The pandemic accelerated competition for on-demand food delivery, and in the United States, there were two clear winners: DoorDash and Uber, which together control 96% of a market that has doubled over the past two years.
After years of using venture capital money to keep prices low and buy up smaller competitors along the way, DoorDash and Uber may have finally cracked the code of squeezing profit out of this notoriously low-margin business: It required a duopoly.
Both companies are making progress. Uber reported it was cash-flow positive last quarter for the first time in its 13 years of operation. “When we look at the competitive environment, this is the strongest we felt competitively globally,” said Dara Khosrowshahi, the CEO of Uber, on a conference call with investors and analysts this week.
Investors are happy, as Uber’s stock popped 19% following the earnings. In the three months ending in June, Uber’s delivery unit, which is mostly comprised of Uber Eats, reported adjusted profit of $99 million. Similarly, DoorDash said that adjusted profit last quarter was the highest in its history, driven by higher restaurant profits. DoorDash reported total orders growing to a record high, and its shares soared 18% in after-hours trading.
Still, both companies remain unprofitable when their adjustments are removed. In the three months through June, DoorDash’s net losses widened to $263 million, up from $102 million a year before. Uber reported losing $2.6 billion in the second quarter of 2022, which it attributes to revaluation of stakes in companies like Didi, Grab, and Zomato.
DoorDash raised guidance for the year, despite saying it “anticipates a softer consumer spending environment” in the second half of the year, cautioning investors it could drive results below its expectations.
On-demand delivery companies, flush with venture capital funding, have burned cash to move quickly into new cities and attempt to dominate the market with frequent offers of free food and delivery. The margins in food delivery are thin, so the idea is massive market share will make the business profitable.
DoorDash remains the leader of the US food delivery market, attributing being ahead of its competition by investing early into suburban markets, where the average order size tends to be larger. (DoorDash’s share in US suburban markets was estimated at 58% in 2020, according to its S-1 filing.) Meanwhile, when the pandemic crushed ride-hailing, Uber turned to delivery to prop its flailing business. The move allowed the company to use its existing network of drivers to simply add food delivery to carrying passengers, which kept drivers busy and added another source of revenue.
The economics of food delivery are challenging, but Uber and DoorDash said delivery logistics are improving. DoorDash said labor costs have declined due to strong retention and improved efficiencies. Nelson Chai, Uber’s chief financial officer, said, on the delivery side, “the cost per transaction is just improving” as things like being able to better batch order or finding the most efficient routes for drivers improve.
Other companies are having less success. Last month, Deliveroo, a UK-based food delivery company, said it expects growth to be than expected, attributing it to “increased consumer headwinds” amid a worsening cost of living crisis.
Whether these market share gains will stick remains to be seen. In early July, DoorDash’s stock fell after Amazon agreed to take a stake in Grubhub’s business, further pressuring Uber Eats and DoorDash to ramp up order volume. “If you can gain it quick, you can lose it quick,” said Herbert Hovenkamp, a professor at the University of Pennsylvania, who focuses on antitrust and innovation. “The thing about these companies is they do not have any kind of technological base that gives them a big advantage over competitors. It’s just their size.”
For instance, Uber is a collection of individual drivers, each of whom own their own cars—that model can be readily duplicated by someone else unlike Microsoft Windows or Mac OS for Apple, which is “a lot less true of very decentralized markets,” he said. “You may be looking at a situation that exists today, but might look a lot different from this four or five years from now.”
The article has been updated with context around DoorDash’s guidance for the year.