By now I’m sure we’ve all seen stories about how third-party food delivery services have been driving down restaurant profitability to a point where restaurants with razor-thin margins are now drowning over the past few months even if they were allowed to stay open for take-out and delivery orders. What’s wild though is some of these third-party companies are losing so much cash they might as well be setting it on fire.
DoorDash, for instance, lost $450 MILLION last year according to this report on The Verge. I won’t even begin to act like I fully understand the business model behind businesses like DoorDash. In fact, it was news to me that part of their business model is to just list new restaurants on DoorDash and when customers see these listings they (DoorDash) acquire new partner restaurants ‘by bulling restaurants’ into participating.
This story on TheVerge is one about a pizzeria owner getting a rare win over the massive venture-backed corporation. His pizzeria didn’t offer delivery service but he suddenly received a barrage of delivery complaints from customers. He found this odd and investigated to discover that a DoorDash delivery option had appeared on his company’s Google listing.
Then he noticed that DoorDash had mistakenly listed the price of one of his pizzas (and pizza dough). A pizza of his that sells for $24 was listed on DoorDash for only $16. The thing is, DoorDash has to pay him the actual price of the item so he got creative, used DoorDash to order some of his own pizzas and pizza dough, and made easy money:
And so the story unfolds. “If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. You’d net a clean $8 profit per pizza [insert nerdy economics joke about there is such a thing as a free lunch],” wrote Roy. They order 10 pizzas this way, and it worked! The money was free, a seamless transfer from SoftBank’s deep venture capital-lined pockets to Roy’s friend’s business bank account. Eventually, in another series of what Roy hilariously calls “trades,” they just ordered pizza dough through DoorDash for $75 in pure profit.
“So over a few weeks, almost to humor me, we did a few of these ‘trades’. I was genuinely curious if Doordash would catch on but they didn’t,” wrote Roy. “Was this a bit shady? Maybe, but fuck Doordash. Note: I did confirm with my friend that he was okay with me writing this, and we both agreed, f**k Doordash.” (via The Verge)
Making $8/pizza might not seem like a ton of money but if the restaurant is typically only making $4/pizza they’re basically printing cash now and their profit margin just got extremely cushy.
The article has a long explanation of how business models like those of DoorDash and Uber are hemorrhaging cash every year. Only GrubHub inc. was profitable last year but they still lost $33.4 million in the first quarter of this year due to the global health crisis.
If these venture-backed companies don’t exist to first and foremost make a profit, they will fail, and some of them could risk taking down entire industries with them.
It’s nice to see the little guy get a rare win over a massive company who bullied him into participating in their delivery service.