The economics and trends of the restaurant industry, with Tony Xu of DoorDash

Cheers. Good to see you.

2013.

The short answer is we got more customers than other people.

I think these are very tough things to study because many things are happening in the same moment, but I'll just talk about it from the perspective of things that I think we got right. When you think about something like restaurant delivery, you actually get judged on multiple dimensions as a service. We get judged on what restaurants we bring you, certainly, whether it showed up on time and the quality and condition you expect, how much did it cost, if we screwed up, what did we do about it? It's not one thing that you have to be good at, actually. It's all of the above. Unfortunately or fortunately, this is literally the game that we're playing where customers are judging us in all of these dimensions. I think getting that right better than anyone else as measured by whether or not people are coming back to the app and using us, using us even when we had no money to market to them or discount offers to them, things like that, I think was the tell.

I think if I were to become overly reductionist and purely looked at it—

From the product perspective, yes, because at the end of the day, any consumer product is judged very simply by its retention and its usage. That's how you know whether you have a differentiated product. I think it's very easy to have differences in opinion about whose app do you like more or whether or not certain apps look similar or different. At the end of the day, though, if our app is performing at a much higher retention and frequency of use than others, that's how we know whether or not the things that we say actually are making a difference to customers. Getting all of that right very, very early and then building the systems to actually instrument that as well as to repeat that over and again, I think was very, very important in the development of the company.

I don't know if we were more focused. I could tell you, though, one of the things that was happening, especially when you see a competitive fight, is you see everybody race towards it. Everybody is going to try to make offers to customers, try to give discounts, try to give coupons, free this, free that. One of the things that we had looking backwards is we actually did not have a large budget. In fact, between 2016, '17, '18, we barely were able to raise a dollar relative to our peers. As a result of that, that made it a constraint. One of the constraints is, okay, you can grow, but you cannot spend in order to do it. In order to do that, you effectively have to actually come up with ideas in the product to actually stand out and make a difference and have organic growth carry you. Then once we were able to demonstrate to ourselves first that we had a product with higher retention than other people and higher frequency, and then we were able to raise capital, then we actually made the decision to pedal to the metal and actually go and acquire customers because we had an unfair advantage.

I think it's very difficult to measure us against other people because I didn't really work at those companies. But again, I really just look at the early DoorDash crew and what were the things that we did that were very useful. We all did deliveries. We all did customer support. We all made menus. We all sold restaurants. We all customer serviced restaurants. We all worked inside restaurants. I think at the end of the day, I think the term customer obsession can be fairly generic and vague and applied. It really just goes to show what actions actually demonstrate that? For us, some of the ones that came to mind, and frankly, the story that actually inspired the value in the first place was when our backs were against the wall, and we had, I think, less than two weeks of cash runway, and we had a terrible night where every single order was late—this was a Stanford football game in 2013, and I had trouble raising the seed round—we made the decision to refund everyone. That cost us over 40% of the bank account. When you have 2 weeks of runway, 40% of the bank—

Yeah, maybe a little over that. We baked everyone cookies and delivered them at 5:00 AM before everybody woke up. Look, this was maybe 100-ish customers or something like this. But I think it demonstrates that this was a real value. It's actually my test, really, which is, what are the actions that are naturally occurring? What are the behaviors that are actually occurring inside of an organization? Then how do you actually articulate it versus the inverse, which is you start with maybe some articulation, and maybe some of the times it matches and other times it doesn't. I've always believed that these cultural norms or behaviors are really 80% of what you've done. I think that's the best way to actually find what they are for your company. We're the only platform today to take care of Dashers when there is these increasing gas prices and making sure that we have their back and that we're actually trying to help them save $1.40 to $1.90 per gallon for Dashers. Or in COVID, we were the only company to cut commissions by 50% when we were not yet profitable as a company. That was an expense over $100 million. We then, on top of that, spend millions of dollars buying national TV campaigns to tell people to order, whether it's on us or our competitors, because restaurants have, on average, seventeen days of cash on hand. You need to order. This is do or die for them. I can give you many of those examples where I think at the end of the day, whether the actions first speak, and then you can articulate the actual words and norms and cultural behaviors that the company is trying to speak. That's ultimately, I think, how I think about customer obsession.

We had several moments where we ran out of money. We had that moment, obviously, in the fall of 2013. We had three very difficult years, 2016, '17, '18, where we had two rounds of financing that were incredibly difficult for us, the Series C and Series D. COVID was interesting because COVID started actually… Again, I think it's easy to forget these things because I think humans, we adjust very quickly. COVID, the first week, actually, the business tanked 80%. It tanked massively because everything was shut down. Then the next week, all of the dining rooms were closed, but the kitchens were open. Boom, we see this massive doubling of the business in a week. There are a lot of these moments. You've seen this at Stripe, obviously, a lot, where you have these moments as an entrepreneur where you have very, very low lows. The highs don't feel as high as maybe they get, but that's what you get.

I think you're going to have to have him on the show to ask him.

But I think Michael always had a fairly simplistic view of the company, where if three things worked, the business works. When I met Michael, it actually reminded me a lot of our journey in Y Combinator, because I think in Y Combinator, I think we were just happy to be there, but a lot of people were really racing towards demo day where the objective function was to raise as much money at the highest possible valuation. For us, actually, the objective function was answering three questions. It was, would consumers pay for this product, pay a premium for delivery? Would merchants actually work with us and pay us commission? And would Dashers partner with us for a wage that we could afford? I think Michael had a very similar set of very simple questions about the company. I think so long as those dimensions looked right to him, he kept on investing. I think he said, 'You have to do the math and work out that the economics of this business do work,' and they do, therefore, a more compelling product experience will win.

I think his third comment was really that we can continue executing into the market opportunity that things will work out. He turned out to be right.

Yeah, there are a few things. This is one where I'm always, on the one hand, so impressed by how far ahead sometimes behavior is in markets like China. Then on the other hand, I have to remind myself that there are differences and why you can't just clone some of these markets. One of the first big differences is the eating out culture in China is very, very high and very, very affordable. Eating out in China is about as affordable as cooking at home. As a result, nobody cooks.

There are a lot of reasons for this, and we can go super deep on retail history and grocery history in China. But anyways, that's a huge phenomenon. I think second, because of labor market dynamics, both the availability as well as the cost of labor in the Chinese market, that's allowed a lot of these businesses to make this activity almost as affordable as if you were to pick up the orders yourself. I think third is that, especially it's not every city in China, but more and more, the Chinese… It started really with the Eastern Seaboard cities, where the density just allowed a very easy delivery setup, almost like every city was like New York City. I think in America, we think New York City is very special. There's more mega cities in China. It has millions of people. In China, there are many dozens of cities, over a million in population, and the population density is even perhaps higher than that of Manhattan. Now, that's actually morphed to the Western cities, too. It's not just the Eastern Seaboard cities. If you actually study this over a time series, whether it's the '80s to the '90s and certainly to today, because of how fast China is able to manufacture things, city plan things, deploy things. I mean, literally, they can build a train station in an entire day. Because they can do things like this, the market potential has really expanded, even as people moved now from Eastern Seaboard cities to other cities.

The cost of the food, I would start with that, is a lot lower. Then you have lower labor costs, and you also have mass availability of labor. Then now you also have rising incomes because of how fast cities are getting developed. It used to be that most of the income for consumer discretionary spend, if you studied as a percent of China's GDP, was along the Eastern Seaboard, say take circa the early 2000s or even up to the 2010s. But if you looked over the last 15, 20 years, that has now become a lot more uniformly distributed, kind of like the US, actually, whereas this is not true in other parts of the world.

And whether or not there are a lot of restaurants. People who can afford delivery, sure, but also the production of food. I think one of the things that I've always thought about is restaurants have two very special properties about them. I do think that more and more, they are almost going towards the ends of these two spectrums. Same thing with retail, and we can talk about that, too. But restaurants, on one hand I think are centers of hospitality. It's incredible, the level of attention to service they have. I think that will never get replaced by AI, that human-to-human connection. On the other hand, where technology and autonomous technology can make a difference is actually restaurants are almost like manufacturing production sites. They're a third space and a factory all in one. It's no different in retail. You have showrooms and warehouses. I think that in the case of, back to your point around China, China has a lot of restaurants. Over seven million restaurants versus what we have here in the US at about a million restaurants in comparison, for example. In China, you also have a very deeply capitalistic society in the sense that wherever there is opportunity, you're going to see lots of people go and fill that. It doesn't have to be a restaurant. It could be a kitchen. It could be coming up with different merchandising. If you're a restaurant, you can sell not just food. You can sell T-shirts, and you can sell hats, and you can sell cookbooks. I think there's a lot of that commercialism also in that industry in a way that is much more advanced than other countries.

Yes, and they are also incredibly sought after. In fact, if you looked at the census data in America now, and this is also true in China, but if you looked in America, in the last 60 years, I think there's only a couple of years where the number of restaurants in the current year didn't exceed that in the previous year. Even though they are such difficult businesses because of our love for food, for socializing, being with each other and what a meal represents and how it can connect different people, it continues to grow. In fact, it's the number one type of establishment that malls and a lot of shopping centers want the most of.

One of the most difficult things is how do you actually staff your restaurant? This is the number one challenge. This has always been the number one challenge. There's no easy ways around this, really. I think because the cost of labor only goes in one direction and only goes up, restaurants are increasingly making this choice of on the continuum of service to manufacturing. Where do I want to sit on that spectrum? I think that is one very big trend that more and more restaurants feel like they have to go towards the ends of the spectrum, whereas before—

Yes, because there's a lot more pressure in order to make sure that everyone deservedly gets paid what is required to actually work there, especially inside some of these city centers. I think that's a perennial trend. I think a second perennial trend, and this is why I think people love restaurants, is the innovation in restaurants is a little bit different than the innovation in, say, software, where innovation in a restaurant is just different types of cuisines and food. You're always going to see the next type of restaurant. I think this is best shown in what I was saying earlier around the number of restaurants. The number of restaurants always grows. That's a perennial trend. That's something that is not changing, even though the types of maybe food is changing or what's hot, what's not, that's changing. What's not changing is the consumer's appetite for actually these restaurants. I would say number three is restaurants are thinking about increasingly how to scale, and this takes on different forms. In the case of some of these large brands, the big QSRs that you've heard of, which represents almost 50 cents on the dollar of restaurant spend in a place like the US, they're thinking about, how do I take my economies of scale and just keep going? Because I have that as a big advantage. You also see smaller restaurants who are trying to figure out, 'How do I open up location number two?' It's really difficult. It's actually really, really difficult in a lot of cities, even for the most popular restaurants, the hottest chefs in town who you'd be shocked at how hard it is for them to raise the capital for location number two or even get the permits to start construction on location number two. I think that's another perennial trend that you see happening in the restaurant ecosystem. Those are the ones that I think a lot about, which are what are the things that are not changing that are incredibly difficult that if you can solve these big rocks, you can unlock even more value. I presented a lot of obstacles, but if you actually look at the totality of the data, you would see that the amount spent on restaurants or eating out has increased over the last 75 years, every single year. It used to be, these are rough numbers, but in the 1950s, when the government was measuring this, we would spend in this country, in America, maybe 75–80 cents on the dollar on groceries versus restaurants. In present day, those numbers are almost reversed, where it's almost 60 cents on the dollar on takeout and 40 cents on grocery. That number has only gone in these proportions or this direction. Even though it is so difficult to make it as a single restaurateur, especially when I think about the days of washing dishes in my mom's restaurant, the totality of the industry continues to remain very strong, and they're moving in one direction.

I think in general, similar to building things, they've gotten largely worse on average. That doesn't mean there aren't cities who aren't green-lighting and making it a lot easier. In fact, if you look at some of the fastest-growing cities in the country, they tend to also be the fastest-growing cities for restaurants. Not a shock.

Phoenix and Austin, these places are doing a good job of permits.

If you look at places in Arizona, like the tri-city area, Phoenix being one of them, Scottsdale and the Tempe area there. You look at the tri-city area in Texas, near Austin, or you look at what's happening in Dallas and the Dallas-Plano area, there's these pockets. In fact, if you look at the country, a lot of this growth is happening in the south of the country. That's been true for a couple of decades now. They tend to be correlated, meaning if it's easy for me to build apartment units and to build just construction in general, it tends to be a bit easier to also get the licenses to open up a restaurant.

I think when you're in any business, certainly the restaurant industry or even our line of work, I would argue, you have to be an optimist. You have to see the silver lining on the way out of how to get there, but it's a slog. I do think that one of the responsibilities we now have as a company, as we're a little bit bigger now, is to help on behalf, particularly of these small businesses, to represent them almost as a class and actually try to even the playing field a bit and make it a bit easier to actually be a small business.

One of the first ones is actually making it easier to actually open up location number two. Permitting reform. Permitting reform is one of those things that we certainly stand for. Making sure that labor laws are changed or when they are changed, that they take into account the restaurants. We're talking about one of the largest sectors of job creation here that is always growing, by the way, every single year, which is a rarity, but a truism in every economy, to take into account what the restaurateurs have to say. Those are some of the big topics. Again, I look at the things that aren't changing in terms of the difficult challenges of being a restaurateur, and we try to fight on their behalf.

Not to speak our book, but one of the first things that comes to mind is actually something like delivery. When you look at the economics for a restaurant, rough math… For every dollar of food that if you and I bought inside of a restaurant, from the cost structure, you're going to have 30% of that in the food and the packaging, you're going to have 30% of it in the rent, you're going to have 30% of it in the labor, something like that. Rough math. On that dollar, a restaurant can net 10 cents. On a takeaway order, you're still paying for the food and the packaging, but you're, largely speaking, using the same labor and you're paying the same rent. There are some exceptions where some restaurants have become delivery only and things like that. But by and large, on average, you're going to make 3-5x the incremental margin. I think, number two, I think restaurants recognize that they need to build relationships with customers that are not just over the telephone or over in-person visits where they're relying on their memory. That area is still, I would say, somewhat incomplete, where there are products where you can manage your social media pages and maybe have a database of relationships that you recall. The challenge, however, though, is you don't get to see everything. You don't get to see the full visibility of your online orders, your in-store orders. Another challenge is your staff turns over. The average staff may turn over every other day. Not every other week, every other day. I do think that there's still a long road ahead there in both making that product a lot more robust for restaurateurs to be able to have those relationships. Back to one of the things we talked about in this conversation about the importance of retention in a consumer business, it is so important for a restaurant to build the concept of a regular, which is a retained customer. You and I, I know we travel a lot for work and so we wouldn't always be great customers for a restaurant. What's more important, actually, is if they knew that there was a regular that is actually coming that should be prioritized. Those are the kinds of things that I think, hopefully, we, DoorDash, can help and actually solve.

It's a hard problem. Let me ask you, what is your favorite food to eat?

All right. How often do you eat that?

Once a month, once every two months. That's the challenge. Even your favorite food is probably not something you're going to do every single day. When you're talking about an activity like eating, which is 20–25 times a week—

Yeah, it's not like coffee. It's even different from travel where the product may be the same every single time. I think it is tough to create what you're describing, which is this program in which you'd be known as regular. But that, I think, is the opportunity that at least we're thinking about at DoorDash, because if you think about it, our product with now over 100 million-plus annual customers, tens of millions of monthly customers, they shop at various frequencies and they're building relationships with all of these businesses, sometimes many times a day, sometimes once every other month, sometimes once a year. I think because there's 20–25 moments per week, I think that there is an opportunity in which we can create that. Now, we recently acquired, last year, a company called SevenRooms that manages a lot of the in-store bookings of restaurants, particularly of higher-end restaurants. If we can democratize that and give that to everybody, and then also layer on the DoorDash data set and actually tell you that John is a regular, and he tends to like the following things, and here's other things that he tends to do, perhaps we can crack open that question.

Yeah, because that is how you build a great consumer business. You need the retention. That is true for every restaurant, every consumer business.

They're relatively small.

Yeah, the model sounds really reasonable, and I think logical on face value where if you can, on that spectrum of restaurants where you have high-end service on one end and hospitality only to perhaps delivery only or more of a manufacturing concept on the other end, it seems reasonable that you can actually just borrow a small square footage of space, not incur a lot of not just the fixed cost, but also the labor cost of actually running your 'restaurant,' and then selling through a delivery platform or acquiring your own customers or doing something like both. It just turns out it's extraordinarily difficult, however, unless you're a large brand or a house of brands, someone like DoorDash, to be able to attract enough customers to make that math work.

Yeah, it's slightly different. Perhaps we can look at two types of examples. You can have one type of example, which is perhaps my mom's Chinese restaurant. It's an SMB where the name value outside of literally its locale isn't that well known. It's very difficult for that restaurant to acquire enough customers to make that math work because they still have to… Remember, I mentioned that staffing was the number one challenge that restaurants face. They still have to staff these kitchens. That's one of the challenges. You go all the way to the other side. Pretend you are a large QSR with a big brand presence. You certainly can attract lots of customers, but you're going to have to think for yourself, 'What's my opportunity cost?' My opportunity cost might be to open up another restaurant. Why not do that and take my economies of scale and actually apply it to more orders, in-store orders as well as to-go orders? Because I can do that with a restaurant. Hard to do that with a delivery-only kitchen. I think because of that, it's a tricky model to scale to every type of restaurant brand.

That happens occasionally. I think these are not decisions where we're accounting for all of the variables. One variable we're not accounting for is 'What else could I do with the space?' You have to remember for businesses like Chipotle who tend to identify real estate in fairly expensive areas, there's high opportunity cost of what you do with that space. Yes, you're right. One choice is to turn it into a kitchen or a delivery-only kitchen, and sometimes that happens, but there's also a massive opportunity to recoup the expense. If you start introducing, for example, franchises. Chipotle is not really franchised, but if you look at other types of brands where it is franchised, I think the economics become even trickier. There's a next best use math.

I actually think any restaurant that's been around for, let's say, two-plus decades, probably has very interesting IP. Obviously, some of this information is not public. You can imagine when you go into a McDonald's around the world, that french fry, perhaps they don't sell the same exact items in every single store in every country, every city, but the french fry almost always tastes the same. That is an extraordinarily difficult feat to accomplish. There's a lot that goes behind the scenes, just like there's a lot that goes behind the scenes at DoorDash in terms of getting you one order on time to make that sentence true. The same can be said about a lot of other businesses that have been around for very long periods of time. That's on the big brand QSR side where a lot of the innovation, if you will, is in the process innovation. Also, how do you run large groups of people and have very high and consistent standards of service? Extremely difficult. That's the IP, I would argue, for a lot of these large brands. On the other side, there are small restaurants, some of whom have been around for almost a century, actually. There aren't that many of them. But when you look at what makes them special, it tends to be the same things that actually make startups special. It tends to be a small group of people that really believe in a certain idea, some commitment towards some standard of excellence. It could be excellent towards the food, the service, or takeout. There are some takeout-only businesses that have been around for many decades. As a result, they have high retention, high usage, and they're very efficient.

One of the things that I'll never forget was I went through a hospitality training at Chick-fil-A. I want to say it was 2017, maybe it was 2018. I don't remember everything on the checklist, but one of them that stands out is that the floors must be so clean that babies would lick them or could lick them.

Exactly.

I don't know, actually, but it's definitely up there.

It's definitely up there. Why is it so successful? It actually goes back to, I think, the standard ingredients of a great consumer business. It has a highly retentive following, which it spends very little money acquiring, and they come back often. They're extremely efficient with all of the scale economies behind the scenes around equipment, which is quite custom to that company, to the service training, to how they treat their staff. One of the most impressive facts about that business is that many people actually that I met with have spent over two, three decades of their careers at Chick-fil-A. We find that to be a novelty actually here in Silicon Valley or in technology.

In the restaurant industry, one where we described all of the churn and the difficulty of staffing, Chick-fil-A has extremely high retention of staff. It has so many repeatable stories of where it gives somebody who comes from not a lot of means, frankly, to become the general manager of one of these stores and earns a really healthy living, pays their entire family through college and beyond. In many ways, a lot of these restaurant stories, Chick-fil-A being one of them, have a lot of the essence still of the American dream.

Have you ever cooked for a large group of people? Or do you cook often?

One of the things I found is that as the number of people you have to cook for grows, the difficulty to keep the standard of service, whether it's the taste, the temperature, the speed in which you receive the food, goes up exponentially. That is what's so hard about exactly what you just said, around keeping that quality control really high. It's maybe easy to build you the Chipotle for one type of cuisine for one restaurant. That's just on the skill perspective. Although I do have some ideas on how perhaps you can do that. But the second reason also is think about who you're competing against. Let's say that you want to make a Neapolitan pizza. You mentioned that. Or any kind of pizza.

Great. I can't wait to taste it, John. Did you know that there are over 1,000 different pizza choices in the Bay Area on DoorDash? Just on DoorDash. We don't have all of the restaurants. That is just one of the many things that you're going to have to do to be able to create this concept and actually scale it. Then don't forget all the other challenges we talked about: the staffing, the permitting.

Potentially. I think the fact that there only exists so many of these QS… Accountable number of these brands who have actually scaled to the size that we're talking about, where they're ubiquitous, I think should be some evidence—

That it's a lot harder than you think. Because of what I just said, there's a lot of process skills that you have to be extraordinarily good at. In fact, I remember we partnered with one brand where we launched this brand to great fanfare and sold a lot of burgers actually on a weekend, testing this idea, can you make a healthy-tasting burger if you put a brand name around it? The answer is yes, and the answer is it's really hard to retain any of those customers.

No, because half of the reviews said, 'Your burgers were great,' and the other half said that they were inconsistent in quality. It's because it's extremely difficult. That exponential challenge as you try to grow scale, and keep up the quality is very, very, very difficult. You have to get right the service, you have to get right the production, you have to get right the pricing, the packaging. There's lots of things you have to get right.

Yes, or about a service like DoorDash. I think when you have high volumes of activity, I think keeping the reliability as reliable as the electricity we have or the water inside of our buildings, that is extraordinarily difficult.

Even before we go there, I think the first question might be what might be delivered? Because I think that's actually still not that well understood. Today, yes, DoorDash is probably most known for food, potentially now increasingly groceries and household items. But that is a fraction of the tens of millions of items inside every single city. One of the biggest things that we're going to have to do before we can just fulfill the items, which is what we'll get to, is where are the items, and what are the items? There's tens of millions of items literally inside these cities, whether it's in the US or different countries within Europe, other parts of the world, they're not cataloged. There's no structured data that you can scrape in order to figure that out. I think that's going to be a long journey. Sometimes the inventory is not even close enough, and so you may have to house the inventory so that you can actually bring those goods and even have the right… A lot of what I believe makes for great logistics is you need a great setup. Because if you're always trying to figure it out on the fly, and you're pulling some magic trick out of thin air, and you have to be the hero, that is not a system. That is an exception. I think great logistics or great reliability, they require building systems. You have the catalog, you got maybe the inventory close enough to where people live, now we can talk about the fulfillment. The entirety of that is what you have to build before we can get into the great technologies. The staging of what it is that you're delivering. Because if you don't know where to get the items or if you can't get the right item, what difference does it make if you have the right vehicle?