Like other gig work giants, DoorDash has admitted in its IPO documents that its own business model—and the way it treats and pays workers—are major “risks” to its business.
In its S-1 filing with the Securities and Exchanges Commission, there’s little to no evidence DoorDash can achieve let alone sustain profitability (in fact, that it may never be profitable is another “risk”), and lots of evidence that its business model is largely based on taking advantage of both restaurants and drivers.
Included in “risks” are the two following statements, which are wonders to behold:
"Our success, or perceived success, and increased visibility may also drive some businesses that perceive our business model negatively to raise their concerns to local policymakers and regulators. These businesses and their trade association groups or other organizations may take actions and employ significant resources to shape the legal and regulatory regimes in jurisdictions where we may have, or seek to have, a market presence in an effort to change such legal and regulatory regimes in ways intended to adversely affect or impede our business and the ability of merchants, consumers, and Dashers to use our platform."
What this means is that restaurants might want DoorDash to take less of a cut from their commission, which is understandable. Even with cuts to DoorDash’s commission rates during the pandemic, many restaurants are still struggling to scrape by.
And then there’s this, which explicitly says the company’s own pay model for drivers is a risk to its further existence:
"Our ability to provide a cost-effective local logistics platform is also dependent on Dasher pay, which is a significant cost and subject to a number of risks. In September 2019, we made changes to our former pay model, and our current pay model includes (i) a base pay amount for each order, which depends on the estimated time, distance, and desirability of the order, (ii) promotions for orders that meet certain conditions, including bonuses for Dashers who meet specific goals, and (iii) tips from consumers, which Dashers receive 100% of on top of base pay and promotions. The base pay amount, any promotions, and any tips that the consumer chooses to include at checkout are shown to Dashers when they are offered a delivery.
Our current Dasher pay model has led to an increase in Dasher compensation, but may also cause less consistency in earnings across deliveries in some cases. Our current pay model may also result in an increase to the fees we charge to consumers, which in turn could affect our ability to attract and retain consumers. Further, this pay model may lead to negative publicity related to perceptions of the complexity of our pay model, inconsistency in earnings for Dashers, and a lack of flexibility in the ways consumers can leave tips, and as a result, we may not be successful in attracting and retaining merchants, consumers, and Dashers. In the future, based on a variety of factors, including legal and regulatory changes, we may change our pay model again. Our current pay model, and any future changes to our pay model or our ability to cost-effectively acquire and retain Dashers, could adversely affect our business, financial condition, and results of operations."
That’s a mouthful, but says that DoorDash’s pay model for delivery drivers is algorithmic, which leads to an “inconsistency in earnings” which is likely to piss off both its workforce and its customers to the point where it may be challenged both in court and by regulators, and reported on in the media. This problem is even worse when you consider the labor patterns of gig companies: they require a large reserve of idle labor to keep wait times low and to fight extremely high turnover rates, but they also rely on a core of full-time gig workers to do the vast majority of work. As a result, the workers hurt the most by this “inconsistency in earnings” are the most precarious and vulnerable workers who rely on DoorDash to make ends meet.
Statements like this have become common in gig economy S-1s, where companies like Uber, Lyft, and DoorDash admit that, while they are already historically unprofitable, they very well may become more unprofitable in the future if they are forced to treat their workforce like humans.
Core to DoorDash’s business model is the fact that its workers are independent contractors, not actual employees, which allows the company to overhire to reduce wait times, while avoiding having to provide this massive but idle reserve army of workers any time off, benefits, health care, etc. In fact, the company’s filing states, positively, that "none of our employees are represented by a labor union. We have not experienced any work stoppages, and we believe that our employee relations are strong."
And yet, here’s how DoorDash CEO Tony Xu describes the company’s mission in the filing:
"DoorDash exists today 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.
And yet this business model has not, to this point, worked. DoorDash admits that alongside a history of net losses, it anticipates "increasing expenses in the future, and we may not be able to maintain or increase profitability in the future.”
It’s notable that in it’s filing, DoorDash reports its profit using an “adjusted” EBITDA measure that’s also used by Uber. This typically allows companies to exclude costs not core to their business, but Uber and DoorDash both use it to obscure operating expenses. Chief among DoorDash’s excluded expenses are those related to legal costs related to worker classification, its previous tip-stealing pay model, a 2019 data breach, reserves for incidental taxes, and expenses from its contribution to the Yes on Prop 22 campaign, which allowed it and other gig companies to continue misclassifying workers in California.
DoorDash justified its exclusion of Prop 22 expenses (over $48 million) by saying such legal costs are unpredictable and likely to be unnecessary in the future. This is doubtful, as many of the largest or fastest growing food delivery markets are in cities and states also considering worker reclassification or already have ABC tests, and the companies themselves have indicated that they intend to replicate the Yes on Prop 22 campaign in the future.
"Now we're looking ahead and across the country, ready to champion new benefits structures that are portable, proportional and flexible,” Xu said after Prop 22 passed in California.
DoorDash also emphasizes that it expects its revenue growth to "fluctuate over the short term and decline in the long term" as "the size of our business grows and as we achieve higher market adoption rates." There's also the admission that "intense competition" could adversely affect their business, largely because of "shifting user preferences, fragmentation, and frequent introductions of new services and offerings."
DoorDash argues that its path to profitability relies on a critical mass of consumers and merchants (more engagement means more order volume, revenue, and earnings for drivers), but if that were true we would already be seeing evidence of it in markets where DoorDash dominates. No such data is offered in this S-1. We are left with some evidence that, after adjustments, DoorDash could one day be profitable but it's unclear what changes to its core operations or unit economics over the past year would have yielded this, let alone if these changes will be long-lasting or sustainable.
In fact, what we do know about DoorDash’s restaurant program suggests a willingness to coerce restaurants into partnerships by secretly scraping their websites—a practice which can be taken even further and used to create “ghost kitchen” competitors ready to undermine restaurants by offering such an nearly-identical product that consumers confuse the two.
Further undermining DoorDash’s outlook is its admission that jurisdictions across the United States have implemented "temporary commission caps on local food delivery logistics platforms." In response to the caps, DoorDash will "increase the fees we charge to consumers." Chicago is the most recent addition to that list—and in some cases are considering keeping them permanently.
To make quick sense of all this, remember how bleak ride-hailing unit economics are: the lion’s share of all profit improvement comes from reducing labor costs (wages) and increasing prices. Uber’s ride-hailing operation has horrible financials, but its food delivery fundamentals are even worse. The question then becomes whether DoorDash’s S-1 clearly suggests a business model or operating economics on food delivery that are fundamentally different than and superior to Uber Eats.
While DoorDash may have more merchants, customers, and subscriber programs to extract revenues from, this does not answer whether the core operational costs are any different. As the S-1 reads, “Dasher pay is a major component of the cost of our business and subject to a number of risks, including changes to our Dasher pay model.”
So long as driver pay remains a key operational cost, the answer seems to be that DoorDash and Uber Eats aren’t fundamentally different operations cost-wise. And if that’s the case, then—like Uber—DoorDash’s pursuit for profits will cut through the million-plus delivery drivers on the platform.