Sustainable Growth and Positive Impact through Food and Grocery Delivery
By: Akansha Ashokan, Erik Better, & Madhu Gupta
This spring, the Builders Fund participated in the Berkeley Haas Impact Investing Practicum, which pairs small teams of MBA students with impact investing firms for a 10-week project. Builders’ was interested in a market landscape analysis of the food delivery space, which has witnessed an emergence of growth-stage business models, driven by a combination of convenience, increased online purchasing behavior, and pandemic tailwinds. While many of these businesses have scaled quickly and raised significant amounts of venture capital, but failed to achieve profitable growth. Low-income consumers, for whom food delivery can have the greatest impact, remain underserved. With these dynamics in mind, we sought to identify attractive market segments, barriers to scale, and business models that can deliver both profitable growth and outsized impact.
We identified Prepared Meals and Grocery Delivery as the most promising segments to consider for growth-stage private equity investment. These segments are less saturated compared to restaurant and meal kit delivery, with strong continued growth prospects. Additionally, opportunities to mitigate cost challenges may exist through business model innovation. Finally, these two segments have the potential to generate significant impact for food insecure and low-income consumers lacking healthy and affordable food options.
Market Analysis
Online food and grocery delivery refers to the intersection of ordering groceries and prepared meals online, typically placed through an app or website. More specifically, we divided the market into four segments:
- Prepared Meal Delivery is the delivery of prepared meals by a chef or establishment, not a restaurant.
- Produce/Grocery Delivery consists of fresh, non prepared products delivered from supermarkets or retailers where delivery is scheduled.
- Meal Kit Delivery involves delivering fresh ingredients to be prepared at home, typically offered through a subscription service.
- Restaurant Delivery includes the delivery of meals carried out directly by restaurants and online delivery services that do not offer food delivery themselves.
Food Deserts and Impact on BIPOC communities
According to the U.S. Department of Agriculture (USDA), over 38 million people, including 11 million children, are food insecure. Many households that experience food insecurity do not qualify for federal nutrition programs and visit their local food banks and other programs for extra support. The increase in food security and high concentration of food delivery options in wealthy, urban centers has made the situation worse than before.
Moreover, people of color experience persistently higher rates of food insecurity. The net increase in low-income food deserts raises concerns about the growing number of struggling households with limited access to affordable nutritious foods, and the ways in which disparities may expand in part as a result. Interestingly, even though 90% of those living in low-income areas and food deserts have at least 1 digital food option, they do not cater to the local populations who face barriers (i.e., price, digital illiteracy).
Barriers for Online Food Delivery
While barriers to accessing delivery remain in low density areas (e.g., South Dakota, Alaska), there is poor delivery coverage as delivery options are concentrated to metros. In fact, a recent study found high food insecurity being associated with lower population density and higher rates of poverty.
Several other barriers, such as a lack of access to a broadband connection, digital fluency, and income levels affect places wherein the extended distances between housing units increases the per-mile cost of delivering both broadband and food. Due to the relatively strong food service map, the more typical under-resourced case is neighborhoods with food options but low broadband adoption; therefore, there is high potential for digital solutions to food access if broadband adoption rates are increased in these neighborhoods. Another barrier is the lack of SNAP benefits offered with online delivery. Although SNAP online purchasing has exploded, SNAP recipients face affordability concerns with delivery fees and tips (not covered by SNAP benefits) and volatile pricing. Cross-sectoral strategies to overcome these barriers could have the highest impact in these communities.
Market Opportunity
The market comprises ~38M food insecure people in the US, many of whom are SNAP participants, BIPOC communities and low-income customers. In Feb 2022, more than 41M people participated in SNAP — 12% above the 37M participants in Feb 2020. Furthermore, Black consumers’ spending on food is projected to grow by 5% per year from $120B in 2021 to up to $200B in 2030 with a preference of healthy options, indicating future growth for this market.
High-Impact Investment Areas
We found that Prepared Meals and Grocery Delivery offer the opportunity to create high-impact, in a mature, yet less competitive market for the following reasons:
- As reported by the National Institute of Health, there is a lack of grocery stores in BIPOC-dominated communities. This means there is limited access to fresh, healthy food options; produce/grocery delivery & prepared meals offer a solution to this problem.
- The other two sectors (restaurant delivery and meal kit delivery) are highly concentrated with key players dominating the industry. The remaining market share is fragmented and extremely competitive.
- Restaurant delivery is a mature market; in fact, most of the ~$39.3M in VC investment in food tech in 2022 was focused on restaurant delivery. This, alongside the high customer churn in the meal kit delivery space suggests that these segments are less attractive for growth stage PE.
Prepared Meals
Potential for Impact
A recent USDA study found that there is significant potential for impact amongst low and middle income populations for prepared meals due to the ease of preparation (e.g, simply heating in the oven or using the stovetop). Low and middle income populations often do not have time to grocery shop and prepare nutritious healthy meals with their demanding schedules and jobs. However, WIC and SNAP participants still spend more time preparing meals than other segments who have easier access to cars and grocery stores. Onerous prep times especially for SNAP participants mean that prepared meal companies have significant impact potential.
Additionally, many prepared meal companies have focused their business model on sourcing locally and sustainably, reducing the number of miles ingredients travel. Pre-plated offerings have also helped individuals and companies reduce their food waste. These environmental aspects make prepared meals ripe for impact.
Another area of impact is the use of prepared meal delivery for medically tailored meals or food as medicine, a growing trend in the segment. These meals are aimed to help patients who are managing specific illnesses and are typically covered by insurance. From an impact perspective, medically tailored meals can improve patients’ health outcomes and makes prepared meal delivery accessible to a lower-income population that may be unable to afford them without insurance coverage.
Market Trends & Dynamics
The prepared meal industry experienced rapid growth that accelerated over the pandemic, but even post-pandemic is expected to continue growing at a normalized but steady rate (6.8%). This growth is especially significant when compared to restaurants which grew at a rate of 3–4% over the past few years. Much of this growth was driven by millennials and Gen-Z who are demanding healthy food that is very low effort to prepare at home.
Despite the strong demand and growth for the prepared meal industry, there are significant market headwinds to consider. The first and likely greatest is that customers are unwilling to pay a large premium over fast-casual food offerings. Additionally, prepared meal delivery services must compete with healthier frozen food options at the grocery store. Because of this, especially when targeting low and middle income populations, prepared meal delivery services will need to price competitively. These pricing demands will squeeze margins in a market where last mile delivery is already expensive due to fuel, labor, and maintenance costs. That said, there are proven successful business models in the prepared meal delivery space, especially those that have vertically integrated businesses. There are also new innovative offerings that may provide a competitive advantage such as healthy and plant-based but frozen prepared meals or meals delivered on a weekly basis.
Grocery and Produce Delivery
Potential for Impact
An MIT study explored three different models to expand access to food in a food desert, and the veggie box models offer the most opportunity for impact. In this model, residents join a subscription service where they pick up those boxes of fresh product at their local corner store. This was the most preferred and feasible model among the residents, indicating grocery and produce delivery has potential for high impact.
Market Trends & Dynamics
From a profitability standpoint, the online grocery segment is mature and growing with small, but steady gains in user penetration. Online grocery sales are expected to grow by 18% in 2024, despite consumers shifting some behaviors back to pre-pandemic ones. In fact, 17% of all grocery sales in 2024 are forecasted to be online.
However, the market dynamics do present risks to consider. Firstly, the online grocery industry continues to struggle with profit margins. Without fees, margins for online grocery are largely negative and this worsens if the process is more labor-intensive.
Secondly, it is highly concentrated with two players, InstaCart and Walmart, holding more than 90% of the market. These players are hesitant to enter underserved markets due to low profit margins and stiff competition. As such, local nonprofits are stepping in but lack the ability to scale. However, more for-profit companies with innovative business models and an emphasis on impact are emerging in recent years.
Profitable Business Models
The “click and collect” model can significantly reduce costs related to last mile delivery. It also aligns with consumer preferences which shifted towards “click and collect” as grocery stores widened pickup offerings and third party services expanded their presence, reducing the time between order and acquisition.
Secondly, In the inventory-based business model, the eCommerce platform owner is responsible for purchasing and storing the inventory. The owner purchases stock directly from suppliers (e.g., large consumer goods companies) and stores them in a self-maintained warehouse. By passing the retailer, the eCommerce platform can maintain higher margins. Additionally, items can be bought in bulk directly from suppliers, reducing the cost of goods sold.
Conclusion
Considering potential for impact and profitability, the prepared meal and grocery and grocery and produce delivery sectors of this industry are most promising. However, with interest rates rising and macroeconomic trends changing, companies with low margins and a lack of competitive advantage are struggling to compete in this environment. The food and grocery delivery industry is undergoing a period of revaluation and consolidation, creating opportunities for winners to emerge to drive sustainable, profitable growth as well as positive impact for underserved consumers.
