Food-tech creates little new value for society long term
but lack of value creation comes at high social costs
DoorDash buys Wolt for $8bn to expand in EU, following JustEats $7.3b to buy Grubhub — this newsline caught my attention. #Foodtech is the hottest industry right now. Sky-high valuations, prime news, even stronger funding rounds. The streets are crowded with curriers wearing all kind of branded uniforms, riding scooters, bikes, cars all with same cubic thermo-backpack rushing to deliver groceries and restaurant food to their client waiting at home.
But that does not mean a thing, as the hype can quickly evaported. We saw that with the Scooter and bike-sharing mania couple of years ago. Its a hype around what investors and broader mass considers tech, but which is not about tech investments at all
It started with “Pizza-Tech”(tm)
Back in late 80s when video clubs emerged in Soviet Union, I got exposed to western movies. Among many cultural shocks were the scenes where actors would order a pizza over the phone, which got delivered within 30 minutes.
Fast-forward to mid-late 90s, when Soviet Union dismantled and exposed to western culture. First pizza came already 1988 (organized by western security agency), and delivery by mid-end massively through PizzaHut and Domino’s. But I digress in nostalgia.
In Western World pizza delivery industry has kept pace with technological developments since the 1980s beginning with the rise of the personal computer. Specialized computer software for the pizza delivery business helps determine the most efficient routes for carriers, track exact order and delivery times, manage calls and orders with PoS software, and other functions. Yet nobody even thought about calling it -Tech. Like Pizza-Tech or so…
Time was critical in delivery service, and Domino’s 30 Minute or free pizza guarantee was (and is) infamous most criticized, particularly for putting pressure on curriers forcing them to drive aggressively. Domino dropped this practice in 1993 after losing a large lawsuit to a woman who got struck a racing delivery vehicle.
But not only restaurant food delivery has a long history, grocery delivery is 25 years old! HomeGrocer.com was one of the first online supermarket players. It started in 1997 in Washington state and quickly obtained investment to allow it to create the infrastructure needed to support the business, including a huge warehouse and a fleet of vans. Early growth was impressive, and by mid-2000, sales had reached over $1 million a day. The other early mover in online grocery was Webvan, founded in 1996.
DotCom bust also busted those pioneers. Funding dried up and both closed shop in 2001. History tends to repeat itself. “This time its different” is a well known joke on Wall Street.
Value drivers
Let me get precise here. Its not about pizza of any restaurant food delivery. They are bad. First, they come at same price as in-dining. Second they come usually cold and, less usually though, late. I know that for sure. That why pizza delivery barely took off in post-soviet Russia (my subjective view)
Ordering groceries is a different story. Food temperature is not a critical aspect here. Its more about:
- convenience and
- reduction of physical work
Instead of me carrying heavy food packs, I use the nasty food sourcing time alternatively and let someone carry the bulky bags for me. This is particularly compelling with non-food categories.
The downside of the outsourcing is that the preparation time gets longer: navigating the apps and marketplaces consumes much more time than in shop (again, subjective experience). Plus the availability of your favorite brand is not guaranteed, but that’s rather a minor thing, albeit generating negative stress.
So I clearly see a case for bulk purchase, like for several days or a week. What I don’t get is the ultra-fast delivery of groceries. 30 minutes, 20, 15 and even 10 (like Gorillas) — that is even faster than Dominoes pizza, even accounting for the prep-time. The only use cases coming to my mind are:
- emergency
- fun
I understand the situation where a mother runs outs of milk for its crying hungry infant (I really do). I also kind of could understand that its simply fun to click and imagine the race to bring you the food as some sort of a weird show (which delivery brings my coffee first, let them race!).
Seriously though, the emergency case cannot justify the GVM growth. So what remains is that in fact time is a side-feature of fun, whereas convenience and physical work are the same motivators as with nowadays traditional over-night delivery. Since ultra-fast costs as much as overnight, I take the former. Why not? Its fun!
Obviously quick commerce (how the politely call it) does not want to be reduced to that. Barry from Gorillas:
“Any innovations that streamline mundane tasks and free up space for meaningful leisure time will always be a strong proposition. If anything, we value our time now more than ever as the benefits of WFH and other flexible ways of working prompt us to revaluate how we live our lives. If we can get an hour a week back from grocery shopping, why wouldn’t we?
Only that we spend that additional hour navigating in the app…
Bottom line: Speed = Valuation narrative, but not a use case feature.
There a very last one:
- discounts
I actually am one of those discounted-only tech users. If its cheaper than physical shopping — I’ll take it. Thats the biggest value drivers. Consumer surplus at cost of shareholders.
UPD: Actually one more:
- cannabis orders (at least possible with users in Ontario). We are talking product differentiation here!
Business economics are worse than shop retail
Profitability is key to success in grocery business. Margins are razor sharply thin.
Conventional grocery stores have a profit margin of about 2.2%, making them one of the least profitable industries in the US.
It also not uncommon to sell at loss just to generate store traffic (milk is such an example, while chocolate is a high margin sale). Profits come from volume
Consumer traffic is key to retail groceries. Steady flow is required also to manage the inventory rotation. Online groceries face a challenge to overcome usage resistance. Back in 2001 only 0.19% of all consumers were buying groceries online, today there were around 10%. Service adoption level today is more favorable today yet stimulating adoption is very costly: you need to purchase traffic but also spend on retention to prolong LTV. Bringing in new customers requires constant acquisition marketing frenzy: discounts, vouchers, etc. All of these come on top of ad spend and traffic.
On the supply side the main challenge is to solve the last mile economics puzzle profitably. The emergence of “dark stores” brought the distribution hubs closer to customer. But that was done to allow a delivery in less than 15 min. In a zero-sum game, it will be real estate operators who profit from it, less the eGrocery.
Last but not least there an “foot soldier army”, human curriers doing the last meter delivery. And here is where my economics breaks —eGrocerers cannot generate positive margin, as FT has demonstated. Statista show similar picture
Bottom line: as a business its even less profitable than traditional grocery shop. So maybe technology would give them an edge?
Where is the -tech in Foodtech?
Home delivery is just not generating positive economics. To improve that following options are possible
- Sell products at higher prices than shop retailers, or
- Charge for delivery
- Switch business model
- Find “magical” ways to reduce last mile delivery
Number 1 is a no-go, as it kills any attractiveness. Charging for delivery is a more transparent approach, but that would kill off the Attract phase of the Attract-Extract Cycle.. Number 3 is all about “click-and-collect” or how I call it, outsourcing last mile to your customer. N Well, not quite it, there is still the intermediary step like postmates, but really, the value is halved as I still need go do some physical activity. Not really innovative or technological.
It turns out that Number 4 is the only really technology option in the whole -Tech narrative.
Drones, Robots, bots, well anything that replaces a human could lower the costs, if it is more productive. Which they currently aren’t. Capex alone kills off the case, mid-term. But I guess its a good narrative for those investors who pretend to be long-term value oriented. Narratives…
While I believe robotization to happen, but still see it as a utopian future (or dystopian, whichever you like). At the same, emergence of robots will not come profitable for eGrocerers, but for the robot suppliers. Unless they build them on their own (and with their shareholders capital).
And last but not least. The way I see it, startups and their investors do not like Hardware in the business. Hardware doesn’t scale profitably. The value of technology is that it allows scaling at almost zero marginal cost. That why “software is eating the world”. That why every startup out there positions itself as -Tech but without it really
Search for narratives in absence of technology
Admittedly food tech is not more than just delivery. Well colloquially at least. Funding flow tells a different story. Its all about it.
Staggering 78% of all funding went into delivery. And we learned that delivery is not about tech. And neither is it about disruption.
So what is the narrative then?
Consider these statements (Barry from Gorrilas, bold font is mine):
“We see traditional retailers as our competition. Ultimately our business can offer something drastically different to their existing way of shopping, so we’re changing people’s habit from being a big weekly shop to more mindful, smaller trips where they’re not wasting food and it’s more convenient. Our competitor set is the convenient versions of Tesco or Sainsbury’s.”
Hmm… ultimate goal is being drastically different. Well at least he did not explicate something like “We are Uber for…”. It seems I am not the only one unimpressed:
But the big four grocers don’t necessarily see Gorillas et al as their competition. Tim Steiner, chief executive of Ocado, was dismissive of their threat.
Well the good part is at least Gorrilas undestand who the competition is, because they seem to lack understanding of who their customers really are:
A key fundamental will be understanding its user base. Barry says right now it is struggling to understand the core demographic. Purchase information suggests it is young professionals and students largely using the service, but increasingly time-poor families in search of convenience are turning to its app.
Where is the obsession with Osterwalder business model framework that is apparently so rigorously employed at startups? It is more of a hit-and-run approach. Well, no, that is not fair. Rather it is a constant exploration. Which is fine in unchartered waters, but since the market is well known (if you know the competitors).
There is no new narrative, there is not even a sound narrative. Covid-19 was the narrative behind online delivery, a misery situation, a force major. Especially ultra-fast delivery is non-value creating feature.
Aggressive expansion = substitute for lack of value creation
Back to the headline news. According to DoorDash CEO Tony Xu reason for buying this finish startup is that:
“We believe these markets provide an opportunity to grow our international business to multiples of what it is today,” Xu said in a conference call with investors. “This should allow us to invest and expand more efficiently than we could have done on our own and on a faster timeline.”
What? OK, lets disect this one.
- Delivery is a hyper-local business
- Its most costly position is last mile/meter
- How is business in Finland going to add any efficiency in US? It doesn’t
Answer is easy: getting big and international is part of the IPO way. If you are local your valuation is 5–10x, international 20–25x.
Therefore we will see more consolidation on a model and market which has to deliver proof for profitability yet. There are still many players and a lot of investor money requiring the re-valuation. This is so much the same game as with Scooters a few years ago. (If you are bored in your #WFH you can play a bingo-game with your colleagues. Who will acquire whom next in the “quick-commerce” space?)
Lack of value creation comes as social cost
Scaling is a value creation at cost of the next round investors. Rupture business without intrinsic value. For worst, it exploits all stakeholders albeit at different lifecycle stages.
- Shareholders let company burn cash to expand. Essentially they finance consumer surplus and adoption (socialist state)
- If the company jumps the chasm from attract to exploit phase — situation will revert: customer pay for shareholder surplus (capitalist state)
- One party at loss: curriers. I am not even going to cite all the miseries there. Just google. It pure exploitation state. Lets hope it does not spill over. After all we are the couch potatoes in this business model, while they are the muscles (literally)
At best its a zero-sum game. But its not and social costs are high partly, because they are invisible to us. VC should stop funding such models excessively, blowing up valuations beyond reasoning (yet still below Rivian). The future should about value creation. More breakthrough investments, less exploitation and half-cooked business models.
