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Deconstructing DoorDash's Coronavirus Response
The Company's "Nothing" Plan to Help Restaurants
Welcome to the Nongaap Newsletter! I’m Mike, an ex-activist investor, who writes about tech, corporate governance, the power & friction of incentives, strategy, board dynamics, and the occasional activist fight.
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As coronavirus roils the markets and pushes the restaurant industry into an existential crisis, I am simultaneously in awe of and deeply disappointed in DoorDash’s handling of the coronavirus crisis.
For this post, I wanted to deconstruct the company’s response to the coronavirus crisis and show how clever they are at saying a lot while doing “nothing”.
I don’t necessarily blame them though. They are (in my opinion) dealing with their own liquidity challenges and aren’t exactly in a position to be truly helpful. They must prioritize solvency/liquidity over growth.
As Warren Buffett famously said:
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
DoorDash CEO Tony Xu is very good (some say brilliant) at scaling DoorDash in spite of food delivery’s awful unit economics, but the coronavirus crisis (in my opinion) has him boxed in.
This post is a bit redundant since it’s carves out sections from [Premium] U.S. Food Delivery Mortal Kombat, but I’ve added a few additional nuggets to hopefully keep it interesting for you.
This post focuses more on “reading between the lines” of DoorDash’s coronavirus response whereas the premium post provides a broader take on the current coronavirus situation.
You don’t reach a $13 billion valuation without some great messaging skills.
I’d go as far as to say DoorDash are masters at massaging their message, and the tactics employed by them are definitely worth studying. I just don’t know for “best practices” or “dark arts” purposes.
Sure, there are folks see through what DoorDash is doing and immediately call them out for their shenanigans, but the positive P.R. generally crowds the criticisms (infamous gratuity policy aside). This is definitely the case with their coronavirus response.
DoorDash CEO Tony Xu is described as a ruthless leader:
[Early DoorDash Employee] Mr Munday described Mr Xu’s working hours as long, and his leadership style as “ruthless” — though perhaps not in the manner of other notorious disrupters in Silicon Valley.
“Ruthless doesn’t mean demeaning people or disrespecting them,” Mr Munday said. “It just means a really, really high standard . . . If you don’t know your numbers, [Tony is] going to ask you the same question five times in a row.”
Why does this matter?
Because it means you can presume CEO Tony Xu knows exactly what he’s doing when it comes to company decision-making.
Study DoorDash’s decisions over the years and you see “ruthless” all over the place. And to be honest, they had to be “ruthless” to overcome the unit economics of food delivery.
Whether it was pursuing non-partnered restaurants, having an aggressive gratuity policy, introducing service fees, or exposing the company to potential sales tax liability, DoorDash scratched and clawed their way into becoming the company they are today (and yes, $100s of millions in venture capital helped too).
CEO Tony Xu clearly has command of his business and clearly understands the decisions he’s making. I don’t consider any message coming from the company random or an oversight. They are precise and they know exactly what they’re doing phrasing things the way they do.
This is why I followed with great interest what DoorDash’s response would be to Grubhub’s gauntlet of 10% cash back and $100 million commission deferrals to combat coronavirus.
When DoorDash confidentially filed their IPO paperwork on February 27 (which feels like an eternity), the company was already in a tough situation. The market was just beginning its volatile descent due to coronavirus and Grubhub’s 10% cash back rewards program launched on February 26 was a massive challenge for DoorDash given their cash runway situation.
I think Grubhub CEO Matt Maloney would acknowledge 10% cash back is uneconomical (it’s a great program for consumers so check it out while you can), and would be very difficult for DoorDash to match without risking the company’s liquidity.
This is why I called DoorDash’s filing an Initial Public Restructuring believing the company was at a crossroads and needed to make hard strategic decisions ASAP.
Fast forward to March 13, Grubhub upped the competitive ante by offering a $100 million commission deferral program to support independent restaurants impacted by coronavirus. It should have been an easy match (it was deferring fees, not waiving them), but anyone paying attention knew this could have major working capital implications for DoorDash at a time when cash is getting tight.
These were very aggressive moves by Grubhub and I believe the primary intent of these actions was to put pressure on DoorDash. Matching Grubhub would potentially put DoorDash in a liquidity crunch.
There was no chance DoorDash was going to match Grubhub’s gauntlet and put themselves in a liquidity crunch so I was curious what P.R. magic DoorDash would come up with to make it seem like they were responding.
Deconstructing DoorDash’s Response
On March 17, DoorDash finally responded to Grubhub’s gauntlet with a plan that ultimately signaled DoorDash, the most aggressive player in U.S. food delivery, was choosing solvency/liquidity over growth.
Let’s deconstruct DoorDash’s response:
They state the plan will generate up to $200 million in additional sales this year.
It’s not clear how this sales lift is calculated and is in my opinion more of an attempt to “double” Grubhub’s $100 million commission deferral announcement. $200 million was meant for P.R. optics.
New restaurants pay zero commissions for 30 days.
This isn’t relief and actually a customer acquisition ploy. Given the poor unit economics of non-partnered restaurants, it’s highly advantageous to transition them to the partnered model.
Restaurants will pay no commission fees on pickup orders and provide additional commission reductions for eligible merchants that are already on DoorDash.
Pickup is generally a small portion of online ordering and it’s unclear what the criteria is for commission reductions and the potential savings.
Added more than 100,000 independent restaurant partners to DashPass — DoorDash’s subscription program which offers $0 delivery for consumers — for free.
This was likely in response to the new Grubhub+ program and doesn’t match Grubhub’s 10% cash back component. Also, does this mean the restaurants that were already in the DashPass network are now competing with these 100,000 restaurants who aren’t paying?
Earmarking up to $20 million in merchant marketing programs.
It’s not clear what this program entails and is difficult to measure its impact.
In summary, alarm bells should be going off right now. There’s not much true relief here and the footnote at the bottom of the post states DoorDash doesn’t have to follow through on their commitments:
This blog post shares how we will support our community of Dashers, consumers, and merchants during the COVID-19 pandemic. Given that circumstances are rapidly changing, we may iterate on or modify our approach, including the type, amount, criteria, and duration of aid, as conditions change.
Food Delivery industry observer Entrecourier echoes my sentiment saying Doordash’s response is more about spin than substance.
Coronavirus’ Exit(stential) Threat
A big takeaway I have of DoorDash’s “nothing” plan is the company is potentially in a much tighter liquidity situation than people realize. Most assume a coronavirus lockdown will help DoorDash by driving more delivery demand, but it’s not that straightforward.
I’m not ready to say they’re in existential crisis yet, but they are definitely in an exit(stential) crisis. DoorDash’s valuations may need to be slashed (killing/damaging the exits of employees and early investors) to raise capital required to ride out coronavirus.
Will they do it?
I think the writing is on the wall, but CEO Tony Xu has a knack for massaging the message to hit next milestone so you never know.