There are a lot of bullish opinions on the long-term prospects for third party delivery apps like DoorDash (DASH) and Uber’s (UBER) food delivery segment. When thinking about their business models, the stumbling block for me has always been the fact that they take 15-30% of the order value for themselves (which in many cases is most or all of the restaurant’s profit on the order) and they have to supply the labor as well, which presents headwinds like rising minimum wages and the debate over whether their drivers can be contractors or must be classified as employees.
The end result is a tough hill to climb to profitability (during a pandemic year in 2020, when the business should have crushed it, DoorDash brought in nearly $3 billion of revenue but lost more than $300 million). Even if they expand successfully to serve traditional non-food retailers too, the same issues apply.
Looking at it from the outside, it seems to me the better bet would have been to build the technology platform and simply sell it to the restaurants. You wind up with a high margin software as a service business that would get a huge valuation on Wall Street, and you let the restaurants hire their own drivers to fulfill the orders that come in. Fewer parties involved directly in the order makes it more efficient and allows restaurants of all sizes to compete with the likes of the big pizza delivery chains, who have a head start with a driver network and online ordering technology.
Interestingly, this is the path that Olo (OLO) has taken and the software provider will go public today at a $25 per share offer price. The stock has yet to open, so I can’t comment on valuation, but I am interested to dig into the company more because I far prefer their business model (charge a monthly service fee per location plus a small transaction fee per order that declines as volumes grow) to one that literally makes you a middleman between the customer and the food.
It will probably not be a winner take all situation. Large restaurant chains with huge order volumes will be able to negotiate better with the likes of DASH to reduce fees and make delivery orders marginally profitable. But smaller independent chains likely can’t do the same, and could very well prefer a scalable software solution where they control the customer experience directly (maybe emphasizing carry out more than delivery) and don’t have to give up all of their margin to stay relevant in the marketplace.
As a value-oriented investor, I hope Wall Street discounts the Olo model and affords it a reasonable valuation, as they are a leader on the software side and their model seems to make a lot of sense if you want to be profitable in the online ordering food space. Time to dig into their financials and see where the stock trades in the early going.