Tackling the New Food Economy

Part One: Successfully Managing Customer

Acquisition

This is the rst 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 denitely in vogue right now: over $1 billion was invested in
US VC-backed food and grocery delivery companies in 2014. Following last

years 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
nding 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 Combinators make stu people want mantra to Andreessen
Horowitzs the only thing that matters is getting to product-market t, the
importance of creating a product that resonates with the target market has
been highlighted by many entrepreneurs. Before companies can scale, they
must rst nd product-market t, underscoring the importance of validating
product-market t as soon as possible, and leaving the slowest movers
behind to watch the industry explode around them.

The process seems simple identify the customer, gure out the right
approach, and then create the right product to t the market but can
require a lot of work. When Sprig rst 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 o Sprig did not have to
oer 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

t.

Chef Raymond Reyess Red Snapper with Green Curry from Munchery.

Munchery rst 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 werent good at delivery or
photography the business model evolved and Munchery began owning
more steps in the marketplace it built, nding product-market t 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
nd 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.

A snapshot of the funding raised by some of the companies competing for market share in the new food economy.

Although Gobble now seems to be on track since relaunching its

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 nd 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 rst 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 oering is well dierentiated,
more attractive than the competition, and communicated with clear
messaging in order to gain mind-share.

Product-market t implies that a product works within a small market and

the next step in the companys evolution should be to scale. Therefore, the

target when entering new markets is not simply to be the rst to nd

product-market t, but rather the rst 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 rst
US-based meal-kit subscription service when it launched in 2012, it was the
rst to nd product-market scale. With $193 million raised, it is the bestfunded boxed-meal company in the industry and it has maintained its
market-leading position despite an inux of VC-funded competitors.

Blue Apron: Miso-Glazed Eggplant with Green Tea Rice.

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. Its always dicult to get people to change their behaviors and
try something new, even if its better for them.

Its always di

cult 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 aecting 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 dont know
what they are in the mood to eat 1 hour in advance, let alone a week and
several studies have found that mood inuences food choice and taste
perception.

Subscription model services therefore should provide exibility. 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 biweekly shipments. Plateds Sonya Bonczek said, We totally understand how
busy our customers are and its just not feasible to cook every single night. I
think people are realizing its like a lifestyle. People look at us as like a gym
membership. She added, Its 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 rst. In addition to the free trials

many companies oer to new customers while launching, o

ine

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 Its

always helpful having some sort of o

ine presence, says Bonczek. We are

nding that when customers actually try it, they get a sense of what our
product is and are really impressed with the quality.

Last fall, Plated went o

ine in New York City with a food truck.

Leverage Loyalty to Drive Pro

tability 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 2025% by implementing strategies to leverage
both which accelerated awareness and improved conversions. It fueled word
of mouth growth when it rst launched by targeting early adopter
communities and oering 5 free meals for startup teams. In addition to
encouraging social sharing by oering 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 oering 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 $46
per order more than the original $2 fee. Considering 60% of customers
order more than once a month, theres a strong incentive to join. When
experimenting, be sure to price high enough to avoid into eating prots.

Muncherys $39/year unlimited delivery plan priced less than of Sprigs

delivery plan has since been discontinued. Look for high retention
dynamics, which is indicative of a good t 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-byneighborhood then city-by-city expansion. In order to grow, they must enter
new cities, build up new delivery eets, hire new chefs, and attract new
customers.

One of the key lessons from Webvans failure is do not expand into a new
territory until demonstrating success in the rst 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 signicantly large by penetrating deeply in one market.

Learn Customer Behavior

In order to nd success, it is important to know market tastes and if the
model is something theyre interested in. Spoonrocket learned this lesson
after the initial San Francisco launch wasnt successful because they didnt
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 trac patterns. After a stint at Y Combinator,
Spoonrocket launched in SoMa, only this time without with the same
intelligence. Unfamiliar with the trac patterns, delivery took longer than
the advertised 10 minutes or less. Unaccustomed to the San Francisco
customers taste, the oerings didnt 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.

Its important to know market tastes: In San Francisco, everybody loves

kale, whereas in Seattle, theres a real anity 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 hasnt been
validated, however, is whether these revenue models work. Protability 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 dicult 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 Plateds Sonya Bonczek and Spoonrockets Steven Hsaio: thank you for
your time and insights. I really appreciate you sharing them.