DoorDash is making a very large investment in delivery-only restaurants.
According to one investment company, Cowen, headquartered in New York, they could not have chosen a better time to do so. The online home delivery business is booming.
Who is DoorDash?
DoorDash is an on-demand restaurant delivery service. The company was founded by Tony Xu, Stanley Tang, Andy Fang, and Evan Charles Moore in February 2013. Its headquarters are in San Francisco, California.
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As of June 2017, DoorDash could be found in more than 500 cities, and more than 59,000 restaurants are signed up to do business with them. Also, they have over 100,000 dashers located across the US and Canada signed up with them.
Speaking about the forecasted growth for the online delivery business model, Cowen's chief analyst Andrew Charles said the following. "All in, we forecast delivery to grow from $43 billion in 2017 to $76 billion in 2022, 12% annually over the next five years.__"
Cowen attributes this boom to the ease with which one can order items online. Customers are capitalizing on this ease. Why run errands when you can get those errands such as shopping and food deliveries done for you and brought right to your doorstep? Why go out to eat and have to wait in line and share your dining experience with complete strangers?
Restaurants owners have also realized that the above thinking can be capitalized on as well.
DoorDash's foray into the world of virtual restaurants is being signaled by their launch of a brand new two thousand square food commissary kitchen. The kitchen is located in Silicon Valley.
Four different delivery-only restaurants will call this brand new facility home. DoorDash has chosen to calculate the rent as a percentage of each restaurant's gross sales. Not a common practice.
The kitchens will be referred to as DoorDash Kitchens, and the food deliveries will be done by DoorDash dashers (driver/delivery person).
The Virtual Restaurant Concept
The virtual restaurant concept that DoorDash is pursuing is not a new one. Munchery located in San Francisco launched their commissary kitchen in 2010. Ando located in New York launched their commissary kitchen in mid-2016.
It's important to note that even though the online home delivery market is booming it is not without challenge.
Munchery is struggling. This could be due in part to the business model they have adopted. They do not just deliver the food. They develop the menus working with chefs or on their own. They also source all the ingredients and are responsible for the labor required to produce the food.This detracts from their bottom line not to mention the challenges of being responsible for the "talent"
Case in point in August 2015 Munchery partnered with Chef Roy Choi. Chef Choi is the talent behind Kogi, a Korean taco fusion food truck located in California. His contract saw him on the receiving end of $100,000 a month in return for creating his own meal line. That contract was canceled five months later in December after Chef Choi offered up only two recipes.
DoorDash is going in another direction. They have adopted the Deliveroo, business model.
Who is Deliveroo?
Deliveroo is a British food delivery tech company.
The food delivery business is divided into three groups says Martin Mignot. Martin is an entrepreneur and has an investment background. He worked at Index Ventures and started Deliveroo among other companies.
The three groups in the food delivery business he has identified are taking the order, cooking and delivering. He recognizes that there is potential for overlap but points out that as a company, you are not required to do all three.
Deliveroo has positioned themselves strategically to control the customers end to end experience while offering a wider variety of restaurants for them to choose from without having to take on the expenses and responsibilities that come with owning an actual restaurant.
The virtual restaurant concept does not only provide benefits to delivery companies. Restaurants benefit as well.
Benefits of Virtual Restaurants
The restaurant business is one of the toughest industries to derive success from. Initial startup costs are steep.
A survey conducted by restaurantowner.com amongst its members revealed that the median cost to open a restaurant is $275,000 or $3,046 per seat. If you own the building that houses the restaurant, that figure rises to $425,000 or $3,734 per seat. These costs come from areas such as equipment, technology, food expenses, labor and sales, and marketing to name a few.
With a virtual restaurant majority of these expenses are greatly reduced and even eliminated.
Growing Revenue Source
Virtual restaurants are highly data-driven. That data can help them determine when and how to grow their revenues. For example, it can help determine how far to expand their delivery area. Also, it also allows them to penetrate markets where either rent is extreme or preferred locations are not available.
Virtual restaurants are not bound to a particular menu. They can change their menu to match demand and changes in food expense. This lets them avoid taking hits to their bottom line when these changes occur.
Multiple Concept Changes
If a brick and mortar restaurant concept fails, you cannot simply flip the page and start over. With virtual restaurants, you can. You can keep doing so until you find a successful concept. Given how things in the food industry can change on a dime this is a great benefit to have.
Offering Additional Information
Information is power, and the more information customers have, the better the decisions they can make. Virtual restaurants are not limited by menu space or server memory retention. They can give a customer all pertinent information on any dish from nutritional composition to best pairings. This has the added advantage of making up selling easier.
The road ahead for DoorDash is steep. However, if the numbers are to be believed the potential for great success makes the challenges ahead worth fighting.