Are Delivery Costs For Food Too High For Dedicated Startups?

UberRUSH

Benzi Ronen, founder and CEO of Farmigo, on TechCrunch about
delivery costs at food startups:

Food tech is big these days — Grubhub, Blue Apron, Instacart — but pretty web design and polished communication strategies aren’t enough to build a sustainable food business. No company will provide attractive gross margins without creating and executing a sustainable new paradigm for food delivery.

It comes down to perishability: Fresh food breaks tried and true delivery models, and drives costs through the roof. (…)

Last year, the local food delivery service Good Eggs shut down operations in three of their four regions; Google Shopping Express is shutting down its two delivery hubs; Foodpanda,TinyOwl and Zomato are struggling to manage their burn rates.

The costs are so high that a dedicated operation (as in a startup that is only doing this) might not be the best way to go. See UberRUSH for example:

UberRUSH is a fantastic example of a Point to Point system. Uber has reached enough density with their network of drivers that they can leverage any vacant cars as delivery vehicles, using their tracking information to evaluate which are closest to a given pick-up point. With short distances from point to point, concerns about long delivery runs and food spoilage are minimal.

UberRUSH is using capacity surplus within its growing and in some markets already established infrastructure (drivers with cars being connected to Uber via smartphone). Compare this to startups having to build out this infrastructure first.

UberRUSH is one example where food delivery will become an additional business. It seems, Amazon will be another one. Amazon Flex, Amazon’s Uber-like P2P delivery service, keeps slowly but surely expanding. Select Amazon Flex drivers in the Dallas-Fort Worth area just started to handle standard Amazon.com deliveries, in addition to Prime Now orders. And besides Prime Now and Amazon Fresh, Amazon is experimenting with restaurant delivery and, it seems, successfully so:

It wasn’t until after he left that it dawned on me the impressive feat Amazon had accomplished. It usually takes about 20 minutes for a restaurant to prepare a carryout order, and the restaurant I chose is about a 12 minute ride from my apartment — up an infamous hill. That leaves just 5 minutes of wiggle room for my order to be able to show up within 37 minutes like it did.

The same argument that can be made for UberRUSH -leveraging an existing logistics infrastructure- holds true for Amazon, and more so: When, not if, Amazon starts rolling out its own delivery network, why should the company then not deliver everything possible through this system instead of ‘just’ ordinary goods ordered online at Amazon?

Models like HelloFresh (recipes and ingredients for meals rather than a supermarket style offering) will work dedicated but they might profit heavily from partnering with strong delivery partners. (And UberRUSH and Amazon might just become such partners within a few years.)

But other than that the online food market is still very much an open question. Delivery models are going to play a significant role for obvious reasons and the delivery market itself just started changing.

More on this topic:

5 comments

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