You should read this if you’re a foodie, or an entrepreneur or an investor. Basically, there are two kinds of foodtech startups everyone is talking about:
- Food startups which cook their own food (own the full supply chain right from sourcing raw materials, cooking the food to delivering it), and use tech as an enabler. Let’s call these the full-stack foodtech startups.
- Food startups which do not cook their own food and work on an aggregation model where they tie up with kitchens in the area to outsource the food production and handle the other not-so-food processes (delivery etc). Let’s call these the aggregated foodtech startups.
Honestly, I don’t even want to count how many foodtech startups have been covered on YourStory or Inc42 alone — the number is easily above 20. More than a handful of these startups have raised impressive seed financing as well. Without doubt, we are going to see a lot of consolidation activity (acquisitions, mergers, and shutdowns) happening in the near future — especially because of the intense competition aided by all that VC money flowing in. It’s going to be fun!
Full Stack vs Aggregated? Who’s Going to Win?
I can’t sum it up better than Robyn Metcalfe, who happens to be a food historian of TechCrunch fame:
But a food startup is different from a tech startup because of the complicated emotional relationship between humans and their food. Make the product ugly, cause it to look like it might be unsafe, neglect the relationship between food and identity: Any one of these oversights will result in certain deflation, even if the market is ready and the product technology is stunning.
Forbes also did a piece here which validates the fact that owning the supply chain gives you an edge on delivery timings as well as better food quality.
I don’t see the aggregated way solving the traditional problems with food deliveries:
- Late deliveries (they’d be dependent on other kitchens and won’t have an optimized, consistent operational process for the backend — cooking, sourcing, makeline processes to deliver on time)
- Inconsistency with food (taste and look will vary as it’d be tough to install a 100% fool-proof, scalable quality control mechanism)
Delivery and cooking are equally vital functions in the whole food delivery chain and need to be controlled by one entity to provide a superior customer experience and gain customer mind share. But wouldn’t it be impossible to grow and scale this? NO. If Domino’s India scaled it without a lean backend (they have high capex due to a dining setup), I am confident today’s foodtech startups with a lean backend (no dining setup, use of tech to generate demand, etc) can figure it out if they get their ops right. Of course it’s easier said, than done — and there are many other operations-level factors affecting the outcome.
The full-stack food delivery startups could beat the aggregated ones simply by being more affordable for the consumer in the longer run — not by burning VC money to give discounts but because of the low food cost as compared to the high costs in the aggregated model — owning the sourcing function in the supply chain enables central buying of all raw materials and hence healthy margins (to the tune of >=20%) whereas the other side would be buying everything at the unit level leading to lesser margins.
You could argue that the aggregated model is easily scalable, but then what good is scale if you cannot deliver consistency in growth? The aggregated foodtech startups may be able to scale slightly faster than the full-stack ones, but they are going to lose customers even quicker than they’d acquire. In an industry where the real value could be generated only when a large share of customer base is loyal over a long period of time (the LTV:CAC ratio has to be high to generate value for the investors), I see companies which own the supply chain having an edge over others.
There is a quote by Todd Francis from Shasta Ventures saying:
There are large companies to be built by offering new, innovative and superior customer experiences to large markets, regardless of how competitive the sector already is or how successful the founders have been.
At rocketfood, we are betting in owning the full stack — right from sourcing the raw materials to delivering North Indian food to your doorstep in 30 mins in highly convenient packaging, we want to change the way India eats!
The market may be competitive but we strongly believe that immense value can be created by building a food company which uses technology as a primary mode of distribution, uses tech as a way to optimize processes (cooking, makeline and delivery), owns the supply chain and wows the customer at the end of the day.
So is it going to be an easy job scaling the supply chain way? NO! Is it scalable? YES, definitely.
