What’s tech about food

From the traditional hawkers who used to roam around with their food stalls from door to door, to modern day high end gastronomical labs soliciting customers, we have truly evolved in the way we look at food; and the way it is brought to us. This compulsive need to eat thrice a day is transforming the world of investing, and how. Millions of dollars are being poured into this space, showing promise of delivery, pun intended, but is it really the attractiveness of the space? With the recent controversies around some of the startups guzzling up money and time, which they initially promised to save, it would be worth it to look at this phenomenon in detail.

In the manner of word, the food tech space can be divided into two very broad categories — Deliverers and Enablers. While deliverers consist of startups pledged to make available food to your doorstep themselves, i.e. all the makes of raw ingredients, in a box or otherwise to cooked meals, the enablers are the companies working towards making you take ‘smart’ decisions about the food you eat. i.e. the restaurant rating and ordering platforms, including the booking platforms (aka restaurant tech). Both are intended to make our lives simpler as we are constantly faced with this ever daunting choice of what to eat and where. From an investors perspective, that’s a lucrative opportunity right there, as the food industry has the highest recurring revenue rate in the world, followed by medicines. No wonder this tech evolution has taken the world by a storm.

How much are they worth worldwide?

If we put aside GrubHub (NYSE: GRUB) with a US$ 2 Billion market cap, as that is one of the rare startup reporting a profitable operation, money has been seen pouring into this market. The recent IPO by HelloFresh, a meal subscription service brought forward the massive opportunity. It is estimated that the global food market is north of USD $6 trillion, with its several morphed offerings like fresh food, halal etc. running into individual billions.

With that kind of a meal on the plate, the funding isn’t too far behind. More than 700 VC’s are financing innovative food tech companies, with over 200% Y-o-Y increase over 2014 (272% Y-o-Y in 2014 over 2013). More than US $750 Million has been invested so far in 2015 in US alone with Q2 2015 stealing the show at US $550 Million. Blue apron, Instacart have all become household names now, replacing the need to go to Walmart every weekend to stock up.

Startup hubs such as London, a host of startups such as Deliveroo, which are combining logistics with food and coming up with a model that serves meals across 10 cities in Europe. Asia is not too far behind. 5 of the largest deals in this space have happened outside of the US last quarter, and is led by, no surprises here, China. The quarterly count in Q3 2015 indicates crossing the $1 Billion deal mark, twice this year.

The Indian saga

Ranked second after US in the number of deals done in this space, India is poised as one of the fastest growing markets in the world in food tech. What’s happening in this country with respect to food tech in particular is very interesting. There are a few good companies which are being chased by a handful of picky investors, resulting in overheated asset prices and lack of tangible exit options apart from IPO’s, which are not easy to come by. As easy as it is to open a website and start collating reviews or taking orders on behalf of the technologically inhibited restaurants, looking at the way this space is heating up, everyone seems to be keen to launch their own food tech company. While competition is always healthy, too much competition confuses the ultimate consumer who is rather better off by calling the restaurant themselves and placing an order. As far as the deliverers are concerned, the astoundingly low labor costs in India have made possible for a grocery store next door to be able to deliver stuff to their customers by a mere convenience of a phone call. Sure there is no app or a fancy tablet enabling this exchange, but this on ground reality remains a challenge for most of the startups burgeoning in this space. Low margins in retail products continue to sink the bottom line, and as a result the startups that everyone is funding or talking about are restricted to only a handful of metropolitan cities. The country, despite having immense potential and a billion mouths to feed, remains an execution challenge for the industry. Nevertheless, 45 deals in the last quarter promise hope.

Better food will be delivered for dinner, if not lunch.

So what works?

Shifting the focus back to the global scenario, it’s interesting to see how the business model of the food tech companies operate and what works in their favor. Let’s break it down.

Before Amazon was born, we were used to picking up groceries ourselves, and that was in fact a daunting task to do every Saturday. With those ingredients, we used to either make a meal ourselves or go out and eat the meals which couldn’t be made at home. Then came this delivery revolution where a tech startup said, “Why don’t you order the stuff you need by clicking a pretty looking page on your phone and we’ll get the stuff to you; and because you’re lucky, you get 5% off”. People bought in readily. What Amazon was able to accomplish is actually a very simple model. The same model is being replicated by the food tech startups, but just the ingredients have changed. By specializing in a certain SKU, the model was named as ‘innovative’ and ‘ground breaking’. The restaurants or the shop owners pay a fee to get listed on the site, the site collates all the information, and makes available an online market for the customers to shop in.

Then came in the tricky part — the restaurants. Serving food is one of the world’s oldest profession. There are more restaurants in an average street in New York than in certain countries.

“But we can’t decide where to eat”. A startup then came in to collate the traditional ‘word of mouth’ reviews and the Editor’s picks on the Sunday edition of a tabloid to bring you ‘rated’ restaurants. The food guides were suddenly passé. “That’s great! How about we take a look at the menu first?” The menus got listed online. “Ok how about reserving a table?” Online reservation was born. “The restaurant was too pricey! I can make the stuff we ordered at home in half the price!” Ready-made delivery comes in. “I like it! Could you send me the recipes too, and where on earth will I get 125 grams of broccoli!” Ready-made meal subscription was born.

So what works in favor of food tech?

Simple — convenience. As long as it is convenient to hand over the chore to technology, it will work. There are two trends pushing this phenomenon — one) urbanization and two) internet. As more and more people are adopting technology in their daily lives, the market for food tech keeps expanding every day. The urban fad of health and fitness is also driving the push and we could see a surge in startups offering organic, healthy food, or some with focus areas such as baby food or lactating mothers or old people. A small trivia, there are thrice as many young people than old ordering the meal subscriptions. The reasons for that are clear.

And what doesn’t?

Food tech, as easy as it sounds to run or operate, is in fact the opposite. There are grave issues plaguing the industry, the biggest one being scalability. The only way a global company can be built in this space is by consolidating several pockets of local entities.

The demographic of the world’s population is changing, with more than half residing in urban areas. The increasing urbanization adds a layer of complexity to the tough to scale companies. Most of the startups which get killed in this space fail because of the inability to match with this pace of urbanization, and restricting only to the local areas doesn’t get enough volumes to drive the margins.

Protecting the delicate margins is another challenge. It’s very easy to go all out on marketing and create a launch, but is extremely difficult and slow process of building up a brand, and in case of rating platforms and meal deliveries, trust. Retail grocery products have low margins, and ready-made meals delivered cannot be priced at a substantial markup than what is available at the eating joint. So if you don’t do deliveries or don’t deliver meals; you can tell people where to go, but in that again it takes investment to build up a trusted repository of information.

A hidden dialogue in all this debate is about health. More health conscious people means no more high margin junk food but more fresh ingredients to serve, which are costly to acquire and deliver, and they can travel limited, unless frozen. As the population prefers healthier choices, it becomes trickier.

In this regard, the enablers would be the ones to watch. But then again, there are issues with that model. It is difficult to reach to the corners of the city to find that ideal restaurant and convince them to sign up for the website. Building up a database takes time and money. Plus this softer issue of trust. Once the users think that the reviews on the site are misleading, the word spreads fast.

The Paris Summit has got our attention to something known as climate change. The food industry is on the direct radar of that. If not immediately, sustainability will emerge as a challenge in the coming years.

The verdict?

The only way to beat the competition is to not have any competition at all, i.e. stand out. Differentiation is strategy that can work in the intensely competitive environment. Food tech is an interesting and very promising concept per se, if executed well. It is another one of the classic technology invasion in our lives to help make it better. The industry is here to stay. So are the players. What can happen is more focused SKU’s being offered on the platforms. Just as they way Italian restaurants weren’t enough, then came the Chinese, Japanese, American, Spanish, Indian, Malay and then the fusion ones, the food tech industry is set to imitate this. Plain vanilla offerings aren’t enough. Because when it comes to food, we have all wanted more.

And what would be interesting to watch is this evolution. Just as an app can tell you which meal to make if you input the ingredients in your refrigerator in the app, life will be a lot simpler. Maybe we could shazam the dishes we eat just as the way we shazam the music, or maybe we can call the chefs to our kitchens to cook for us, or source Greek cheese with Columbian chilies and Thai papayas to make a salad, the future will for sure be colorful.

While scalability and profitability are significant challenges, we would still want a hot burrito delivered right at our doorstep.

The money will continue to fund. The companies will continue to come, grow and die. People will continue to order online. The investors will continue to thrive.

With about 8 billion mouths to feed, thrice a day; the so called food tech is here to stay.