Operations

DoorDash IPO Weighed Down by Restaurant Industry Woes

Investors rejoiced when DoorDash announced on November 13 it will soon be traded on the New York Stock Exchange. The company holds a commanding market share and tripled its top line in 2019, up to $885 million. Moreover, the COVID-19 pandemic has shown just how important DoorDash’s platform can be as a lifeline for small businesses.

However, the news should concern restaurant owners. Companies go public as a means of raising capital to expand, and recent DoorDash beta models signal the company plans to divest from restaurants and invest in competing industries.

On top of that, a resurgence of COVID-19 cases nationwide and subsequent local restrictions on retail and hospitality businesses are a threat to the company’s customer base. Recent estimates show that over 60% of the restaurants closed because of the pandemic will not reopen.

This article will highlight some concerns restaurant owners should be aware of.

Beta Models

DoorDash recently expanded its platform by adding DashMart, a digital convenience store channel, and adding options for customers to purchase grocery items. While both of these models are great for customers during the pandemic, they highlight issues DoorDash expects the restaurant industry to face in the near future.

“During these trying times, our platform has become a critical lifeline to those we serve, and we’ve been hyper-focused on building new products that meet the immediate needs of our customers while helping our merchant partners thrive in new ways,” Andrew Ladd director for DoorDash said in a statement.

One immediate need DoorDash is serving is safe access to fresh food. However, by entering the convenience store and grocery store markets, the company is prioritizing food distribution over retail, a sign of the times in the restaurant industry.

Since mid-March, several surveys have found Americans are cooking at home more frequently. In turn, convenience and grocery stores are under increased stress to provide fresh products for consumers. Some restaurants began selling their meat and produce to consumers to make up the slack.

Now that DoorDash is in a position to compete with restaurants in this space, it will be more difficult for small businesses to compete with the cash-flush behemoth. This could limit the ability of some businesses to retain critical revenue.

Business Is Booming…Maybe

Businesses that survived did so by relying on businesses like DoorDash to deliver their products. However, the company has proved itself to be an unreliable business partner, at best.  In April, the company was infamously included in a price-gouging lawsuit. The company had also previously been caught signing up unwitting businesses and charging them proprietary fees.

The lawsuits didn’t stop DoorDash from boosting its business during the pandemic, though. According to MarketWatch, DoorDash has made $1.92 billion in the first nine months of 2020, up more than $500 million from this time last year.

However, profitability remains a problem. Over the same nine-month timespan, DoorDash collected losses totaling $143 million.  In 2019, they had lost $543 million by this point of the year. In fact, the company has never been profitable in its 7-year history.

Companies like DoorDash remain in business by convincing investors that their money will one day return a nice sum. Amazon was not profitable between 1994 and 2001 but has since become one of the most profitable companies on Earth.

A report by State Street Bank found that investor confidence is waning as the pandemic enters its second phase. In October, its Investor Confidence Index dropped 0.3 points, but is still trending a full 15 points below its previous recorded highs in April and May. Companies who rely on investors to keep their lights on could see funding begin to dry up as the full financial impacts of the pandemic are realized.

This can be especially perilous for small businesses that need loans to stay open through the winter, or longer. If private equity dries up, businesses will be forced to take high-interest loans from banks or other institutions over more flexible funding options.

A Weakened Customer Base

DoorDash’s customer base is twofold. On the one hand, they serve businesses, while on the other are consumers. And since the beginning of the pandemic, both of these categories have been decimated.

Yelp’s Local Economic Impact Report from September shows that many restaurants still struggle to survive, even though DoorDash isn’t charging its normal fees to small businesses. Concepts that were hit the hardest include Sandwiches, Burgers, and Breakfast & Brunch.

Meanwhile, a report by the Independent Restaurant Coalition estimates up to 11 million restaurant workers are at risk of losing their jobs because of COVID-19. This could amount to a $653 billion loss for local economies.

Consumer confidence has also been decimated by the pandemic. The retail and hospitality job market is highly volatile due to local restrictions on restaurants. Adding insult to injury, a recent study from Stanford and Northwestern University linked restaurants to super-spreader events.

While this study is useful in determining strategies to stop the spread of the virus, they do not help restaurants convince their customers to return. A recent poll found that only 20% of Americans have confidence that restaurants are properly cleaning during the pandemic. This means restaurants still have a long way to go before consumers feel comfortable setting foot inside their establishment. And, therefore, have much fewer return customers to turn to.

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