Food Fight! 16 Meal Delivery Strategies That Work

By Robert Emerson

The book presents 16 profitable and rapidly growing strategies for meal delivery, six other strategies that are unsuccessful and 10 more in early stages where the outcome is unclear. Meal delivery has proven to be a minefield for investors, with the collapse of numerous companies in both the public marketplace and within the private equity space, with many stocks having collapsed more than 75% in the past two years. Rapid grocery delivery, has proven not to be a solution to a problem, but rather a non-solution in search of venture capital funding.

• Language: English
• Publisher: Robert Emerson
• Release date: Jul 22, 2022
• ISBN: 9781005453527

Book preview

SOURCES AND METHODS

Bibliographies are normally consigned to the end notes by authors, but the subject of this book is unusual. So much is changing in the tumultuous world of meal delivery that what seems clear today may be obsolete a month from now. Any operator or investor needs to keep abreast of the latest thinking, so I’m recommending some reliable sources who publish frequently even before offering my own analysis.

Being an analyst in the meal delivery space is akin to being a perpetual five-year old on Christmas morning: every day brings a new surprise. A recent example is the partnership between Amazon and Grubhub that was announced on July 6, 2022, just as this book was about to go to print. My analysis of the deal can be found in Chapter 10. (Spoiler alert: this is not a windfall for Grubhub or its owner, Just Eat Takeaway.)

The pace of new entrants, the capital inflows, the closures, combinations, divestitures, and the tweaks in business models are so rapid that it’s difficult to stay up to date. For those who wish to try, I offer the following list of sources, all of whom are thorough, well-versed and write very well. While some of them are friends of mine, I have no business relationship with any of them.

• Buy Meredith Sandland and Carl Orsbourn’s recently published book, Delivering the Digital Restaurant: Your Roadmap to the Future of Food. Meticulously researched and written in an entertaining style, this is the go-to book for understanding both the history and personalities in the food delivery space. Additionally, they create a 10-minute weekly Podcast called The Monday Minute in which they discuss in often amusing fashion the headlines in the industry from the previous week.

• Follow the insights of Brittain Ladd, who designed logistics strategies for Amazon until 2017 before striking out on his own as a consultant. He opines frequently in the pages of Forbes, conducts webinars and publishes regularly on LinkedIn. His articles on technology and his advice on business combinations and strategies are must reading. He also publishes a weekly think piece called No Retreat/ No Surrender.

• Subscribe to the Food On Demand Weekly Newsletter, which is published by John Hamburger’s Restaurant Finance Monitor and edited by Tom Kaiser. Like Sandland and Orsbourn, Kaiser conducts frequent online interviews with leading participants in the industry. Additionally, they sponsor an annual conference with numerous industry experts.

• Follow the triumvirate of Laura Forman, Heather Haddon and Jaewon Kang of The Wall Street Journal. Forman is a frequent contributor to the Heard on the Street column, which often features her in-depth discussions of the leading publicly owned delivery providers, while Haddon is among the most numbers-oriented of columnists specifically focused on the food and restaurant industries. Kang is an astute observer of Instacart and the entire grocery industry.

• Follow Stephan Soroka, who publishes Wear Your Brand, a daily publication in Prague that covers the entire food delivery industry worldwide and, at least at the moment, is readily available on LinkedIn.

• Subscribe to HNGRY, which founder Matt Newberg describes as a subscription media platform examining a world where technology shapes the way people eat. He also offers a free version of the publication that has fewer articles but is still well worth reading.

• Follow Celia Van Wickel, who is Senior Director of Digital Commerce at Kantar, a market research consultancy. She publishes frequent insightful analysis on LinkedIn. Moreover, Kantar offers two podcasts each month on topical subjects in the retail industry that provide some of the best available advertising and marketing data.

• Winsight Grocery Business publishes an array of newsletters in addition to their flagship bi-monthly magazine.

• Subscribe to Stratably, which is a weekly freemium subscription discussion of the digital commerce market, with particular emphasis on Amazon.

• Brick Meets Click is a consulting and market research firm focused on the intersection of e-commerce and the grocery industry. They provide individual reports on the industry as well as subscription services.

• Robert DellaFave publishes Value Sleuth, which provides well-documented research on a variety of eCommerce topics, often written in a witty style.

INTRODUCTION: WHAT THIS BOOK IS ABOUT

More than $90 billion of funding has poured into the online grocery, apps and meal delivery space in the last five years, over $25 billion in 2021 alone. The results have been rewarding for some of the founders and venture capitalists when their investments were able to have public offerings, but much less so for public shareholders who bought the stocks.

For example, Factor75, which was acquired by German meal kit powerhouse HelloFresh in November 2020 for $277 million, had been started by Mike Apostal in 2013 and raised a total of $15.0 million in funding. Freshly, which was founded in 2012 by Michael Wystrach and Carter Comstock and raised a total of $270 million from outside investors, was sold to Nestle in October 2020 for $950 million, plus $550 million in performance incentives.

In a series of funding rounds beginning in 2013, DoorDash raised a total of $2.431 billion, with the largest investors being Softbank (20%) and Sequoia (16%). The company’s IPO in December 2020 raised an additional $3.4 billion, and at the first day’s closing price of $189.51 (up from the initial offering price of $102.00) valued the company at $72 billion. According to Forbes, DoorDash co-founder Tony Xu’s net worth as of April 2022 was $1.3 billion. Mr. Xu and his partners created the company while they were students at Stanford in 2013.

So, founders and early investors have sometimes fared very well when they either had a public offering or sold to a larger entity that was eager to get into food delivery. But, as we shall see, none of the publicly held U.S. companies addressing the meal delivery space has produced a profit for its investors since their IPOs and in some cases the losses have been substantial.

The following table shows the decline in stock price from the initial public offerings of five prominent companies in the food delivery space since the fourth quarter of 2020. Note that all, with one exception, showed large gains on the day of their IPO, but all have since showed dramatic declines. The one IPO that fared badly on the day of its offering was that of Deliveroo in London. The Financial Times described the collapse as the worst public offering in London in more than two decades.

The losses shown in the above table are not the worst results for recent investors in the food delivery space. Rapid grocery delivery startups in New York BUYK and Fridge No More raised $46 million and $15.4 million in 2021, respectively, and both filed for bankruptcy in March 2022. Managements of each company blamed the war in Ukraine for drying up their Russian funding sources. Hotel ghost kitchen provider Butler Hospitality raised $50 million in funding, $35 million of which it received on October 28, 2021, and ceased operations in mid-May 2022.

Interactive Brokers Founder and CEO Thomas Peterffy made a bold and prescient prediction on CNBC on March 22, 2022. In response to a query about the outlook for interest rates and the market he replied, The situation is further aggravated by the very high level of borrowings in the $11 trillion private equity space, where managers have been trading companies among each other at ever higher prices loaded with more and more debt. That worked just fine when interest rates were zero. That will not work at 3-5%. So, I think we will see a lot of bankruptcies in the space.

The decline in the stocks throughout the delivery space has not been confined to recent public offerings. The carnage has been wide-spread and ongoing. The following table indicates the decline in prices of a wider selection of food delivery stocks from their recent highs as of the end of June 2022.

The poor performance of this group of stocks represents something more troubling than merely a shift in short-term investor preferences. The fact is that profits have come under pressure for some of the best-managed and most profitable companies in the food and restaurant industry in recent months even as revenues have continued to grow.

The most hotly contested battlefronts as of this writing are the rapid 15-minute grocery delivery segment from dark stores in an urban setting (Gopuff and Gorillas being the largest factors); the looming three-way contest in Florida for grocery delivery dominance among Publix, Walmart and new entrant Kroger; and the popularity of start-up ghost kitchens.

The situation in Florida is particularly important because it pits partnerships between Walmart and robotic warehouse designer Symbotic against Kroger and Ocado; and against Publix with Instacart and its captive nano-fulfillment centers that are called Carrot Warehouses. None of these players are likely to run out of money in the foreseeable future: the battle is going to be expensive.

But the abysmal performance of the investments outlined above does not mean that food delivery and related services cannot be lucrative. The following 16 delivery concepts are profitable and have growth prospects that are virtually open-ended.

1. Foxtrot, headquartered in Chicago, is a chain of 21 high-end convenience stores with a novel free delivery program and a selection of curated artisanal foods that it sells nationally.

2. Mom’s Meals, headquartered in Ankeny, Iowa, addresses the burgeoning market for Food as Medicine that is about to become a gold rush.

3. Fresh n’ Lean is a medium-priced prepared meal delivery firm using organic ingredients that was begun 12 years ago in Anaheim, California by an 18-year old college freshman who has never received outside financing. It now does $100 million in sales and is about to complete a new plant in Las Vegas with $1.5 billion in annual capacity.

4. Feast & Fettle in East Providence, Rhode Island uses its own fleet of 30 trucks to deliver gourmet meals priced at $42.00 for two. It now makes 1,200 deliveries each day and will double its production capacity before year-end 2022.

5. Georgie & Tom’s is a premium prepared meal concept created in New York City two years ago by the former culinary team at London’s Marks & Spencer that offers gourmet meals for two priced at $29.00 with free delivery. It is projected to have $500 million in sales within the next five years

6. Goldbelly provides nationwide delivery of local favorites from a network of more than 850 restaurant partners with the financial backing of Shake Shack founder Danny Meyer.

7. Gridwise provides delivery drivers with software that allows them to select the most profitable assignments, does their taxes, optimizes their routes and in turn sells anonymous data on the dining habits of their clients.

8. Symbotic is the creation of C&S Foods owner Rick Cohen in Keene, New Hampshire and is dedicated to robotic warehouses in partnership with Walmart and Softbank. Its backlog is currently $11 billion and its SPAC was successfully launched on June 8, 2022.

9. WhatsGood began in Rhode Island in 2014 as an online farmers’ market and has since expanded its unique delivery service to 21 states and is opening brick & mortar sites in Chicago.

10. Hungry Root is an online grocer that uses AI to coordinate with its customers’ eating preferences and delivers groceries that simplify cooking, reduce waste and save customers an average of $22.00 on their weekly grocery bills.

11. Onfleet is a B2B software company in San Francisco that produces software that optimizes last-mile delivery. It has been profitable since its founding in 2015 and has doubled sales in each of the last four years.

12. Factor75 has quadrupled its sales of high protein prepared meals since its acquisition by HelloFresh in December 2020.

13. Everytable is the creation of former hedge fund trader Sam Polk and has opened 25 stores throughout southern California since its founding in 2013. The innovative model sets its very modest prices according to the median income in the zip codes of each of its stores and has created a unique social equity franchise program for new entrepreneurs as it enters the New York market.

14. Real Eats produces farm-to-table ready-to-heat meals in sous vide sealed pouches along with fresh greens and salads from its massive new facility in the Finger Lakes region of upstate New York.

15. Menumavin provides delivery of more than 1,000 hot lunches daily in a 90 minute tightly scheduled time window to office buildings in Stamford, Connecticut. It employs a Milkman delivery model using a fleet of six vehicles.

16. Club Feast provides meals from a network of 600 restaurants in San Francisco, New York and Miami that are priced at $6.99 with a $2.00 delivery fee. By providing them with orders in advance that allow for off-peak preparation, its restaurant partners are able to sell meals 30-40% below their usual menu prices.

This list is not comprehensive. I tried to cull the list to include only firms with very rapid future growth potential. The following four companies operate highly profitable operations, but whether they will elect to expand aggressively has not yet been determined.

Erewhon Market, which operates seven stores in the greater Los Angeles area, is among the most lucrative purveyors of high-end health foods and organic produce and is, if nothing else, the most fashionable grocery chain in the known world. (What is ‘high end?’ you may well ask. Vegan coconut yogurt at Erewhon costs $19.00, so it’s probably not for everybody.) At its price points, there may well be a limit to the number of stores they will be able to construct, though they are reportedly considering coming to New York City at some point. They also offer nationwide delivery of a selection of their in-store offerings in much the same way that Foxtrot does.

I considered including Danny Meyer’s Daily Provisions, which is similar to Foxtrot, though without the breadth of curated artisanal offerings, but no decision has yet been made of if or when the concept will be expanded from its four current locations. The enthusiastic reception the model has received in New York City suggests that the potential for expansion is there if Mr. Meyer chooses to exploit it.

I thought about including the original Pasta Vita in Old Saybrook, Connecticut, which I described in my last book as the most profitable legal business in America. I am not sure it enjoys that distinction any longer, as several of the marijuana stores in Great Barrington, Massachusetts may now hold the title, but the real reason I did not include it on the list is that its primary focus is in-store sales of its ready-to-heat meals rather than delivery. In the jargon of e-commerce, it does not focus on BODFS (Buy Online, Deliver from Store), though it’s still a marvelous business, producing more than $9 million in sales out of less than 600 square feet of floor space. The tiny store actually earns more in absolute dollars than the average Whole Foods in 40,000 square feet. Read that sentence again. I continue to be amazed that no one has tried to acquire the company and expand it nationally.

Similarly, I did not include Dallas BBQ in New York City, which is an extraordinarily lucrative operation (its Times Square location often serves more than 10,000 meals a day) but again is not singularly focused on delivery, nor is it likely to expand aggressively in the near future from its eleven locations in New York City.

My purpose in this book is to analyze the shortcomings of several of the existing business models in the food delivery space; focus investors’ attention on under-the-radar strategies that have proven successful and identify interesting new models that are still in their infancy and where the outcome is still uncertain.

Some of the strategies that I address are still quite small and will require additional capital. Others, like Foxtrot, HelloFresh, Gopuff and Wonder have already secured the necessary investment and their future success or failure will be a matter of execution. Finally, in Chapter 23 I present a new strategy that builds on some of the promising new models and represents improvements on existing ideas.

The Holy Grail of food delivery is not yet available, at least in the United States. This would mean restaurant quality meals in a moderately-priced ready-to-heat format that are available for home or office delivery on short notice. None of the mass market prepared meal concepts can yet deliver meals on the same day that you would be proud to serve to your foodie friends. The meal kit companies can provide the requisite quality and variety, but the same-day delivery feature and freedom from time spent on cooking are still missing. Even super premium providers like Georgie & Tom’s and Feast & Fettle, while they do produce meals that gourmets can enjoy, do not yet have a model for same-day delivery.

There is a solution to the challenge of profitable free home meal delivery that I present at the conclusion of the book. The winning strategy offers the following attributes:

• Same-day free delivery of meals freshly prepared earlier in the afternoon

• The ability to order as late as 4:30 p.m. and receive the meal at home by 6:30 p.m.

• Restaurant quality meals you’d be proud to serve to your foodie friends

• Servings priced competitively with QSR and below leading fast casual chains

• Minimal prep time by the customer, defined as 10 minutes or less

• Cash-on-cash returns to investors higher than any existing franchised model

• Profitability from the first month of operation

• Because the kitchen only operates between 9:00 a.m. and 5:00 p.m. and the store closes at 8:00 p.m., hiring is much easier than for restaurant operations or restaurant delivery models. Employees get to have a life.

None of even the most successful existing strategies that I discuss in the book quite check all these boxes. But combining the kitchen efficiency of EATCH and SVK; the gourmet recipes of Georgie & Tom’s; the curation of local artisans of Foxtrot or WhatsGood; the Milkman delivery strategy of Feast & Fettle or Picnic; and the logistical tools provided by Olo and Gridwise can produce the required outcome.

The aphorism CAC [Customer Acquisition Cost] is the new rent, was coined in an interview with Inc Magazine in March 2018 by Daniel Gulati, who recently became Founder of Treble Capital in San Francisco. His insight was profound enough that it quickly became both the theme and the catchphrase behind billions of venture investments. But now the losses at dozens of startups suggests that a more penetrating follow-up might be, Yes, CAC is the new rent… but can you afford it? In many cases, brick and mortar is making a comeback as the most effective form of CAC.