Food-tech companies got a lot of attention from investors over the last couple of years. By attention, we obviously mean money.
However, things don’t look too good now.
The second most important lesson is this means absolutely nothing. The people who run these companies aren’t entirely at fault. Most of them are guys who are attempting to make it big by giving a service that’s missing right now. Granted, this sometimes leads to a depressing turn of events, but that’s no reason to not give it an honest shot.
While we are at it, the most important lesson is to stop assuming that all venture capital companies are idiots. VCs are like Dharmendra. They throw their money at everything they can. Some of those investments will pay-off in a big way…
If you sit back and think about it, there are perfectly sound reasons why food-tech is a tempting place to throw your money at. The market is largely fragmented and unorganized (two words that perk-up any VC’s ears). It’s a fairly high-margin business. It’s a sector where the last technological advancement in the field of food distribution was the vending machine. As an added bonus, your customers can’t download your product on Piratebay.
Oh, and did I mention that your entire potential customer base needs what you are selling three times a day?
Not want. Need. Nothing attracts venture capital more than telling VCs that your customers are literally dying to have your product.
If you try to estimate the size of the food market in India, it works out to around $50 Billion dollars.
So, now we know that the size of the market isn’t the problem. Nor is the composition. Above all, it’s trapped in the stone age. All this leads mostly sensible people to argue that a half-decent technology company, following a dull but level-headed business model, could meet with a fair amount of success.
That’s a good argument to make.
So it’s a little disconcerting when you find out that’s not exactly what’s actually happening.
In order to understand what’s going on with food-tech in India, it’s important to unpack it a bit. Food-tech is a notoriously complex business, with several players fighting each other (and sometimes themselves) to make money off different areas. However, at the heart of it, food-tech is divided into three parts:
Out of these, food delivery is where several players are fighting for dominance. Even food delivery has several models. And all these models basically depend on who takes the order and who does the delivery.
Food-delivery companies are all essentially logistics companies. Most of them dress it up in some way or the other, but that’s what companies like Opinio, Shadowfax and Grab do – they move stuff from one place to another and try to make money off it.
So, let’s understand how that works.
Let’s assume, purely for illustrative purposes, that you decide to get into the lucrative business of delivering whiteboard markers to startup founders in Bangalore.
The model is straightforward. The founder opens an app and asks for a whiteboard marker, and you send a delivery boy to the closest stationary shop, who picks one up and delivers it to him.
Now here’s the first problem. The startup founder is bootstrapped and isn’t going to pay you much for this service.
After a while, you wonder – how does one fix this? So you call your good friend, who thinks about it for a long time and says : ‘Dude, you need to get your guy to deliver more orders’
This is actually easier said than done. Because if you look the pattern of orders in a day, it looks like this
That’s how people place orders. It’s random. Sometimes demand spikes because a Sequoia VC was spotted at Costa Coffee in Koramangala and sometimes all the startup founders are arguing on twitter about Rahul Yadav and nobody needs whiteboard markers that day.
However, if you could figure out a way to deliver all the orders that come in with one delivery guy, you would be sorted. You could probably break even. But since you cannot have your delivery guy in two places at once, you do the obvious thing: You tell your customers that they can place all the orders they want, and you will deliver their markers the next day, instead of doing it immediately.
At first, everybody is upset.
The best part about this model is that the more orders you get, the better it is for you. You are paying your delivery guy the same amount every day. And you are focused on getting as many customers as possible in order to make money.
That’s why companies generally try to scale as fast as they can once they hit upon a model that works. Also, there’s pretty strong evidence that the bigger you get, the more you can drive down your costs.
There are more things you can do. If you had the scale, you could, for instance, buy all the markers you needed and stock them in a warehouse, and send out people on routes to deliver them the next day instead of hitting local stationery stores.
Logistics companies have perfected and tweaked this technique over decades. To date, this is the only logistics model that has consistently and demonstrably made money. Think about it : everybody from the postal service, courier companies like FedEx and your doodhwala – all of them use this model.
With me so far? Good. Because things are about to get wild.
Now let’s say that for some reason, you are a young, up-and-coming startup with some funding interested in changing all this. Competition is tight, and orders are scarce. So in a bid to differentiate, you announce that all whiteboard markers will be delivered in a couple of hours – guaranteed, instead of having to wait a day.
We even gave it a name. On-demand delivery. Have to admit – has a nice ring to it.
Normally, this might seem like a minor differentiation, but in the world of logistics, this is an earthquake.
In logistics, time to deliver is a huge factor. It’s what makes the difference between profits and losses. The more time a customer is willing to wait for a delivery, the more leeway the company has to figure out what’s the least expensive way to do it. They can determine the best route, group deliveries together and do a ton of things to keep costs low.
That’s the thing about logistics – preparedness is profit. The less time a logistics company has to make a delivery, the lesser are the chances are they can group deliveries together. This is why speedpost is more expensive than regular mail and why Amazon charges you more for same-day deliveries.
Preparedness is profit.
But if your business model hinges on delivering everything on-demand, you are basically throwing all of these lessons out of the window.
Now let’s get back to our startup.
So, what does this shiny startup do? Remember, this is what the order pattern looks like in a day.
However, delivery guys cost money. So this means that you are losing money with every order you deliver. This is a concern, and you want to control it, but your investors tell you – don’t worry about it. Go after scale. Remember – scale always reduces costs.
Scale is like George RR Martin. It can help resurrect you if you have your basics sorted out. But if it’s been four years and you still haven’t figured your stuff out, you are probably going to suddenly find yourself at a wedding in the season finale.
Do you see what’s going on? Scale seemingly makes no difference, because in your model, to see the benefits of scale, to do all those amazing things about grouping deliveries and all that, you will need to get really, really big.
But there’s another problem.
Normally, scaling a business is one of the hardest things to do. There are tons of books written about it. There are MBA courses on scaling strategies. It takes time. And large, careful investments.
But not for you. Your business is built on an app, and you don’t have any large investments. Plus, if you give away your stuff for free, it’s remarkably easy to scale.
This means that you get bigger faster than you anticipated you would, because hey, who doesn’t love free deliveries? You projected you would have a hundred customers a day, but instead you now have a thousand. All expecting instant on-demand, free service at the touch of a button.
Do you see the problem? You are losing money with every order you make, and because your growth is out of control, you are losing money faster.
But your investors are delighted.
Again, remember : This is happening because you shortened a one-day delivery to a two hours. And this limits your ability to group deliveries – which is how everybody else is making money. However, with some luck, you still manage to squeeze out and do some group deliveries. But two hours is too short a window. It isn’t enough.
But it’s okay. You tell yourself to take deep breaths.
Good. Because it’s going to get worse.
If you are delivering food, you need to remember two key things:
First – you can’t afford to be late while delivering food. Much like the Aam Aadmi Party leadership, food is a perishable product. Also, if you keep people hungry for too long, they aren’t going to be happy about it.
So you no longer have two hours. Actually, it’s more like 30 minutes.
Secondly, this is what the distribution of orders look like for whiteboard markers, or groceries or basically any product.
Oh, and don’t forget – you are paying your delivery guys by the hour. Regardless of whether deliveries happen or not.
So in summary:
- You have a lot of orders.
- You are losing money for every order.
- You are growing faster than you expect.
- You have lesser time to deliver every order.
- All these orders happen in a couple of bursts during the day.
- Your co-founder thinks the whole thing is your fault.
This is why the food-delivery business is so hard.
—End of Part I—
Part II will be published on 29th November for The Ken’s subscribers only