What’s Up Wednesday 1/23/19

Another Food Delivery Startup Ceases Operations

Munchery, founded in 2010, was a fresh-food delivery startup that received significant venture funding during its eight years of operation.  Many well-known VC firms participated in its funding rounds.  Those rounds of VC funding totaled $125 million, with the company’s latest round (in 2015) totaling an impressive $75 million.  With that last funding round, Munchery was valued at $300 million.  Ultimately however, the startup failed to attain the needed revenue growth and profitability to remain viable and it has now discontinued day-to-day operations.  It’s become one more casualty of the food delivery on-demand business model.

As a venture-backed enterprise, dealing in food is always a difficult route and it typically requires something new and different to generate interest from the traditional venture capital firms that are focused on tech startups.  Margins in the food business are typically measly and competition is immense.  It’s a business that is fraught with little true differentiation and there are minimal barriers to entry.  The significant level of competition in the food business places continual downward pressure on prices.  The costs of meat, produce, bread, and other raw foodstuffs involved in meal making meanwhile tend to be viewed as inelastic.  It’s hard to justify, from a consumer’s perspective, the premium price required to make fresh-food delivery an ongoing business.  It requires both a unique service and an atypical customer base.

This is one of the reasons why so much effort and focus has been placed on automated delivery services.  One of the driving forces behind automation in the delivery process is cost efficiency.  If delivery expenses can be lowered with automated delivery methods and driverless vehicles, the food-on-demand business becomes a much more intriguing business model.  The reality is that delivery costs are prodigious and when you’re talking about a business with such inherently low profit margins, those delivery expenditures are magnified and make up a prominent portion of the total cost of the product or service.

Munchery is not the only well-known VC backed food startup to go down recently.  Doughbies, a fresh-cookie delivery startup, was forced to close shop in 2018.  Doughbies never experienced the high levels of VC financing that Munchery received but it did attract $675,000 of venture money prior to shutting its doors.  Again, the delivery aspect of this cookies-on-demand business model proved to be an irreconcilable factor in its downfall.  The service wasn’t able to achieve the required margins to remain afloat – although many customers liked the cookies and considered them a tastier treat than most.  Doughbies may have fared better as a standard brick-and-mortar enterprise (like a popular local doughnut shop – of which there are many – for instance).  But that’s not what founders desired and instead had their eyes set on conquering a non-traditional and possibly more scalable business model that never came to fruition.

This failed cookie startup became interesting to me because I have a good friend who’s embarking on a similar startup where she hopes to eventually combine a physical storefront with an on-demand delivery option.  She just happened to be visiting a state where a number of brick-and-mortar cookie shops have recently opened and are seemingly doing quite well.  However, an obvious question for anyone considering the path she’s on is whether consumer interests in cookies are a short-term trend or one that is sustainable in the long run.  That’s a difficult question to answer as consumer tastes and preferences, as we all know, tend to be as fickle as diet crazes.  And how will such a business fare in recessionary times – considering the fact that the economy has been in expansion for going on nine years, an impressive performance following the Great Recession – in fact, you can draw at least a rough parallel between the economic expansion we’ve enjoyed in this country and the proliferation of cookie (and other high-end sweet) shops in some markets.  Fresh-baked cookies certainly aren’t a staple food nor are they a necessity for most individuals.  But that doesn’t absolutely mean a brick and mortar cookie shop with a delivery option can’t succeed (or that it couldn’t work in a recession – after all, Starbucks has endured multiple recessions in its history).

A key aspect that I’ve attempted to relay to my friend, the cookie entrepreneur, is the need to be realistic regarding the true costs of her product and service; the need to be realistic with those costs and how they will impact a potential break-even point (before the discussion of actual profitability of the startup even begins) is something that every entrepreneur must have in mind when embarking on such a venture.  Going into something like this without possessing a reasonable understanding of a break-even point is a not-uncommon stumbling block.

It’s fun to take risks and we fully support entrepreneurs in their quest to achieve something meaningful and profitable.  But before starting, gather as much information as you possible can and be realistic as you project what can be achieved.  This is always an important factor – and it becomes even more critical when you’re entering such a competitive area of the market (and one in which margins are typically minimal).

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