Tackling the New Food Economy
Part One: Successfully Managing Customer Acquisition
This is the first in a series of posts exploring how new food delivery startups are successfully managing the challenges of supply chain, production, logistics and customer acquisition.
Food delivery is definitely in vogue right now: over $1 billion was invested in US VC-backed food and grocery delivery companies in 2014. Following last year’s multi-billion dollar IPOs by Grubhub and JustEat, vertically integrated on-demand meal delivery and boxed meal-kit startups are springing up everywhere and raising record amounts of venture capital as investors clamor for a seat at the table in the on-demand food space in hopes of finding the next Uber. Since February 2015, the biggest players in the American market — Blue Apron, Sprig and Munchery — have raised $265 million with a combined valuation of over $2.6 billion, contributing to the fear of an impending food tech bubble.
Encouraged by this funding frenzy and no longer intimidated by the challenges of food delivery, more and more companies are entering the market with similar services and competing for a slice of the food retail dollar pie. As a result, the need to focus on customer acquisition is paramount. Below are some recommendations based on conversations with successful food 2.0 companies:
Focus on Product-Market Fit
From Y Combinator’s “make stuff people want” mantra to Andreessen Horowitz’s “the only thing that matters is getting to product-market fit”, the importance of creating a product that resonates with the target market has been highlighted by many entrepreneurs. Before companies can scale, they must first find product-market fit, underscoring the importance of validating product-market fit as soon as possible, and leaving the slowest movers behind to watch the industry explode around them.
The process seems simple — identify the customer, figure out the right approach, and then create the right product to fit the market — but can require a lot of work. When Sprig first launched, they extensively interviewed customers and made tweaks until they had developed a product and experience customers loved, kept coming back to and referred to others. This laser sharp focus on the core product paid off — Sprig did not have to offer deep discounts to grow their user base (in contrast to Spoonrocket who sold meals for $1).
“The only thing that matters is getting to product/market fit.”
Munchery first launched in 2010 as a marketplace to bring personal chefs to the masses: chefs could upload menu choices, set minimum orders, specify delivery areas, schedules, etc., and customers who wanted to eat healthier on a budget would go online to look at menus and buy the food. After realizing errors in the model — chefs weren’t good at delivery or photography — the business model evolved and Munchery began owning more steps in the marketplace it built, finding product-market fit along the way. By mid-2012, it had begun investing in infrastructure, consolidating work into a single kitchen and streamlining the distribution process. By November 2012, the company had raised most of their $4 million Series A investment.
By comparison, Gobble launched in 2011 in the South Bay, suburbs of Palo Alto as a marketplace for home-cooked meals. As the company struggled to find an initial product customers liked due to many of the same issues Munchery initially faced, newer entrants like Sprig and SpoonRocket launched in densely populated urban cities of San Francisco and nearby Berkeley and the on-demand meal space exploded. Gobble eventually pivoted from peer-to-peer food creation, returning from beta in 2014 as a centralized dinner kit subscription service.
Although Gobble now seems to be on track since relaunching — it’s experiencing 42% monthly growth and recently delivered its 230,000th meal (more than the number of meals Munchery or Sprig delivered after a similar amount of time) — the years it took to find a product customers wanted has given competitors tremendous advantages. The $1.3 million Gobble has raised in venture since 2011 pales in comparison to amounts raised by its competitors, which means that Gobble has more constraints around customer acquisition and expansion.
Race to Product-Market Scale
Given the low barriers to entry into food delivery, it is no surprise that many similar services are sprouting up across the country. CB Insights recently reported that one-third of all companies in the food-delivery sector received their first round of funding in the past year. Each is competing on a variety of factors — price, menu, quality, delivery time, order lead time, user experience, and geographical reach. Those competing in the same geographic regions have to ensure that their offering is well differentiated, more attractive than the competition, and communicated with clear messaging in order to gain mind-share.
Product-market fit implies that a product works within a small market and the next step in the company’s evolution should be to scale. Therefore, the target when entering new markets is not simply to be the first to find product-market fit, but rather the first product-market scale. Once achieved, it is possible to overtake successful players and dominate markets no matter how few barriers to entry there are. Although Blue Apron was not the first US-based meal-kit subscription service when it launched in 2012, it was the first to find product-market scale. With $193 million raised, it is the best-funded boxed-meal company in the industry and it has maintained its market-leading position despite an influx of VC-funded competitors.
Lower Barriers for Customers
In order to change customer behavior, startups must implement strategies to lower barriers for customers. Addressing long-term challenges, Blue Apron CEO Matt Salzberg stated:
The challenge is showing people and educating them that buying food from Blue Apron is better for them from an experience perspective, a convenience perspective, a cost perspective, and a quality perspective than going to your grocery store. It’s always difficult to get people to change their behaviors and try something new, even if it’s better for them.
“It’s always difficult to get people to change their behaviors and try something new, even if it’s better for them.”
While the principal driver for meal-kit delivery services is convenience, a primary barrier affecting adoption is urgency. Considering the way Americans shop for groceries has remained largely unchanged for decades and many customers want to buy and consume products immediately, the requirement of meal-kit services to place orders up to 7 days in advance forces a substantial change in customer behavior. Many people don’t know what they are in the mood to eat 1 hour in advance, let alone a week and several studies have found that mood influences food choice and taste perception.
Subscription model services therefore should provide flexibility. In addition to allowing users to select meals up to 3 weeks in advance and skip and essentially pause their subscription, Plated allows customers to select bi-weekly shipments. Plated’s Sonya Bonczek said, “We totally understand how busy our customers are and it’s just not feasible to cook every single night. I think people are realizing it’s like a lifestyle. People look at us as like a gym membership.” She added, “It’s like date night for a lot of our couples and they look forward to getting their Plated box every week and cooking together and learning new techniques and cuisines.”
While only a small percentage of Americans currently order groceries for delivery online or use an online automatic subscription service, a recent Neilsen report states that nearly half of its respondents said that they are willing to do so. In order to appeal to the other half, companies should develop strategies that will help establish credibility: many consumers are hesitant to try online shopping, so exceeding consumers’ expectations during every interaction, especially the first. In addition to the free trials many companies offer to new customers while launching, offline engagement strategies can be utilized to reach consumers whose primary barrier is the need to touch, feel, or try products before purchasing.
Last fall, Plated launched a food truck in New York City, allowing customers to learn about the company, taste samples, and buy meal kits on the spot. It also partnered with Foxtrot Market in Chicago this Spring where Plated meals are sold in-store. Plans for a national experiential marketing “It’s always helpful having some sort of offline presence,” says Bonczek. “We are finding that when customers actually try it, they get a sense of what our product is and are really impressed with the quality.”
Leverage Loyalty to Drive Profitability and Growth
Leverage early adopters and the most committed part of the customer base to increase lifetime value of already acquired customers and word-of-mouth referrals by rewarding customers for their loyalty. Munchery has maintained a monthly growth rate of 20–25% by implementing strategies to leverage both which accelerated awareness and improved conversions. It fueled word of mouth growth when it first launched by targeting early adopter communities and offering 5 free meals for startup teams. In addition to encouraging social sharing by offering referral awards with dual-incentive discounts for ambassadors and their referrals, very early on, it launched an invite-only VIP program that focused on the best customers, rewarding frequent orders and chef engagement with an automatic 10% discount.
Another strategy to drive revenue from this segment is to build a subscription model into a service offering such as delivery fees. This front loads revenue, locks in behavior change amongst customers and encourages more orders. Sprig introduced a $10/month delivery subscription to sidestep the dynamic delivery fees, which averages $2.75, but can get as high as $4–6 per order — more than the original $2 fee. Considering 60% of customers order more than once a month, there’s a strong incentive to join. When experimenting, be sure to price high enough to avoid into eating profits. Munchery’s $39/year unlimited delivery plan — priced less than ⅓ of Sprig’s delivery plan — has since been discontinued. Look for high retention dynamics, which is indicative of a good fit for the model.
Grow Existing Market Before Expanding
Startups can broaden their customer base by adding new geographies and extending delivery coverage. Unlike Uber, which rolled out teams in every city, this this can be particularly challenging and operationally complex for full stack food delivery companies which require neighborhood-by-neighborhood then city-by-city expansion. In order to grow, they must enter new cities, build up new delivery fleets, hire new chefs, and attract new customers.
One of the key lessons from Webvan’s failure is do not expand into a new territory until demonstrating success in the first market. Sprig launched with weekday dinner service in one area of San Francisco, slowly adding lunch, more neighborhoods, more hours, and more days. It took over a year before launching in Palo Alto, a mere 40 miles away. Similarly, Munchery did not expand to a second major city until three years after launching. With double-digit month-over-month growth claims, both show that companies can grow to be significantly large by penetrating deeply in one market.
Learn Customer Behavior
In order to find success, it is important to know market tastes and if the model is something they’re interested in. Spoonrocket learned this lesson after the initial San Francisco launch wasn’t successful because they “didn’t know enough about the market aside from the strong demand for a service like this,” says CEO Steven Hsaio. Initially a late night delivery service in Berkeley, the founders knew a lot about the East Bay area — the food trends, demographics, logistics and traffic patterns. After a stint at Y Combinator, Spoonrocket launched in SoMa, only this time without with the same intelligence. Unfamiliar with the traffic patterns, delivery took longer than the advertised 10 minutes or less. Unaccustomed to the San Francisco customer’s taste, the offerings didn’t resonate well and the company did not gain the traction it hoped for. Spoonrocket eventually shifted backwards: it closed down in SoMa to and reopened the next week in Berkeley, the market the it knew.
It’s important to know market tastes: “In San Francisco, everybody loves kale, whereas in Seattle, there’s a real affinity for Italian food,” says Munchery co-founder Conrad Chu. Usually learned learned through trial and error, it is a costly process that must be replicated in each new market entered. As a low investment way to test out the Seattle market, Spoonrocket temporarily altered its business model and delivered for other restaurants to learn customer behavior, food preferences, and city routes. After four months, operations were put on hold while the company prepares to re-launch with their own production facilities in the fall. “We just feel that having control over your own production of the food provides a better experience for the customer,” said Hsaio.
The proliferation of players this new food economy demonstrates consumers’ hunger for more convenient, healthier food options. What hasn’t been validated, however, is whether these revenue models work. Profitability will be a function of market share, which permits economies of scale, reducing unit costs, and ultimately marketing costs as competition becomes fewer and less powerful.
This, therefore, is a long race. Success will be determined by building a great brand with great service and great food. The recipe is simple, but then again, it is the simplest recipes that can be the most difficult to cook.
Have you used an on-demand food delivery service and want to make it better? Please take a short survey here!
For those working at a Food 2.0 company and have additional tips to share, please drop me a line: luanna@tradecrafted.com.
To Plated’s Sonya Bonczek and Spoonrocket’s Steven Hsaio: thank you for your time and insights. I really appreciate you sharing them.
