Third-party restaurant delivery services like DoorDash (DASH 0.24%) are convenient but not exactly budget-friendly. They have higher item prices than you'd see in person and multiple layers of fees, along with a tip, which can push the cost of a meal into the stratosphere. A sandwich dropped off on your doorstep in 20 minutes sounds great, but not so much when it ends up costing $30.
Despite the high cost that consumers pay for restaurant delivery, DoorDash has historically struggled to make its business model work. Even during the height of the pandemic, when in-person dining was on hold, the company failed to turn a profit. In the post-pandemic world, DoorDash's profitability has deteriorated further.
|
Period |
Net income |
|---|---|
|
2020 |
($461 million ) |
|
2021 |
($468 million ) |
|
2022 |
($1.37 billion ) |
Data source: DoorDash.
The situation could get much worse
For more than three years, tens of millions of student loan borrowers with federal student loans have not had to make payments. That pandemic-era accommodation officially comes to an end in October, so many households will suddenly have hundreds of dollars per month redirected into student loan payments.
This student loan payment restart will likely have a negative impact on many companies, but DoorDash could feel it more than even retailers. The company's service is pure convenience, and an expensive one at that. As household budgets tighten, that $30 sandwich starts to look increasingly absurd.
While DoorDash is popular among all age groups, just about half of its customer base is 45 years old or younger, while more than 30% are 35 years old or younger, according to Statista. These age groups are the most likely to have significant student loan debt.
About 33% of those between 25 years old and 34 years old have federal student loan debt, the highest proportion of any age group. That's also the largest age group in DoorDash's customer base.
With DoorDash already unable to turn a profit, any decline in demand is going to wreak havoc on the bottom line. In the first quarter of 2023, the company grew total orders by 27% year over year and total revenue by 40% year over year. But on that $2 billion of revenue, it realized a net loss of $162 million.
Restaurant delivery is largely a commodity. DoorDash faces competitors, including Uber, that offer exactly the same service, and often feature exactly the same restaurants. This means DoorDash doesn't have much in the way of pricing power.
The quality and speed of the service are important, too, and those are areas where a delivery company can carve out a small edge. But that's unlikely to translate into the ability to charge much more than competitors without suffering market-share losses.
NASDAQ: DASH
Key Data Points
Stay away from DoorDash stock
Even if the student loan payment restart has no negative effects on DoorDash's business, the company is still an unprofitable restaurant delivery company with little-to-no pricing power. Its biggest competitor is its customers, who are going to pick up the food themselves, which will often be dramatically less expensive.
DoorDash is still driving orders through its platform higher, but the combination of a tough economy and the return of student loan payments could slow that growth dramatically. The stock has soared 60% so far this year, but that rally could be easily undone if the company's results come under pressure later this year.
