The pandemic boosted food delivery companies. Soon they may face a reality check
One of the original grocery shipping companies, Grubhub, considered putting itself up for sale after it entered the market. Competitors DoorDash, Postmates and Uber Eats had also reportedly had merger talks. Meanwhile, Uber’s CEO signaled a fundamental change for its food delivery service: focus on profitable growth.
Then the pandemic changed everything.
The health crisis, coupled with the economic crisis, created a perfect storm for the delivery companies – a large pipeline of unemployed people looking for work, countless people staying at home and having groceries delivered, and restaurants increasingly dependent on take-out and delivery are.
Now as the year draws to a close, DoorDash will lead this wave of pandemic-triggered demand to an IPO expected this week.
“The stars have aligned. This is basically the perfect time for last-mile delivery companies to go public,” said Asad Hussain, lead mobility analyst at data research firm PitchBook, highlighting a number of reasons including the unprecedented shift the demand from the pandemic as well as the recent consolidation in the industry. (European company Just Eat Takeaway.com has acquired Grubhub and Uber Postmates, which means fewer companies are competing on pricing.)
“You’ve been a huge beneficiary of the shift,” said Semil Shah, who invested early in DoorDash and Instacart, which are reportedly heading for an IPO next year. “I think both companies would have gone public at some point – I think it’s unclear whether they would have gone public now without the pandemic, maybe it would have been a little later, but who knows.”
Airbnb, another on-demand company that has struggled to get its business back on track amid the sharp drop in travel during the pandemic, is expected to go public this week. Both companies are making headway with their Wall Street debuts as the first coronavirus vaccines are expected to be available to some in the US and abroad.
The introduction of the vaccine signals the beginning of the end of the pandemic and with it a further shift in demand. For Airbnb, the question is how far the end of the pandemic could boost business. For food suppliers like DoorDash, the question is how much the end of the pandemic will hurt them.
“People have become much more used to ordering groceries and other products through delivery services. Some of that will, of course, decrease when it’s safe to do things in person,” said Scott Duke Kominers, associate professor at Harvard Business School. “But new habit formation is powerful.”
DoorDash, which raised $ 2.5 billion from investors such as SoftBank and Sequoia Capital, warned in its IPO filing that the pandemic boom may not last forever. “The circumstances that have accelerated the growth of our business due to the effects of the Covid-19 pandemic may not continue into the future,” the company said.The company, which also owns Caviar, became the top-selling US company in May 2019, according to Second Measure. However, it took a pandemic for DoorDash to make its first profit in the second quarter of this year before reporting losses again in the final quarter. Delivery services like DoorDash arguably had a bigger impact during the pandemic as many restaurants rely more on reaching customers at home, but the pendulum may swing the other way after the pandemic. Kominers, who recently co-authored an article on the importance of a delivery app’s relationship with restaurants and other suppliers, said delivery companies need to focus on better sharing revenue and tools with retailers in order to build sustainable businesses. The high fees that delivery services charge restaurants for orders have come into the spotlight during the pandemic. Some states and cities have capped third-party grocery delivery fees to help local businesses. Companies have explored new ways to work with companies. DoorDash introduced Storefront, a product that allows restaurants to set up their own online stores that don’t charge them commission for items sold, and Self-Delivery, a way for partners to list on their platform and arrange their own delivery take care of.
Looking to the future, coupled with an improving economy and legal challenges to their business model, the end of the pandemic could make it difficult for companies like DoorDash to continue their existing model of using independent contractors who do not have the same costly benefits and occupational health and safety as they do the staff would.
The companies scored a victory last month in passing a California election measure, which enabled companies to avoid classifying their gig workers as employees in the state and avoid the costs of a full suite of performance protection measures like a minimum wage and overtime paid sick leave and unemployment insurance under California labor law. However, the problem is far from being solved.
That business model “survives by essentially forcing workers to compete in a race to the bottom,” said Rebecca Givan, a professor of ergonomics at Rutgers University.
“While the economy is bad and unemployment is high, there will always be desperate workers who are likely willing to work on these apps even at very low wages,” added Givan.