Weekly reading – 19th February 2022

I didn’t write anything last week and this weekly post is late because I was traveling back to Vietnam and locked out of my account. My blog’s two-step authentication requires a verification by SMS, but my carrier doesn’t enable calls or messages outside the US.

Business

Sequoia’s invisible hand: How Roelof Botha became one of the most powerful people in venture capital. VCs usually cut overly confident figures but this profile shows that even one of the best in the business expects himself to have unsuccessful deals and do have unsuccessful deals. Even one of the best needs support in times of uncertainty.

The Hidden Ways Companies Raise Prices. I have no beef with businesses that raise prices to cover high costs. I do have a beef with companies that do so sneakily. Be upfront and tell me that you have to raise prices due to inflation. Be straight and transparent with me.

DoorDash to Bump Up Its Fees on Slow McDonald’s Restaurants. An interesting look at the negotiation between a delivery service like DoorDash and a merchant like McDonald’s. DoorDash has considerable bargaining power, in my opinion, because it can drag an icon like McDonald’s to the negotiation table and get a deal.

Doing Business in Myanmar Is Tough, but Norway’s Telenor Finds That Leaving Isn’t Much Easier. While I feel bad for Telenor as the company has to find a way to leave Myanmar even though it only tries to do good by the people, I feel even worse for the people of Myanmar.

Discover Is Bringing a Payment Option Popular in Asia to the U.S. Discover is expected to announce a new partnership later this week that will enable merchants to accept payments through checking accounts. I am eager to learn how Discover is going to change consumer behavior and how this kind of initiative would affect the arguably duopoly of Visa and Mastercard

Inside Facebook’s $10 Billion Breakup With Advertisers. The article struck a positive and compassionate tone for Facebook as it didn’t mention once that the business model is built on users’ data and can violate their privacy or that Facebook usually leads the news headlines for all the wrong reasons related to that business model.

Other stuff I found interesting

How Pfizer made an effective anti-covid pill. “Right away, researchers got a lucky break. When Pfizer checked, it found that none of the thousands of proteins in the human body shared the same bit of molecular structure they planned to interfere with in SARS-CoV-2. That meant they could hit the virus hard and not expect any major side effects. Nature had provided the scientists with a big bull’s-eye”

The Logistics Behind Deicing Airplanes. I think after watching this clip by WSJ, I become more understanding any time flights are delayed.

Stats

According to a presentation to investors by Shopify, Amazon has 41% of the U.S eCommerce while Apple has 4%

The discontinuation of Monthly Child Tax Credits is allegedly pushing 3 million kids back into poverty

Weekly reading – 22nd January 2022

What I wrote last week

Square Online’s on-demand delivery

Netflix’s price hike

Uber Eats lags behind DoorDash in the US. Advertisers made up 18% of Uber merchants

Business

Another gem from Howard Marks. “Superior investing consists largely of taking advantage of mistakes made by others.  Clearly, selling things because they’re down is a mistake that can give the buyers great opportunities. So it’s generally not a good idea to sell for purposes of market timing.  There are very few occasions to do so profitably and very few people who possess the skill needed to take advantage of these opportunities. Thus, someone entering adulthood today is practically guaranteed to be well fixed by the time they retire if they merely start investing promptly and avoid tampering with the process by trading. On April 11, 2019, The Motley Fool cited data from JP Morgan Asset Management’s 2019 Retirement Guide showing that in the 20-year period between 1999 and 2018, the annual return on the S&P 500 was 5.6%, but your return would only have been 2.0% if you had sat out the 10 best days (or roughly 0.4% of the trading days), and you wouldn’t have made any money at all if you had missed the 20 best days.  In the past, returns have often been similarly concentrated in a small number of days.  Nevertheless, overactive investors continue to jump in and out of the market, incurring transactions costs and capital gains taxes and running the risk of missing those “sharp bursts“”

Google Misled Publishers and Advertisers, Unredacted Lawsuit Alleges.Google misled publishers and advertisers for years about the pricing and processes of its ad auctions, creating secret programs that deflated sales for some companies while increasing prices for buyers, according to newly unredacted allegations and details in a lawsuit by state attorneys general. Meanwhile, Google pocketed the difference between what it told publishers and advertisers that an ad cost and used the pool of money to manipulate future auctions to expand its digital monopoly, the newly unredacted complaint alleges. The documents cite internal correspondence in which Google employees said some of these practices amounted to growing its business through “insider information.”

Shams vs. the ‘Woj bomb’: Sports reporters are duking it out for scoops on Twitter, and their value is soaring. The business of being constantly on the phone for breaking news sounds excruciating and exhausting

Interview: Ryan Petersen, founder and CEO of Flexport. “One thing to remember here is that in America, the ports are owned by the local city that they’re in. Therefore, they’re not managed as a strategic national asset, which they clearly are. The first thing that I would do if I were in charge would be to actually put a team in charge. Right now, there isn’t a dedicated team within the federal government to coordinate all public and private sector activities to help resolve the supply chain crisis. It’s spread across multiple regulatory agencies, jurisdictions and levels of government. The two big bottlenecks are a lack of chassis and a lack of yard space both at the container terminals and in the yards around neighboring cities. We know that the federal government and the state government of California owns a lot of land so we’d love to see them make it available for storing containers and creating off-terminal storage facilities where truckers can pick up containers easily without having to wait in long lines at the gate to the ports.”

What JPMorgan is doing with that $12 billion tech spend. The threat from fintech startups is real. It should be applauded that an incumbent like JP Morgan stays vigilant and is willing to invest a chunk of money to stay competitive. Not every company can do that. With regard to the ROI of this $12 billion investment, I get that folks can be skeptical when the management doesn’t reveal it. But at the same time, there are benefits that are very hard to quantify and the technology roadmap can change all the time.

Google Team That Keeps Services Online Rocked by Mental Health Crisis. A damning account of Google’s working culture, which once was a draw for talents

Peloton reportedly pauses bike and treadmill production because of lack of demand. The darling Covid stock now bears the brunt of ineffective management and operational flaws. They invested a lot in supply, only to find out that they picked all the low hanging fruits on the market and that they couldn’t sign up more customers.

Other stuff I found interesting

Nowa Huta: The city that went from communism to capitalism. An interesting story on how a Polish city transformed itself from a communist ruin into a vibrant city powered by capitalism

Tesla Wooed by India States After Elon Musk Flags Challenges. I am not really a fan of governments at different levels being pitted against one another by rich companies. Companies always go to states that offer them the biggest benefits; which do not often translate into better lives for the constituents and local economies. If Musk and Tesla have to enter India, and if the federal and state governments are unified in how they welcome Tesla, what choice would Tesla have?

How Big Beef Is Fueling the Amazon’s Destruction. “More than 70% of deforested land in the Amazon turns into pasture, the first step in a supply chain that’s among the most complex in the world.”

Stats

Ho Chi Minh City startups raise $1.1 billion in venture capital in 2021

Apple Card’s balance as of Q4 2021 was $8 billion

7 million or more than 5% of US households are unbanked

Alcohol sales was boosted by Covid. Source: Bloomberg

Uber lags behind DoorDash in the U.S. Uber advertisers made up 18% of its merchants

Uber Eats in the U.S accounts for 23% of its total Gross Bookings. Still far behind DoorDash

To prove that it’s a valuable partner for merchants, Uber commissioned what they call Uber Merchant Impact Report. This report is based on internal data between October 2020 and September 2021, as well as an online survey of 727 U.S merchants whose response is anonymous. According to Uber, there are 400,000 active Eats merchants in the U.S alone. Hence, the number of surveyed responders (727) doesn’t seem very representative to me. Nonetheless, the report does have some useful nuggets.

In the last twelve months, Uber Eats facilitated $11 billion in “sales” for merchants in the U.S. The word “sales” here is tricky as I don’t know for sure whether it is Gross Bookings or what merchants actually receive after Uber gets its cut. The difference can be in the region of 25%. In this case, if we assume that the figure is Gross Bookings, it means that Uber Eats in the U.S was responsible for 23% of the company’s total Delivery Gross Bookings (approximately $48 billion) in the last year. Quite a significant piece of the business. However, it still lags quite far behind almost $40 billion in Gross Bookings that DoorDash recorded in the U.S in the same time frame.

Additionally, Delivery has 400,000 active merchants and 2 million active drivers in the U.S at the end of September 2021. In the past year, these merchants and drivers helped facilitate more than 500 million Eats orders. In contrast, DoorDash, if we assume all their Operating metrics are U.S alone, has 500,00 active merchants, 3 million active riders and almost 1.3 billion orders.

Uber Eats/DeliveryDoorDash
Gross Bookings between Oct 2020 and Sep 2021 (in $ billion)11 – 13.7540
Orders between Oct 2020 and Sep 2021 (in millions)5001,300
Active merchants as of end of Sep 2021 (in thousands)400500
Active drivers as of end of Sep 2021 (in thousands)2,0003,000
Comparison of operating metrics for the U.S market

Uber advertising is growing

Uber advertising was first launched in the U.S in Q3 2020, has since expanded to all Eats markets, exceptGermany, and has been seemingly well-received by merchants. The number of active advertising merchants grew from 30,000 in Q3 2020 to 140,000 a year later. As share of total active merchants, advertisers made up 5% and 18% in Q3 2020 and Q3 2021 respectively.

While the growth figures look good, I have a couple of concerns over this advertising business. The first is its outlook. We obviously can’t expect 100% of merchants to become advertisers. If 18% is the adoption rate right now, how much higher can it go? 25% or 50%? In that case, what would be the ramifications of having too many advertisers and too many sponsored listings on an app? We all feel annoyed with Google searched result pages littered with ads. If Uber is not careful, it will risk losing valuable consumers because of inferior customer experience. That’d be too high a price to pay, I’d say.

The second concern I have is whether this segment can actually move the needle. Uber revealed that advertising reached an annualized run-rate of $100 million in Q3 2021. Whether this number was annualized on a weekly or daily basis is unclear; which makes it impossible to really gauge how much revenue Uber actually generated from advertising. Additionally, even the annualized run-rate of $100 million is a drop in a bucket as Uber’s last 12 months’ revenue was almost $15 billion. Is advertising dollars helpful? Yes. Will it be a needle mover soon? I doubt it.

Square Online’s on-demand delivery

On Wednesday 1/12/2021, Square announced a new partnership that will enable Square Online orders in Canada to be delivered by DoorDash Drive. The new service in Canada is an extension of what Square launched in the U.S before. This is how it works: after a Square Online merchant receives an order, a DoorDash/Uber Eats courier (depending on whether you live in the U.S or Canada) will come to the merchant’s location, pick up the order and bring it to the customer. The customer can track the order through a link sent in a text message by Square. All orders with on-demand delivery will be commission-free. For every order, merchants will only pay a dispatch fee of $1.5 and a processing fee of $3.6 to Square.

Square on-demand delivery
Square on-demand delivery. Source: Square

At a closer look, the service is interesting to me. The sales pitch merchants will hear is very simple: work with us, become our merchant and you won’t have to waste valuable dollars on delivery staff or those expensive marketplaces with high commissions. A saving of $11 on every $50 order is highly attractive, but it’s not the whole story for merchants. Even though Square Online is free, anyone serious about operating a business will certainly need to upgrade to a higher tier. Who wants to build a brand with a “square.site” in their domain? Even a nobody like myself tries to secure a custom domain. To use a custom URL, merchants need at least a Professional plan at $12/month. Additionally, merchants can only enable PayPal checkout, product reviews or gift options with a Performance plan, which costs $26/month. Want advanced eCommerce stats regarding product performance or sales trend? Pay $72/month for the highest tier then. For Square, this means high-margin & recurring subscription revenue. For merchants, they need to think about what they may get themselves into.

Merchants must also be aware that using this on-demand delivery service with Square is different from being on Uber or DoorDash app. These marketplace apps are household names and likely bring more sales. That’s their primary value proposition. That’s how they can charge a commission of 30% per order. Since orders must be from merchants’ online stores, the task of generating sales and marketing now falls onto merchants who will have to choose between a bigger piece of a smaller pie and a smaller piece of a bigger pie. One thing that I have to say, though, is that by having customers place orders directly online, sellers can establish a precious relationship with customers, instead of ceding it to the likes of Uber or DoorDash.

Square Online pricing tiers
Square Online pricing tiers. Source: Square

What also interest me is the low dispatch fee. For every DoorDash Drive order, merchants normally pay a flat fee of $8. In this case, the dispatch fee is only $1.5. As the market leader in food delivery, DoorDash certainly has the bargaining power that they would not bend over backwards to work with Square at all costs. A drop of 81% in dispatch fees is massive, affecting DoorDash’s top and bottom line. Hence, I believe Square must compensate their partner in this agreement and make up for some of that loss. The question is: do the numbers add up for Square? It’s worth pointing out that a DoorDash Drive flat fee of $8 includes DoorDash’s standard processing fee of 2.9% + $0.3 per order. In other words, a normal $50 DoorDash Drive order will result in a processing fee of $1.75 and a dispatch fee of $6.25. A cut of $1.5 per order from Square on-demand delivery means DoorDash will lose about $4.75 per order in revenue. Let’s assume Square compensates DoorDash $3 on every order with on-demand delivery. 1,000 such orders per month (around 3 per day) for 1,000 merchants would put a dent of $3 million on Square’s financials. Square claimed to have millions of sellers. A wide adoption of this on-demand delivery service wouldn’t be financially tenable. How does Square make this work?

My hunch is that Square’s target audience for this service is small, to begin with. Any merchant wishing to use this on-demand delivery service must have a Square Online store. We can exclude medium and large-sized merchants from this population as they must already handle their online activity. Those that are in need for Square Online should be mom-and-pop or local restaurants that do not have a website or really need an upgrade and a delivery service. This market segment should be small enough for Square to offer this service and make the numbers work. I suspect that the company wants to use this offering as an opening to get these merchants to install Square POS in stores. Once Square successfully has its POS installed, the more orders merchants have, the more revenue Square generates. What intrigues me is what Square would do if merchants had too many on-demand delivery orders? Would Square terminate the service or start charging more?

This service from Square offers great benefits to small merchants and really differentiates the company from its rivals like PayPal. I don’t have access to their financials and breakdown on this specific service, but my guess is that because the target audience is very small to begin with, it won’t move the needle much. Is this a threat to Olo? I don’t think it is. Olo’s bread and butter at the moment is franchises with multiple locations. Their business doesn’t hinge on who powers merchant’s websites. What matters is that Olo offers a centralized system helping merchants deal with the likes of Uber, GrubHub and DoorDash efficiently. Square’s on-demand delivery requires that merchants have to build online presence with Square. It’s a different game.

Uber Q3 FY2021 Earnings

In this post, I’ll share my notes on Uber Q3 FY2021 earnings and the business in general.

The last quarter saw Uber’s business continue to recover from the recent challenges, including driver shortages and lockdowns in various parts of the world. The number of Monthly Active Platform Consumers (MAPC) reached 109 million, an increase of 40% year over year. This is the highest number that Uber has seen in the last 12 months. The number of trips rose 39% as the average monthly trips per consumer was flat at 5 each. As usage increased, the company saw Gross Bookings (GB) and Revenue grow by 57% and 72% respectively (Figure 1). Adjusted EBITA, which Uber uses to measure profitability, was positive for the first time.

Specific segments (Mobility, Delivery and Freight) showed great progress in both GB and Revenue. Mobility led the way in GB growth at 67%, followed by Delivery at 50%, mainly because of the law of big numbers. In revenue growth, Mobility trailed Delivery (62% and 97% respectively), because the latter managed to raise its take rate by 410 basis points (Figure 2) while the former’s take rate took a modest hit. As the revenue continued to climb and operational optimization kicked in, Uber’s Delivery was inches away from profitability on Adjusted EBITA basis.

There is an argument to be made that Covid-19 created a golden opportunity for Uber to transform itself. The pandemic impacted its Mobility segment to great extent as lockdowns were imposed and consumers stayed at home. Not only did the company persevered, but it also pivoted successfully to grow its Delivery service. Since December 2020, the company’s total GB every month already exceeded that of February 2020. The key was in how Uber did it. While Mobility’s GB still hasn’t recovered to the pre-Covid level, Delivery has grown leaps and bounds by several folds (Figure 3). Furthermore, the two segments start to complement and support each other as one becomes a key acquisition tool for the other. Here is what Dara, the CEO, had to say on the earnings call:

So about 50% of, for example, U.S. and U.K.gross bookings come from cross-platform users. That number is closer to 45% globally and generally increasing. In the U.S. now, mobility continues to be a very significant customer acquisition tool for Eats. So now 1/4 of U.S.first-time eaters are coming from our Ride’s business, which is pretty extraordinary. For perspective, that’s more new users than we get from Google, Apple, Facebook, Instagram from all of these paid entities combined.So it’s free. We have tested that because consumers actually like this super asset that we’re building and the numbers are significant and increasing. And then on the other side, what’s interesting is that 20% of U.S. mobility first trips are coming from eaters. So now that we have a very, very big delivery business, we’re able to now cross platform into whether it’s offers or on the app or off app, we’re able to promote into our Mobility business. That number for the U.K., for example, is 40%. I’ll repeat it. 40% of U.K. first trip mobility users actually came from Eats — were Eats users, which is pretty extraordinary.

Source: Uber Q3 FY2021 Earnings Call

This synergy and ability to cross-sell is a competitive advantage over other Delivery rivals like DoorDash or Mobility nemesis (Lyft). None have this capability, especially on a global scale, like Uber does. From a consumer perspective, the extra utilities that Uber offers create a compelling reason to be a member and use the Uber app more often. According to the management team, there are 6 million members globally who already make up 1/5 of the total GB. On average on the Eat side, members’ basket size is 10% bigger than that of non-members. In Taiwan, Eat members made up more than 50% of the market’s GB and placed 3x more orders than non-members.

The increased utilization is also reflected on the driver side. A few months ago, in an article on the acquisition of Postmates and Drizly, I wrote: “Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up. When it comes to making more trips and money, do drivers care if it’s a parcel or a person that needs transporting?”. The sentiment was confirmed yesterday by Dara on the earnings call:

On the driver side, one thing that’s pretty cool is that about 1/3 of our new driver sign-ups now are driving both people and food, so to speak. And that is a higher number than our overall number. So about 25% of our drivers in the U.S. drive both people and food. That number was in the teens pre-pandemic.So it’s going up from the teens to 25% overall. And new drivers, 1/3 of them are electing to do both. So that, again, is like the iteration of our product getting better and better in terms of kind of pushing both services or offering both services, both on the demand and supply side.

So I think we’re going to see more earners on our platform for years and years to come. And we are finally getting the right muscle in terms of promoting cross-platform usage, which is going to lead to higher utilization on our platform in terms of time of day and in terms of driver utilization, structurally, it will be an advantage over the other players. So we want to be that platform that is kind of the one-stop shop for earners that they keep coming back to for a long period of time.

Source: Uber Q3 FY2021 Earnings Call

The investment in drivers that Uber made earlier in the year, plus the recovery from Covid and the increased driver utilization, helped the company tackle the driver supply issue. Compared to January 2021, Uber has seen 75% more active drivers in Q3. The wait time dropped from 7. 5 min on average in the U.S in March 2021 down to 4.5 min in October 2021.

In addition to the true ride-hailing and food delivery services that people come to know Uber for, there are a few other developments that are very promising and potentially beneficial to Uber. First is advertising. Having a marketplace (app) that is used by millions of users enables the company to monetize that traffic. Merchants wishing to broadcast their name and generate more business ought to pay advertising dollars to Uber. From Uber side, advertising revenue which Uber reported to amount to $100 million on an annualized basis in Q3 2021 and feature 140k merchants is high margin that allows the company to “fund” other emerging verticals. Which brings me to non-food deliveries. The new verticals make up about 6-7% of Delivery’s total GB and are expected to reach double digits next year. The investments that Uber has made to scale these verticals actually dragged down the profitability of the whole Delivery segment as the core verticals are now already in the black.

Additionally, the company is expanding alcohol delivery to more states in the U.S after the acquisition of Drizly. Drizly has a business model that is already profitable. It acts as a marketplace to connect merchants and consumers, but leaves the delivery duty to merchants. That way, Drizly can simply earn revenue from monthly subscriptions and a small fee every order without having to deal with drivers and all the expenses that come with delivery. Other ventures include rapid delivery, dark grocery (tiny warehouses that hold a limited selection of grocery to facilitate rapid delivery) and Baby + Kids vertical.

One stripe that people have against Uber is the tendency to burn money every quarter. The criticism is legit as that’s been the company’s model. This quarter saw net loss balloon to $2.4 billion, $2 billion of which came from a “net headwind (pre-tax) from revaluation of Uber’s equity investments in Q3 2021”. According to Uber’s CFO – Nelson Chai, the write-down resulted mainly from the loss of value of Uber’s stakes in DidiChung and this fluctuation can continue from one quarter to the next. I have quite mixed feelings about this issue. While I appreciate that Uber has valuable assets such as this equity, the fluctuation and complication don’t provide the simplicity and certainty to investors.

Lastly, Uber revamped its pricing tiers for merchants. The new pricing system mirrors very well what DoorDash offers with two distinct differences. One is that while DoorDash includes in its take rates the credit card processing fees, it’s unclear if Uber does the same. This can be an important point as 2.5% in credit card fees can mean the world to merchants. The other difference is that Uber guarantees 5 more orders every month with its Premier tier than DoorDash’s highest tier. As these table stakes are level-set, the difference between these two impressive companies will come down to: who executes better, who can bring more business & drivers to merchants?

Overall, this, to me, is a good quarter for Uber. The company took steps to address the driver supply issue and they worked. There is a great synergy between Delivery and Mobility that seems to go from strength to strength over time. Delivery doesn’t seem to show signs of slowing down and is actually profitable at the core while still in the red with the new verticals. Once Mobility gets back to the pre-Covid level and the new investments become more mature, the outlook will be even brighter for this company.

Disclosure: I have a position on Uber.

Appendix

Figure 1 – Uber’s Q3 FY2021 Financial & Operational Highlights
Figure 2 – Uber’s Revenue and Take Rate in Q3 FY2021
Figure 3 – Uber’s Monthly GB
Figure 4 – Uber’s platform supply growth efforts showing results in the U.S

Weekly reading – 15th May 2021

What I wrote last week

App Tracking Transparency & Apple Search Ads

Business

Why DoorDash and Uber Eats Delivery Is Costing You More. The service and delivery fees seem to be bigger than they were before Covid. I am not so sure if that trend is positive to the future of these delivery companies. At some point, it would hurt the relationship with merchants

Walmart is losing its grips on grocery. I don’t really expect Walmart to catch up with Prime soon, but it’s a bit surprising to me that the company is losing its lead in grocery, their bread and butter.

A sensible and good writeup on Epic vs Apple. I may be biased towards Apple as it is my first ever stock, but if you are a reasonable person, you likely won’t look at what Epic did and does, and support them.

Vietnamese startup Nano raised $3 million seed round. I believe this should be one of many fintech startups from Vietnam in the near future.

The Korean Chatroulette-style dating app quietly taking over the world

JPMorgan, Others Plan to Issue Credit Cards to People With No Credit Scores. It’s past time that companies take into account other factors in giving prospects credit cards or not.

What I found interesting

Biggest ISPs paid for 8.5 million fake FCC comments opposing net neutrality

Apple AirTags vs. Tile: The Best Tool for Finding Your Lost Stuff. The current generation of AirTags may have weaknesses and their performance isn’t eye-opening yet. But give it some time and I believe it can be another great segment in addition to AirPods and Apple Watch

Fact-checking Modi’s India. It’s just mind-blowing how the truth can be bent that much so that some people gain so much power.

The Verge has a good article on Federated Learning of Cohorts (FLoC), a new initiative by Google as preparation for life after 3rd party cookies

Jony Ive’s advice to the next generation of designers

Stats that may interest you

Consumer prices increased by 2.6% for 12 months ending March 2021. Perhaps it’s time to be rigorous in saving your money, unless you can increase your income.

App Store stopped more than $1.5 billion in potentially fraudulent transactions in 2020

Get to know Olo – that SaaS company with eCommerce solutions for restaurants

If you haven’t heard of Olo before, but want to know about it, grab a drink and read on.

What is the company about? What does it do?

In 2005, Noah Glass founded Gomobo to let consumers order food in advance with just a text message. Apparently, he convinced an investor to shell out half a million dollars for his startup idea and relinquished his chance to get into Harvard Business School in the process. Five years later, in 2010, he took a fateful decision to pivot the business from being a forefront customer facing application to a B2B one working behind the scenes to help restaurant manage their online orders. He named the new identity Olo, which is an abbreviation of “Online Ordering”. More than a decade later, Olo went public in March 2021 at a valuation of $3.6 billion, after raising a modest $100 million from outside investors in its history.

Olo products include Ordering, Rails and Dispatch. Ordering is the company’s flagship module that enables restaurants to quickly establish its online presence, manage online orders and seamlessly handle integration with internal systems such as rewards or Point-Of-Sale (POS). If a restaurant has each of its infrastructure elements (website, mobile app, reporting tool, payment processor, rewards and POS) developed by a different vendor, it’ll be a pain to get these inconsistent fragmented systems to talk to one another. Worse, the fragmentation makes combining data to produce a holistic view of the business a time-consuming endeavor. In this day and age, operating blind without data is similar to walking in to a gun fight with a screwdriver. Ordering’s value proposition is that it can help restaurants have a single source of truth, build an integrated infrastructure and do all of the following in one simple tool: manage online orders, offer customers a nice online experience, run reports, make informed and timely decisions or manage menus.

Additionally, Rails helps restaurants manage and centralize orders as well as menus on different platforms. Restaurants partner with aggregators such as DoorDash or UberEats to leverage its marketing and delivery prowess. However, there are a couple of challenges involved in this kind of partnership. If restaurants update menus once a month, how much time is usually lost in ensuring the new changes are reflected properly on each of the aggregators’ apps? When orders from these aggregators come in, how easy is it to combine the order data with a restaurant’s own data? The idea behind Rails is that it is a one-stop shop where menus are up-to-date on all contact points and orders are centralized.

And finally Dispatch. As you can tell from the name of the module, it deals with the delivery aspect of a restaurant’s operation. This module allows restaurants to incorporate delivery into the order process right from their website or mobile app.

How does it make money? How has the company performed financially?

Olo makes money through subscriptions and transactions that it processes. Every Olo customer has to be an Ordering subscriber, paying the company a monthly fee for access to its foundational and flagship module. A typical Ordering subscription contract usually runs for 3 years, even though restaurant operators can cancel it with a 90-day notice. In addition, it’s up to restaurants to add Rails and Dispatch or not. Unlike Ordering, the other two modules are on a transaction basis, meaning that the more transactions a restaurant processes through Rails and Dispatch, the more revenue Olo makes. As the transaction volume grows, restaurants have to pay a higher Ordering subscription fee to enable the excess in transactions. Plus, aggregators have to also compensate Olo for the luxury of working with its customers.

As of December 31, 2020, Olo’s customer portfolio featured almost 400 names and more than 64,000 active locations. The company recorded $98.4 million in revenue, up from $50.7 million in 2019 and $31.8 million in 2018. Covid-19 was a big boon to Olo’s business as restaurants were forced to go online. Its gross profit ballooned from the high 60%s in 2018 and 2019 to 81% in 2020. After running in the red for the previous two years, Olo became operationally profitable in 2020 with $16 million in operating income.

Olo's Income Statement
Figure 1 – Olo’s Income Statement. Source: Olo

In its S-1, Olo offered a few data points to show the stickiness and growth of its business. For the last three years, its Net Dollar Retention Rate was higher than 120% every year. This number means that Olo extracts more revenue from existing customers from this year than the previous. In 2020, transaction revenue made up 43.3% of platform turnover, up from 6% only just two years ago. It is a reflection of the exponential growth in Gross Merchandise Value from $2 billion in 2018 to $14.6 billion in 2020. Because of that eye-popping expansion in GMV, Olo handles on average 2 million orders per day. For a company that focuses only on the US and the restaurant industry, I’ll say it’s not too shabby. While 44% of Olo’s customer base used all three modules in 2019, the figure shot up to 71% a year later. These numbers show that its ecosystem is growing and sees more buy-in from customers.

Why restaurants choose Olo?

Covid-19 made consumers more accustomed to ordering food online. Even when this pandemic blows over and diners go back to physical restaurants, the popularity as well as marketing power of apps such as DoorDash or UberEats will keep food online orders alive. Operating in an intensely competitive field, restaurants cannot afford to stay completely offline, but it can be daunting and time-consuming to set up a digital presence. Olo addresses the infrastructure pain points for operators by offering turnkey solutions that both lower the initial investments and shorten the development time.

Plus, Olo also offers values by integrating different systems into a one-stop shop. Instead of juggling from one system to the next, operators can carry out fundamental and essential tasks on one Ordering dashboard. That lowers operational stress and brings improved efficiency which, in turn, means an increase in margin. And in the cut-throat restaurant business, every percentage point in margin counts.

Another value proposition from Olo is that it allows operators to maintain direct relationship with customers. Aggregators bring visibility, sales and delivery capability to restaurants, but they also take away the direct relationship with the end users. A Doordash customer that wants to make a Five Guys order, does so from the Doordash app, not from Five Guys website or mobile app. The customer relationship here exists belongs to Doordash and in business, who owns the connection with customers wields power (just look at Amazon or Apple to understand this point).

With Olo, restaurants have a chance to own the customer relationship while still being able to work with delivery partners like Doordash or UberEats. When a restaurant uses Rails and Dispatch to handle delivery, the business process will be as follows: a customer will go to the restaurant’s branded website or mobile app to make an order. The customer will be informed of the delivery details and make a payment. In the backend, Olo collaborates with a delivery partner to work out the delivery. The merchant receives the payment, owns the relationship with the customer and only has to pay Olo for its cut. Olo, in turn, reimburses the delivery partner accordingly.

Olo's Dispatch Payment Flow
Figure 2 – Dispatch Payment Flow. Source: Olo
Figure 3 – Deliver partners own the relationship
Figure 4 – Merchants own the customer relationship

While Olo does have a lot to offer to restaurant merchants, it remains to be seen whether the actual net benefit is positive. After all said and done, do merchants benefit financially by working with Olo, net all the fees? As Olo gains more bargaining power over merchants, will they raise the subscription and transaction fees?

Moving forward, Olo has some tailwinds behind its sail. With an existing customer base of 400, there is a lot of market share out there to gain in the future. Moreover, as the company’s operation is currently in the US only, an international expansion, while having its risks, can significantly expand its TAM. It’s also worth noting that Olo has positive free cash flow and no outstanding debt; which is a good position to be in if it wishes to make hefty investments.

With that being said, Olo has some fierce competitors in Chow Now, Wix, Square, just to name a few. The likes of UberEats and Doordash are at best “frenemies”, especially the latter. As of December 31, 2020, DoorDash made up 19.3% of Olo’s total revenue and essentially made up the entire Rails segment. But the two companies were recently embroiled in a lawsuit in which Doordash accused Olo of cheating them and violating the contract. The two settled afterwards, but it goes to show the business risk of relying on one partner for 20% of revenue.

In summary, given Olo’s vertical knowledge in the industry and its value propositions, I can see growth ahead in the near future. If we consider Olo to aggregators what Shopify is to Amazon, Olo then should take a page out of Shopify’s playbook. Shopify has aggressively forged partnership with Pinterest, Facebook and Walmart to bring sales and visibility to its merchants. That’s what the likes of Amazon, Doordash and UberEats are great at. Consumers know them and they can bring a lot more eyeballs than others. Olo already has solutions to domestic pain points for merchants. Now it may need to also think about how to address the external ones, aka sales.

Weekly reading – 12th December 2020

What I wrote last week

How much money could you save from drinking coffee at home?

Business

The economics of the $2B+ Christmas tree industry

Bloomberg’s profile on OnlyFans, a potential major social media on the horizon

Uber sold its autonomous vehicle arm to Aurora. This move isn’t a surprise given that Uber has been trying to offload cash-intensive and loss-making businesses in order to focus on the ones that do make money. Though there is a big write-down from $7.5 billion to $4 billion, investors may find this deal good news

CNBC has a good article on AT&T, HBO and their effort to compete with Netflix and other streamers

Inside Google’s deal with French Media

Many Google employees came out with their version of the story involved Timnit Gebru, contradicting what the company publicly said

WSJ’s profile on a few men that helped build Microsoft’s gaming business today

Online grocery slowed down in the last few months compared to the height in the summer. The basket size continued to be relatively big, compared to the same period last year and pre-Covid months.

https://www.brickmeetsclick.com/stuff/contentmgr/files/1/495948404a0913f7ced51b6524a17539/files/bmc_scorecard_nov_2020_sm.png
Source: Brickmeetsclick

Clover, which belongs to Fiserv and sells hardware & software payment solutions to small businesses, a competitor of Square, seems to have a higher GPV as well as a higher percentage of sellers with $125k in annual GPV. As Clover has more than 90% of its sellers above the $125,000 GPV threshold, the figure is far smaller for Square.

Source: Fiserv

Technology

John Gruber’s review of Apple’s latest product: AirPods Max

What I found interesting

A story on a small coffee business in Vietnam that prioritizes sustainability

Benefits of walking

The US Department of Health and Human Services published a presentation on how unhealthy Americans’ diet is. The information is informative and use, but the presentation is hilariously terrible.

The old Americans get, the more they spend time alone

Weekly readings – 14th November 2020

What I wrote

My reaction to Biden’s win

My thoughts on DoorDash’s S-1 filing

Business

Loup Ventures on Apple Pay

CBInsights has a long helpful piece on ByteDance, the owner of TikTok

Is advertising a new source of revenue and profit for big box retailers?

Apple’s transparency report which includes data on how often it complied with requests from authority

Technology

A couple of reviews of Homepod Mini by The Verge and WSJ

Apple executives talked to The Independent about the new chip M1 and how they were surprised at their breakthrough. Safe to say, there won’t be Macs with touchscreens any time soon.

Autonomous vehicles are hard. Really hard. Uber now wants to offload its autonomous vehicle arm to Aurora.

What I found interesting

The EU is about to relax regulations on encryption, a move that can threaten user privacy

Why Democrats lost Latinos in South Texas

Less screen time and more sleep critical for preventing depression

DoorDash picked the perfect time to go public as the business has grown amid Covid-19

DoorDash is a food delivery service which, after receiving an order, will deliver the order to the customer’s door. The service has three main stakeholders: merchants (restaurants), customers who order food and delivery partners whom DoorDash call “Dashers”. The business started in 2013 as three Asian Americans wanted to help local restaurants. The CEO, Tony Xu, migrated to the US at the age of 5 and worked in his mom’s kitchen in his earlier years. It is that background that inspired him to start this business. 7 years later, these entrepreneurs and their team are about to reap the fruits of their labor after the business has grown leaps and bounds and is on the verge of going public. Let’s take a look at how DoorDash makes money

How DoorDash makes money

This is the graphic DoorDash included in its S-1 to explain where its revenue comes from

Source: DoorDash

As you can see, DoorDash generates its revenue from charging customers fees which include typically include delivery and service fees, as well as taking a cut from the merchant side. In 2018, DoorDash introduced DashPass, a subscription that is worth $9.99/month. The subscription will remove per-order delivery fees and reduce service fees for customers. At the same time, DoorDash hopes this subscription will help increase the stickiness of the service and keep the customer churn low.

DoorDash has gone a long way and become increasingly…less unprofitable

According to its S-1 filing, DoorDash grew its market share from 17% in January 2017 to a market-leading 50% in the US in October 2020, besting other contenders such as Uber Eats, Grub Hub and Postmates. Compared to the same period last year, DoorDash tripled its order count and the Marketplace Gross Order Value (dollar amount of all orders) in the quarter ended September 2020. In Q3 2020, the delivery company generated more than $7.2 billion in GOV and received 236 million in total orders. In the last two years, an average order on DoorDash has stayed largely consistent at $30. Since these numbers were recorded after the introduction of DashPass, I wonder what has been the effect of the subscription on the average ticket.

The company grew not only on the top line, but also on the profitability side. Gross margin has steadily increased from 23% in Q1 2019 to a sweet 53% in Q3 2020. Contribution margin, which represents the result when you divide the difference between revenue and variable costs by revenue, went up from -74% in Q1 2019 to 24% in Q3 2020. In other words, for each order, DoorDash didn’t had to spend as much on acquisition and promotion as it had had. In fact, DoorDash reported that existing customers on the platform have increasingly made up the majority of the business, reaching an overwhelming 85% of the total GOV. This is a very good sign for DoorDash as it shows customers love what they sell and stick around more. In business, we often say it costs 5-6 times more to acquire a new customer than to retain one.

While its competitor Uber Eats never sniffs profitability, DoorDash achieved the feat in Q2 2020. While its revenue grew almost 7 times between Q1 2019 and Q3 2020, DoorDash’s operating loss has shrunk 6 times during the same period. To highlight the increased efficiency of the business, Sales & Marketing, which is usually the biggest expense for a multi-sided platform like DoorDash, has been lower than Cost of Revenue for 4 straight quarters through Q3 2020 and stood at 33% in the lastest quarter.

Source: DoorDash

As the business grows, so does DoorDash’s legal trouble. The company spent a few pages only on legal lawsuits, most of which concern its labeling Dashers as independent contractors, instead of full-time employees. The company repeatedly warns investors in its filing about regulations which could adversely harm its business. That’s because if DoorDash has to change its classification, it would mean the company has to pay higher wages and employee benefits. California introduced AB5, a legislation that would force gig economy companies like DoorDash to alter its operating model and classify workers as employees. However, DoorDash got a victory when Californians passed Proposition 22, which essentially stayed AB5. However, I don’t think the legal challenges will end there for DoorDash and they are something that prospective investors should pay attention to.

My thoughts on DoorDash

Clearly, things have been going well for DoorDash. The past few months have seen a substantially positive impact by Covid on the business. More order, more business and higher odds at profitability. Even though DoorDash indicates that their customer base makes up only 6% of the US population, I am pretty doubtful whenever companies cite the Total Addressable Market. First of all, not all the US population will use DoorDash. Second of all, the company has fierce competition from the likes of Uber Eats, Postmates and Grub Hub. I am confident that DoorDash will grow its top line in the next year or two, but the magnitude that the company hints in its filing is not really realistic. On the other hand, DoorDash can grow internationally. The company recently debuted in Canada and Australia. There is no doubt it will make inroads into Uber Eats’ market share, but at the same time it will require more resources from the management.

Recently, we have seen DoorDash strike partnerships that are not food related such as the one with Walgreens to deliver drugs and health products. In the future, I expect to see DoorDash develop to be a delivery platform, not just a food delivery machine. The logic is simple: the more orders there are, the more revenue DoorDash can generate and the happier it can keep customers and drivers. I didn’t see this piece much from the filing, but don’t be surprised if it comes up more in the next couple of years.

Additionally, some people wonder the sustainability of this model as restaurants have to relinquish a significant amount of margin to DoorDash. In the example above, restaurants have to give up 18% ($4 out of 22%) to the delivery service, while it was reported that in some case, the commission could go up to 30%. While it is indeed concerning as some restaurants may resist working with DoorDash and lawmakers may intervene, the fact and the matter is that a commission rate of 15%-20% seems to be the industry standard. Plus, restaurants may find that developing their own delivery muscle and marketing ability won’t be that much cheaper. As we are going through the worst phase of this pandemic so far and the weather is getting colder and colder, diners may favor delivery to in-dining, a huge tailwind for DoorDash.

Some interesting facts from DoorDash’s S-1

  • Dashers’ age ranges from 18 to 55. 45% of Dashers are women
  • As of September 30, 2020, there are 5 million DashPass subscribers
  • DoorDash has 390,000 merchants, 18 million customers and 1 million Dashers on its platform
  • “In 2019 alone, merchants as a whole experienced 59% year-over-year same store sales growth”
  • DoorDash’s list of 3rd party partners include AWS, Stripe, Salesforce, Twilio, Wavefront, Snowflake, Olo, Salesforce, Twilio, Wavefront, Snowflake, Olo and Google Maps