When the coronavirus hit, restaurants faced a sudden choice: Figure out how to survive on takeout and delivery, or close. For many owners, staying afloat meant allying themselves with the most popular food delivery app in the U.S., DoorDash. “We were in a chokehold,” said Roni Mazumdar, who runs several Indian restaurants in New York City.
Delivery allowed Mazumdar to keep selling biryani and butter chicken but at a steep cost to his business. When patrons order through DoorDash Inc., Mazumdar has to fork over 24% of the sale. “Doing delivery out of conventional restaurants is not a sustainable model,” said Mazumdar, whose flagship restaurant in Queens is called Adda Indian Canteen. (The name roughly translates from Hindi to “a place where people hang out.”)
DoorDash, which is expected to price shares Tuesday for its initial public offering, grew from an idea to a startup with a $16 billion valuation in seven years. It was propelled by a narrative that the service equips small, local restaurants with a delivery infrastructure on par with that of Domino’s Pizza Inc. Since early on, the San Francisco-based company has highlighted its connection to mom-and-pop joints, even though it also delivers food from the likes of Burger King, Chipotle Mexican Grill Inc. and McDonald’s Corp.
Tony Xu, the co-founder and chief executive officer, frequently says he was inspired by his mother’s immigrant story, in which she first worked at and then managed a Chinese restaurant near his hometown. In its IPO filing, DoorDash said its mission is “to grow and empower local economies.” A letter by Xu in the prospectus said his company wanted to “empower those like my mom who came here with a dream to make it on their own. Fighting for the underdog is part of who I am and what we stand for as a company.”
Interviews with restauranteurs tell a different story. Rather than empowering small businesses, they said DoorDash and its ilk often charge smaller or newly established restaurants higher rates. This breeds a sometimes-contentious relationship, which was only exacerbated by the Covid-19 pandemic. The dynamics have forced restaurants to rely on a service whose costs at times outstrip the benefits. Yet, the company, with its 18 million customers, has also provided a lifeline to many local favorites that might otherwise have gone out of business.
With investments of more than $2.4 billion from SoftBank and an array of venture capitalists, DoorDash expanded rapidly through American cities and across the suburbs. The pandemic was an accelerant. DoorDash posted its first-ever profit in the second quarter, and revenue tripled in the first nine months of the year. Now it’s expected to produce one of the five largest IPOs of the year, already the busiest ever for such deals.
A spokesman for DoorDash declined to comment, citing regulatory restrictions surrounding the IPO. The company has said it took steps this year to help small restaurants during the Covid crisis. It gave grants to some restaurants building outdoor seating, and it slashed commission rates by half for restaurants with five or fewer locations for about six weeks in the spring.
In the past, operating restaurants meant focusing on diners walking in through the door. That changed this year for Boom Wanvisa, managing director of Farmhouse Kitchen and Daughter Thai Kitchen in the San Francisco Bay Area and Portland. “My boss held an urgent meeting and told everyone that we are going to change our strategy completely and think of our business model as a takeout restaurant,” she recalled.
All of a sudden, every meal cost Wanvisa’s restaurants more. She had to account for food packaging, protective gear for her staff and crucially, DoorDash fees. Each time they sold an order for delivery through DoorDash, the restaurant paid 20% in commission. When a customer orders through the DoorDash app and picks it up themselves, Farmhouse Kitchen pays 12% to the company, Wanvisa said. “We could barely make it,” Wanvisa said. “With less margin, we have to push more volume for us to stay afloat.”
Wanvisa considers her business more fortunate than most. Farmhouse Kitchen was grandfathered into a lower commission rate because it signed up years ago with Caviar, a delivery app DoorDash acquired last year. “I talk to some of the people who just opened restaurants not too long before Covid, and they pay up to 30%,” she said. “I just can’t believe it.”
Even with a relatively low rate, Wanvisa’s company found it cheaper to handle its own takeout orders. After the pandemic started, the restaurant group rushed out an app for customer pickups with no service fees. “We try to communicate to our customers, ‘Hey, you help me, and I help you,’” Wanvisa said. “They love the idea.”
Restaurants can often reduce their rates with DoorDash, Grubhub or Uber Technologies Inc. through negotiations. That’s much easier to do for large, recognizable chains. But restaurant owners can play the various delivery companies off of one another to get a lower rate, said Mike Whatley, the vice president of state and local affairs for the National Restaurant Association, a trade group.
Some city governments have intervened. Seattle, Los Angeles, New York City, San Francisco and Washington capped the rates that delivery companies can charge restaurants at 10% to 20%. But DoorDash has found ways to make up the shortfall. In Denver, the city council voted to cap rates at 15% in October. By the next month, DoorDash started charging customers a $2 “Denver fee” on every order there.
Oren Dobronsky, who runs Oren’s Hummus in the Bay Area, signed one of the first contracts with DoorDash. Dobronsky said DoorDash and other delivery platforms were life-saving during Covid. But he also recognizes the power they hold. “The bigger these apps are, they can squeeze the restaurant more and more,” he said. “It will eventually manifest in the prices that all consumers are paying. If they squeeze a certain percent for commission and you cannot live without them, then you need to raise prices across the board.”
©2020 Bloomberg L.P.
