Unit economics matter, but restaurant food will break the model
In ten years, we will witness the total carnage created by the marriage of today’s VC-backed “foodtech” delivery companies and the cheap supply of calories. However, sprung from this pairing, will be the right, universal answer for better, nourishing food, packaged in a more convenient way (read: not on-demand).
The topic of food delivery is ubiquitous. Ask a food investor these days about their portfolio, and they snap their neck the other way. Fast. We’ve learned the hard lessons on what it’s like trying to figure out exactly which company(s) will be standing over time. Easy answer, Amazon and Uber (more below). Or which companies are solid, innovative models (Mealpal, Good Uncle). Or are too innovative, they fail (DinnerLab, KitchenSurfing, Kitchit, Farmigo). As a result, we’ve fallen short to make food, the behaviors around it, and the relationship we have with it, a larger part of the discussion. It’s not just a logistics issue, we have a food problem.
As consumers, we think we know what we want. We don’t. We’re just like our toddlers, throwing a public tantrum on the ground because we want M&Ms —now! So, as an embarrassed parent, what do we do? This is not rhetorical. Get your child those fricking M&Ms and we all can move on with our day.
Our current food delivery world is designed in this light. Our parents, the human M&M dispensers, are the tech-obsessed “on-demand” delivery companies answering our call of instant gratification. Please, feed me now Postmates, DoorDash, and Seamless. Salty, sugary, and sweet — as cheap as possible, please. Use those algorithms and promise of scale; whip us some delivery magic on the backs of sinful, poor-quality food. Well, as they say, be careful what you wish for and a Merry Christmas to us.
It should be no surprise, but guess what? We just earned a gold medal in the category of obese AND malnourished for the United States. It takes a village folks. Our restaurant plates are four times the size they were 50 years ago, which are now also delivered to us as we inhale in front of our tv sets. Calories are cheap, nutrients are expensive — that’s the not-so-secret secret. Big food companies talk about “share of the stomach”. What’s that, how do you increase the “share of the stomach”? Easy answer for any MBA student: increase the SIZE of the belly and make food easy for consumption. That’s the soft drink philosophy. Between on-demand logistics and the type of food we crave, we’ve malnourished ourselves. Hitting “purchase” from our couch or desk to have something yummy and crave-worthy brought to us from our delivery company of choice is like a parent that spoils us rotten. We just smile and say thanks.
This particular demand of ours has manifested in all types of ways. Look at office lunch, a time of day when most people want to eat healthier (NYT). Catering concierge companies, which grew out of Silicon Valley, offer family-style meals for budding foodies at the office, are a total #workperk that has spun out of control. Want the “sweet waffles with toppings like banana cream and speculoos dust, and savory ones with bacon, brie, and basil all prepared onsite for Thursday’s meeting? You got it and build time for a siesta while you’re at it! Forget about the fact that people need to be productive, let them feast on your dime like it’s a birthday party, employers!
How did we get here?
Pre-tech: the rise of Dominos, Papa Johns, and Chinese Take-out
Let’s dig deeper into the earliest food in food delivery. Pre-tech — Domino’s, Papa John’s, and your local Chinese takeout were the first to figure out how to build a business around logistics. Really cheap food, with even cheaper (and efficient) labor, made it possible to bring you pizza for Monday Night Football. Consumers were hungry, lazy, and willing, for a few extra bucks, to get their intake of calories brought to them. (Hello, I was in this camp. Kettle. Black.)
Then companies like Seamless, Eat24, and others figured out how to aggregate these vendors onto their own site. (It is a marketing platform, charging around a 20% cut of the revenue from these vendors). Now, as a consumer, you can pick if you want pizza, or wings, or Chinese without having to make a call or toggle between browser windows. Brilliant and easy. Cheap food for everyone! (The model worked, and cannot emphasize this enough, because the the food and labor were cheap, cheap, cheap.)
Round I: The Introduction of Caviar, DoorDash, and Postmates
Then, as this model evolved two things happened. First, consumers wanted more options. Second, these marketplace sites needed more vendors. So, Postmates, Caviar, and DoorDash came along promising higher-end food options, more restaurant quality food, with their ability to deliver it. To commit to this promise, they had to lower delivery fees and meet the market. But, here’s what’s happened. It got too expensive, and the food that’s being delivered actually shouldn’t be delivered for our every day consumption.
Round II: The Coming Decline of Caviar, DoorDash, and Postmates
One restaurateur, David Chang of the Momofuku empire, has heard the sirens and has taken a stand. When Chang’s best diners said to him, _Dude, you have to deliver your ramen (_his words), what was his response? They’re fans, not supporters. Supporters know that the food shouldn’t be delivered. Chang feels that his brand is an unwritten contract between a company and a consumer, delivering his Momofuku food was a breach of that trust and authenticity. (Also, check out Wiley Cerilli’s solution of Good Uncle.)
Companies like Caviar, Doordash, and Postmates are in a race that can only be won by Usain Bolt — Amazon, UberEats. Amazon and UberEats will eat foodtech’s lunch eventually, buying up the companies for pennies on the dollar.
What’s important to realize is that Uber has delivery capacity at lunchtime; their model exists and is built-in. Amazon too, their infrastructure is already in place for food delivery. To make their overall models more efficient, mealtime, particularly regarding lunch, helps use that capacity and bring business to Uber’s independent drivers and Amazon’s workforce, decreasing the costs of all deliveries. Food Delivery isn’t core to what they do, it’s another product line that they subsidize for their customers, increasing customer lifetime value.
Take a quick look at the delivery economics. As an experiment, head to Postmates right now. I have the option of getting a S’mores milkshake and a Buttermilk country fried chicken brought to me in the next hour for an extra $8? Or for a more reasonably-priced option with the cheapest $1.99 delivery fee? Well, back to the drawing board of Sbarro, Manny & Olga’s Pizza, and Mr. Chen’s (in Washington, DC). All fast and greasy cheap food. Isn’t that interesting.
A friend told me she paid $12.50 for a Shake Shack burger, fries and drink via PostMates; Postmates takes about 20% from the restaurant. BUT, say it costs Postmates $7 to deliver it (an average delivery is 1.7 deliveries an hour — industry data), Postmates is paying me to use their platform right now. How long will they do this? We’re paying artificial prices under an auspice of a path to a network effect. As consumers, we’re eating a lot of the industry’s figurative lunch.
Unit Economics and What Matters Most
This brings us to the unit economics of delivery models built on restaurants as suppliers. By default, the way to scale quickly was to get to get the current food producers to produce — restaurants. This isn’t core to the restaurant model, and it’s part of the problem.