Let’s face it, Indian food tech startups have seen more venture investments for proven US models than for novel ideas.
Touted to be a $78 billion dollar market that’s growing 16per cent yearly, VCs have hurried to place bets in India before it becomes too late. Unsure of which US food tech model may work, they have adopted a spray-and-pray approach.
Given this approach, many food tech startups will go out of business in the next few quarters while a few winners will emerge. In 2015, Dazo and Spoonjoy shut operations and we hear of troubled times at Foodpanda and downsizings at Zomato.
So, will most of these companies die or are their business models sustainable? Ideally, it’s the latter.
Evolution of food-tech in the US has given us insights into the models that work. Let’s take a deeper look at the evolution of these models, how they create value, and what will ultimately lead to their success in India.
Restaurant delivery aggregation
Food ordering took off when GrubHub made it possible to find menus online, unlocking a takeout and delivery market of $70bn by taking a 10per cent commission from restaurants. Grubhub went public in 2014.
The latest entrants, Door Dash and Caviar, built their own delivery infrastructure, creating a market for restaurants that previously did not offer delivery, charging them 20per cent. Grubhub also added delivery capabilities by acquiring ROTR.
While a boon for customers, the delivery-based model has to contend with tough economics. Given the unwillingness of customers to pay delivery fees and food markups, which can add up to 30per cent to the food cost, the costs of delivery could make B2C delivery aggregators unprofitable. This has forced consolidation, with Yelp acquiring Eat24 and Square acquiring Caviar. Doordash introduced additional service fees to make its model financially viable.
Interestingly, Indian startups Swiggy, Tinyowl and Zomato leapfrogged the Grubhub model to build a delivery network either by themselves or through partnerships. With the discounting party already over, both Runnr (Tinyowl acquired and rebranded) and Swiggy have introduced delivery charges and order minimums. Two models will likely emerge: a) Zomato will likely get out of delivery and move to the original Grubhub model of order leads for restaurants; b) Swiggy or Runnr will focus on affluent customers who will pay for consistency of delivery and customer service; the one with the better service builds a more profitable business.
The B2B model
The B2B model is disrupting the catering and cafeteria industries. Seamless kicked off this trend by delivering dinner to financial and legal firms. Since then, EAT Club and Zerocater emerged, while Zesty and Miles (earlier Fluc) adapted this model in 2015, validating the large opportunity.
For businesses, offering free lunches boosts the productivity and collaborative capacity of their team. Eating lunch at the office contributes to “casual collisions”, and 26 per cent of workers in a CareerBuilder survey said special perks like lunch are an effective way to improve retention.
Startups focusing on the B2B model are creating a new, affordable lunch market for businesses. This model drives high repeat usage, and the value of each customer is greater than with B2C models. More importantly, this model can drive the delivery cost down to less than 15per cent of revenue, which makes it inherently profitable.
While the trend started in the US 5 years ago, it is now starting to gain traction in India with Foodpanda. Expect more pivots to this model in the next 12-18 months.
Full-stack food delivery services
The full-stack category creates ready to eat food options for time-pressed urban dwellers who prefer to eat healthy, good quality food at an affordable price.
US startups like Munchery, Maple and Sprig essentially give users the benefits of chef-crafted recipes and quality ingredients without the expense and effort. They differentiate themselves by emphasizing transparency and the wholesomeness of their food.
The economics of this model are also challenging and are yet unproven as evidenced by the Spoonrocket shutdown. Munchery is steadily moving its business to a membership model to drive higher repeat usage and reduce per meal delivery costs. Bigger leverage, however, lies in owning the food production infrastructure, enabling them to systematically drive down food costs to 35-40per cent of revenue. These efforts, if they work, will position them as the Chipotle or Subway of delivered food.
Shipped dinner kits
Dinner kits aim to take the thinking out of cooking; targeted at urban dwellers who don’t know how to cook but want the joy of cooking and eating together as a couple or family. Basically, feel like a world-class chef cooking world cuisines in 30-40 minutes with no wasted ingredients.
This model is by far the fastest growing in the US, with Blue Apron already valued at $2 billion and Hello Fresh evaluating a potential IPO. Hello Fresh has already demonstrated that the unit economics work and it’s more about managing sales and marketing spend to drive operational profitability.
While there are multiple Indian startups like Let’s chef, Burgundy Box, Out of the Box and Chef’s basket in this sector, it has seen the least funding momentum in India so far. Unlike the US, the biggest challenge for this segment is more around mass market adoption given the model's relevance to a small segment of well traveled, world cuisine-cooking explorers in urban areas. The concept is still a few years ahead of its time with respect to the Indian market.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
Want to make your startup journey smooth? YS Education brings a comprehensive Funding Course, where you also get a chance to pitch your business plan to top investors. Click here to know more.
- Business model
- Startup company
- food delivery services
- Mobile Application Software
- delivery infrastructure
- Foodtech Startups