Food Tech Startups – Learn from Mistakes and Find out How to Make Food Tech Startups a Huge Success Now!

Food Tech, popularly known as online food delivery business, is considered as a cash intensive business. The cash is burnt primarily on account of spending on technology, customer acquisition (including marketing) and logistics.

Food Tech Startups

According to India Brand Equity Foundation (IBEF), the food and grocery market in India is the sixth largest in the world, with retail contributing 70% of the sales. It is projected to touch US$482 billion by 2020, growing at a rate of 104%. The organized food industry in India is valued at US$48 billion whereas the food delivery business is valued at US$15 billion as of September 2015. Most of the 250 food tech startups in India follow standard business models with slight variations. There are online marketplaces, such as TinyOwl. There are hyper local delivery startups, such as Swiggy, which apart from providing an online platform also handle delivery. And there are the cook and sell models such as Kitchen’s Food that sell home-cooked meals via apps.

Irrespective of the business model, the appetite for funds among Indian food based startups is huge. However, the prospects of generating a good ROI so far look grim. This is because of the marketplaces (or restaurant aggregators) and hyper local delivery startups have no control on the quality of food that is delivered to the customer. Further, their margins are wafer thin, ranging from 5%- 15% of the transaction value. To make matters worse, the delivery is not uniform throughout the day which results in lower productivity of delivery executives and higher costs. Unlike traditional e-commerce businesses where deliveries in an area can be clubbed together for a particular time slot to get the economies right, clubbing is not possible with strict delivery windows in hyper local delivery.

Marketing is another area where these startups burn a lot of cash. Depending upon the business model, Customer Acquisition Cost (CAC) typically varies from as low as INR150 to as high as INR1,500. With the sales primarily driven through discounts and offers, CAC is already high, sometimes even higher than traditional e-commerce. Customers have no loyalty in this segment and tend to go with the service provider which offers maximum discount, a fact that has been well proven in the Foodpanda debacle. This results in low repeat business from the same customer and adds to the mounting CAC’s.

Reduction in Funding

The funding slowdown for Indian internet companies has started taking a toll on cash-hungry food-tech startups, forcing several of these to scale down. Eatlo, FreshMenu and Frsh do not have money to sustain operations beyond a few months as they are unable to raise fresh rounds of funding. In fact, founder of Eatlo has revealed that the company has money to sustain for another 9-12 months. SpoonJoy, which has Flipkart Cofounder cum CEO and SAIF Partners as investors, until recently served 1,500-1,800 orders a day in seven areas in Bengaluru. It has now suspended operations in four areas and merged its seven delivery centres into two.

Food tech companies mushroomed rapidly in the past year, becoming a much preferred ecommerce sector. However, their strategy of offering heavy cash discounts to attract customers failed as the market got quickly crowded with players doling out similar strategies.

The change in the fortunes of food tech startups is symptomatic of the looming threat of a growth-stage funding crunch for Indian internet companies. The dearth of second round funding has prompted food tech startups to re-assess their business models and reduce their cash burn rate. It can be hoped that such remedial actions are able to stall the impending gloom for the food based e-commerce industry in India.

This blog is written by Bhoopal Ram, Sr Analyst with DART Consulting.