What is wrong with food-tech startups?

Venture capitalists are always on a lookout for the next big idea. After placing their bets in e-commerce sector in India, the next sector that excited them was food-tech startups. As investors opened their purse strings for such startups, more and more entrepreneurs launched food companies or QSR businesses. As an early stage VC firm, we are also keen to invest in a food-tech startup but we haven’t yet come across a company, which has a differentiation, and can disrupt the space or create a niche in the space. Presently, food-tech companies have developed their business model around service component, which is not so commercially viable. Their whole objective is to serve the customer without considering the unit economics. The reason that many food-tech companies like FoodPanda and TinyOwl, in spite of growth, saw turbulence is because of high serving cost for the kind of service being rendered. This was mainly because of lower margins and higher operational cost coupled with high customer acquisition cost in a bid to acquire market share.
Home delivery model
Delivery cost is a big component in order to make the home delivery model work. And it doesn’t come cheap. Companies have been delivering food to customers at a higher cost in the hope that they will form a habit of ordering food, and volumes will eventually make enough business sense for them in the long run. However, this premise has not proved right and has gone against food-tech startups. They started out as tech companies and transformed into a marketing model, which has different costs associated. Examples are for everyone to see. Localbanya, a mobile app and an online tech enabled grocery company, in spite of having a large customer base, had to shut down because of
higher operational cost.
Another problem area is that today nobody is talking about unique product offering coupled with consistent quality/taste and variety, which would bring stickiness. Most of the startups, which got funded, focused more on acquiring customers than working on preparing menu, which could have offered better variety food. If you see the menu options available, there is hardly any fusion food or even new food items being thought about. That’s because everyone is so focused on the packaging and delivery part of the business. Entrepreneurs have to realise that more food variety options and innovation in food offering will drive sales more with stickiness than fancy packaging.
Internet-first restaurants
Another popular model in the food-tech space is Internet-first restaurants. They need to bring more variety in their menus otherwise overtime customers will get bored and won’t come back for a repeat order. They also need to come up with a formula where they can achieve positive unit economics for every item that they are delivering or at least achieve positive average unit economics. Unless they show a consistently growing revenue cycle, investors won’t show the money. Another factor that has hurt Internet-first restaurants is that the space got too crowded too fast. Thus, they didn’t get a chance to build food habits or even a loyal customer base. A customer is now constantly ordering from various sites wherever the discount is highest. This was also because the habits were built mainly on a discount model than building a business on creating a niche or solving a real problem. Most of the customers came because they were getting a discount and before business could be built on sustainable basis companies ran out of money, resulting in the closure of business or truncating operations.
Operational efficiency
For food-tech startups to survive, operational efficiency at every step of the way is important. The kitchen, where they prepare their food, requires maximum investment in terms of equipment, ingredients, chefs and other related infrastructure. And on top of that there is the high real estate cost too to be factored in.
Omni-channel platforms may not work as every customer has a limitation over the number of apps a phone can download and support. One can’t expect them to download the apps of every food-tech startup that is getting launched in the country.
Explore other revenue generation models
Focus on revenues is important if you are in this business for the long haul. Cut down on expenses that don’t need to be there. For example, tie-ups with restaurant across a city’s various suburbs to use their kitchen for preparing your daily order will cut down your cost of preparing a meal substantially. Spread out to the whole city with such partnerships. It will give you a larger footprint, ability to serve customers faster, control your cost and thus generate revenues once you have a critical mass of customers.
Only restaurant listing as a business model is a risky proposition specially now when we already have players like Zomato who started out as a listing marketplace years ago. Even they have diversified, so there is no reason for you to start your journey from the beginning of the curve.
Deep discounting model will not work. Faasos’ survival amidst this turbulence is a proof of that. The reason Faasos is seeing good traction in their business is because to some extent they have been able to control their costs. They have their own menu, cook their own food and deliver it. Tie-ups with players like FoodPanda, Zomato, TinyOwl work as support for getting additional business to the company. They are marketing heavily to drive their app’s downloads.
Box8, another fast-growing food-tech startup, launched with a new concept to fit the entire meal in a box, making it convenient for the customer to eat anywhere – be it at office or on the move. They have also control on their menu and food quality, which has resulted in customers liking their food.
One of the older players, Goli Vada Pav, which has been around longer than any of the food startups, has grown to a pan-India presence gradually. The company services its outlets through a centralised kitchen, uses technology at the backend, has a franchise-led model that has helped them keep real estate costs under check and they have achieved unit economics. That’s the reason companies like Goli are growing faster than their peers and will continue to grow.
Business ideas around food tech have to go beyond what Zomato, FoodPanda, TinyOwl have achieved. As an investor, I would be interested in evaluating businesses that are optimising someone else’s kitchen and keeping their costs in check. If a food startup or a QSR wants to include home delivery piece and make it a viable business model then the cost of delivery can’t be more than the total value of the food items ordered. Till this issue is not addressed, the sector will continue to feel the pressure.
Funding woes
Until six months ago, VCs were happily writing cheques to new age food-tech startups. But easy flow of money into the sector disturbed the dynamics of the business. Companies started burning cash faster in a bid to acquire more customers than the others without realising that there are multiple stakeholders in the system. Customer stickiness cannot be built on a discounting model. Companies who have been able to rectify this issue by changing their menu, pricing, etc., were able to raise another round of funding.
Thankfully, investors are not allowing food-tech companies to burn money mindlessly anymore. There is a clear shift in thinking towards ‘Lets get the pricing right’. If you are a food-tech startup looking to raise funds, then make sure your business is scalable and sustainable, unit economics should work in your favour, and you should focus on revenue generation.
What will work?
A pure delivery model is a no-no because value add is not great. As an investor, I would be inclined to invest my money in a food-tech startup that connects restaurants and consumers, enables discovery and has a rational costing model for the home delivery part of the business. For a home delivery option to become a revenue generator for any food tech company, the average ticket size per order should be in the range of Rs. 150-200. In addition to this, one should keep the following points in mind:
• Use tech to optimise cost of production
• Optimise kitchen
• Better cost management
• Focus on operational efficiency of the kitchen
• Avoid building your kitchen
• And obviously, no compromise on quality and taste
I have been associated with startups for more than a decade and my job allows me to learn and explore various business models. I have been mentoring a food-tech startup and the team has developed their menu, have a dietician on board, ops manager but they don’t own a kitchen and they are working on bringing down the cost of delivery further.
Has the bubble gone bust?
That won’t be correct to say because food-tech startups are the way forward as more and more customers go digital. This is a correction phase and is likely to continue for sometime. Funding activity will gather momentum once the correction phase is over. New investors will also start looking at startups as an asset class, bringing in fresh dollars. Hopefully, the entrepreneurs will also come out of this phase with new learnings.