Is On-Demand Food Delivery On A Diet?

The Favor Offices in Austin, Texas

Josh Breinlinger, a VC at Jackson Square Ventures and cofounder at on-demand startup Rev, published an article earlier this year bluntly stating the facts: many on-demand companies are “operating at negative margins.”

Case in point: food-delivery startups. When it comes to pronounced operational issues, the struggle is very real in this segment. Once the site of an all-you-can-eat investment buffet, VCs have become bearish on the space as incumbents continue to grapple with viability. From Instacart to Zomato, Sprig to PepperTap, food delivery startups are now tweaking their models in an attempt to improve supply-side liquidity and increase revenue — and encountering no shortage of scrutiny for doing so.

All of this instability has caused many an on-demand pundit to insist that food-delivery startups simply don’t work. Is the entire industry destined to go hungry?

Looking Past Last Mile Logistics

Right now, food delivery in the on-demand economy is often considered synonymous with last mile logistics. But focusing on that last mile isn’t enough.

If all you care about is getting something to someone quickly, you’re about as innovative as the pizza delivery guy.

Companies that do as Breinlinger suggests and change their business model will do so by focusing on the bigger picture and not just the last mile of delivery.

Jag Bath, Favor CEO

To illustrate this, let’s look at the on-demand food delivery app Favor. Straight out the gate, Favor has a few things working against it. First, it’s trying to compete in a saturated market: Doordash, UberEats, Postmates… the list goes on and on. What’s more, there are already plenty of fatalities in this arena (RIP SpoonRocket). Well aware of these obstacles, Favor announced that Jag Bath, the former SVP of Product at RetailMeNot, would be taking over as CEO last fall, focusing his efforts on product innovation and revenue creation.

Bath’s approach? Getting “back to basics.” During a panel appearance at SXSW early this year, Bath remarked on the “incredible importance of getting the service right.” Unlike other on-demand apps that focus almost entirely on speed of delivery, Favor makes the customer service experience between the client and the service provider — or Runner, as they’re called — a higher priority. “Everything that happens in the 35 minutes between order and delivery is extremely important,” Bath remarked. “In those 35 minutes, the Runner essentially becomes your personal assistant.”

It Pays to Pay Attention

By putting communication first, Favor enables its Runners to not just set customer expectations but to ultimately exceed them. For example, let’s say you order a meal for you and your significant other using the Favor app. Ten minutes later, your mother-in-law pops in unexpectedly. With Favor, not only can you text your Runner and change your order on the fly, you can even ask them to deliver it to the back door (where you can quickly plate it and pretend it’s homemade).

Favor claims they can delver anything within an hour.

Delivering food to the customer quickly is still important at Favor, but it’s not the be-all or end-all of the business model. In fact, Bath, like Breinlinger, feels that too many companies are focusing on last mile logistics rather than building towards sustainability. “You need to make sure you’re doing things that will drive the business towards positive unit economics. That is something that we’ve always focused on from day one — getting that formula right.”

High-touch value-added services appear to be a part of that formula. By opening the lines of communication between the Runner and the customer, Favor is able to help enhance the experience on both sides of the marketplace. Customers are provided with increased transparency and visibility into logistics, while Runners have the power to better manage logistics and control customer expectations. The result? Satisfaction is through the roof.

“More than 90% of all completed Favor orders receive five star ratings,” — jag Bath, Favor CEO

Repeat business is also booming. “Customers that order more than five times per month on the Favor app are contributing to over 40% of the company’s total order volume.”

We’ve Heard This Before…

While Favor’s commitment to customer satisfaction is honorable, we’ve heard the “service with a smile” line before. Remember Webvan? The darling of the dot-com boom, Webvan spent heavily building the infrastructure behind its online grocery delivery service. The company instituted a 30-minute delivery window, a decision that drove costs through the roof. While Webvan’s customers were enjoying fresh produce, the company itself tried — unsuccessfully — to eat the mounting expenses. Rather than pass the costs onto customers, Webvan burned through more than $1 billion in funding before eventually taking their trucks off the road. Webvan’s customers loved the service (Hyperwallet’s COO, Lynda Talgo, says she swore by it back in the day).

But it takes more than customer satisfaction to put dollars in the bank.

When pressed on this, Bath agreed that happy customers, while important, are just one piece in a complex economic pie. “Investors are going to put money into a company regardless of the sentiment about the space if the company is growing ​in a way that is actually sustainable.” To date, the company has raised $16.9 million in four rounds, including a $13 million Series A from Silverton Partners, S3 Ventures, and Tim Draper. Favor’s early Texas investors [the company was founded and remains headquartered in Austin] were very conservative, so in it’s early days, the startup had to prove that they were headed towards positive unit economics in their early markets, long before they could go out and launch in other cities. The company is now active across Texas and 10 additional states. Operations are also up and running north of the border in Toronto, Canada.

In a world where people are short on time, on-demand certainly remains in-demand. Favor’s high-touch, value-added services approach has helped the company rise above the competition, but is it enough to remain competitive in the on-demand marketplace? Thus far, Favor has proven that better communication leads to improved stickiness and repeat usage, which — in turn — leads to higher lifetime customer value. It might be too early to claim Favor has the recipe for on-demand success, but their focus on high-touch logistics and supply-side management is certainly giving other delivery platforms some serious food for thought. Perhaps the next step could involve a menu of improved payout options for their Runners? Only time will tell.

This article was originally published on the Hyperwallet Voices Blog. Visit Voices to read more articles on the on-demand economy.