable, a three-body system lacks a general closed-form solution and is unpredictable, nondeterministic, and thus chaotic. Three-body systems are so complicated that this concept has given rise to the world-famous novel The Three-Body Problem by Liu Cixin. Managing a system of three parties is materially more difficult than managing a system of two parties. Think of the last time you did a group project involving two people, versus a group project involving three people. That is the complexity of a three-sided network. That is why Tony Xu, the CEO of DoorDash, wrote, “DoorDash only works when it works for everyone” (source: DoorDash’s 2023 Q1 letter to shareholders).

The second reason is that local delivery, especially food delivery, presents a unique fulfillment challenge that does not exist in general e-commerce nor ridesharing. From the moment a hungry customer places a food delivery order, a delivery platform has approximately 35 minutes to successfully complete all the following tasks: 1) identify an available driver (who can be located anywhere and who works for these platforms on a voluntary basis); 2) have the driver arrive at the target restaurant at an opportune time (restaurant can be located anywhere; cooking time varies by food types); and, 3) deliver the pack of food, in a good shape, at a good temperature, to the customer’s door (which can be located anywhere and perhaps is inside a large residential complex). Not easy. However, for ridesharing, drivers only move on paved roads, and riders come to the street to meet their drivers. For e-commerce, Amazon delivery team can turn a package upside down during a delivery, and sometimes the delivery is late for a day or two — and it would be okay for most customers. However, food delivery customers would not tolerate any of these: food cannot be just dropped on the street; food cannot be turned upside down; and food cannot be late by even an hour. If a platform cannot successfully deliver a package of food within approximately 35 minutes, the customer will be both angry and hungry (a terrible combination), which means the platform will likely lose this customer. If a platform does not have enough customers, restaurants will leave the platform and drivers may leave as well, making it even harder for the platform to meet the “fulfillment challenge.” Customers leaving, merchants leaving, drivers leaving, this can quickly turn into a vicious cycle that brings down a food delivery platform.

Deliver a pack of food to a customer within 35 minutes — to repetitively do this at a scale, while making sure all three sides are happy and making sure the platform business is profitable — that is an extraordinary feat. That is why the business of local delivery is so much more difficult and complex than general e-commerce and ridesharing.

TikTok’s expansion into e-commerce and food delivery serves as a particularly illuminating example. TikTok was able to quickly ramp up its e-commerce business in the U.S. and in Southeast Asia, taking some market shares from existing players. However, TikTok’s expansion into food delivery has met with difficulties. In summer 2023, Chinese local media reported that TikTok dropped its annual business target for its food delivery venture — an unambiguous signal validating what I just laid out here.

America’s Suburbs Represent A “Difficult” Market

The consensus view for much of the past ten years and perhaps even today is that the best (easiest) food delivery market is America’s big cities and the worst (most difficult) food delivery market is America’s suburbs. The former has all the advantageous conditions such as population density, restaurant density, and labor density; the latter has none. Uber Eats and Grubhub both made the strategic choice early to focus on the best (easiest) market while DoorDash chose to focus on the worst (most difficult) market.

The result, as it should not be too surprising to us now, is that the easiest market (i.e., big cities) turns out to be more competitive, less profitable, smaller in scale, slower in growth, and heavier in government regulations. The suburbs, due to various factors such as larger family size, fewer traffic jams, and abundant car parking, have proven to be the better market. By doing the difficult but right thing, DoorDash now owns the best food delivery market in the U.S.

Artificially Lower Ad Revenue Is A Difficult Choice

Most local delivery companies have been boasting about their ever-increasing ad revenue. For example, Delivery Hero has for a long time guided an ad revenue target of 3-5% of GMV. Uber also put an emphasis on ad revenue in its Feb 2022 Investor Day presentation. Instartcart identified “advertising fees” as one of its top “drivers of profitability” (IPO Prospectus, page 115).

DoorDash already commands the largest local commerce audience in the U.S., so it is in a good place to run a lot more ads on its platform. DoorDash is also under pressure by investors to show more profits and show them faster. For these considerations, a casual observer would conclude that DoorDash should have ramped up its ad business faster. But DoorDash didn’t. DoorDash made the difficult choice by not joining the bandwagon of chasing ad revenue.

DoorDash’s Tony Xu said recently, “my view and our company’s view on advertising is the most important thing about building a highly incremental advertising business is to build the biggest and most robust marketplace and not to confuse the sequence or the order of operations there” (source: DoorDash’s 2023 Q3 earnings call). Ravi Inukonda, the CFO of DoorDash, also said to the media that DoorDash didn’t set goals for the growth of its advertising business (source: Bloomberg News).

Running too many ads on a platform could come back to harm the business. DoorDash’s leadership team is fully cognizant of this risk and thus they made the difficult but right choice. The choice is difficult because it runs the risk of vexing investors in the short run. The choice is right because it will benefit investors in the long run.

Acquiring Talents Not Market Share Is A Difficult Choice

Back in 2021, when DoorDash announced the acquisition of Wolt, most investors were puzzled. Wolt was a relatively small delivery company operating in a “strange” collection of mostly small markets with no meaningful market share leadership in most of these already quite small markets. The consensus idea shared by many was that the primary reason for an acquisition to happen in the delivery industry is to acquire market share. And DoorDash was NOT getting market share via acquiring Wolt. So, naturally, most investors were confused by what DoorDash was doing.

Two years after the acquisition, according to my calculations, Wolt’s top line growth has accelerated from 2022 to 2023. In some of the key markets Wolt is in, it is likely that Wolt has already dethroned incumbent market leaders to become the local No.1. In Sweden, for example, Wolt’s management team told local media that Wolt’s total orders in Sweden have grown 50% YoY for the first half of 2023. Sweden is the largest Scandinavian country and Wolt has already operated in Sweden for seven years — and therefore, 50% YoY growth is a remarkable growth rate for a market that is both large and old. Kudos to Wolt.

Usually after an acquisition, the management team of the acquired company will leave. A few weeks ago, at an industry conference, DoorDash’s Tony Xu said and I quote, “we’ve effectively retained everyone [at Wolt] two years after closing.” Not only is almost everyone still there at Wolt, they have been given more responsibilities. At the same conference, Tony Xu confirmed again that Wolt is now managing all of DoorDash’s businesses outside of the U.S., effectively taking over DoorDash’s non-U.S. businesses.

Actions speak louder than words. By retaining effectively everyone at Wolt, by “ceding” parts of DoorDash’s pre-existing businesses to Wolt, by Wolt showing spectacular business results after the acquisition, DoorDash demonstrated that by making the difficult choice (acquiring talents instead of market share), DoorDash is doing the right thing (building a stronger and healthier business for the long run).

Actually, attentive followers of DoorDash should have noticed that in a 2021 presentation deck released by DoorDash to brief investors about the upcoming Wolt acquisition, the word “difficult” was used. And I quote that presentation:

“Wolt Started in Finland, One of the Most Difficult Markets for Last-Mile Local Logistics”

It is not a coincidence that the trait of “doing the difficult but right thing” is in both DoorDash’s and Wolt’s DNA.

Key risks: competition risks; valuation risks; key person risks; labor regulation risks both inside and outside of the U.S.

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