This week San Francisco-based food delivery service Sprig announced that it received $45M in Series B funding from Greylock Partners and Social + Capital.
We’ve come a long way from the days of ordering egg rolls over the phone off of tri-fold brochures and struggling to hang up to a barrage of “and den, and den, and den and den and den.” Today the food delivery space is a crowded one, particularly in San Francisco, where the demand for artisanal food delivered to hungry fingertips seems to know no bounds.
We thought we’d take a deeper look at some of the leaders in this space and tease out who the true competitors are, where competitive advantages will come into play and theorize on what would be required to take the cake.
The key in the prepared food delivery business is to find balance between predicting demand and producing that supply. That comes into play in two ways: first (obviously) is producing the food. Second, delivering the food before it goes bad.
When it comes down to it, these companies are second generation logistics companies (Uber, Lyft, Amazon are first generation; they had only one dimension to deal with which was delivery speed v. cost). Whereas transportation companies are purely focused on ensuring there are enough drivers on the road when there’s a surge in demand, pre-made food companies also have to face the issue of food going bad. This accentuates the need for accurate ‘just-in-time’ supply chains. In this game, the most successful company will be the one that is able to simultaneously serve the bougie tastes of urbanites and squeeze every last penny out of those high-cost ingredients they use (no wonder so many of these meals come with a side of cucumbers…) to produce just enough dishes required.
Blue Apron and Munchery operate in a slightly different arena from Sprig, SpoonRocket, and EatClub because they offer frozen meals/food to create meals. This allows them to reduce the risk they take on the supply side. Customers place orders ahead (in Blue Apron’s case by several days). Their meals are also frozen, so they don’t have to be concerned with delivering meals at the right temperature that still look appetizing.
This model is a lot less risky, and it definitely caters to the market of people who want to have a home cooked meal but don’t have the time, skill, or determination to crack Rachel Ray’s latest. However, these companies lose the class of people who are really looking to order dinner in. This market is huge, and growing. We know that this market is ginormous just by looking at some start-ups that have tapped into the take-out consumer base: Seamless and Eat24, both billion dollar start ups, now do many millions in transactions yearly.
However, delivering a hot, fresh, healthy, locally sourced meal created of high-quality ingredients — that’s a tall order. Margins overall in this business are low, risk is high. Like in the hotel business, the baseline number of minimum orders to break even is about 70% of capacity — as opposed to many other businesses like restaurants, bars, or even theme parks that strive for 40-45%.
For companies like Sprig, Spoon Rocket, and EatClub, hitting the big time will likely require sales to entreprise clients who will make mass orders. Seamless and Eat24 actually didn’t hit the big time until they started getting large enterprise clients who would place big orders for employee lunches and dinners. EatClub in fact is totally lasered in on this market, not accepting orders for groups under 15 people. This helps them avoid a high delivery cost to meal cost ratio. Sprig and Spoon Rocket, by contrast, are both open to one-off consumer orders, but they have also forged some contracts with enterprise clients who order large quantities to feed employees. In order for either of these start ups to become a major staying force in the ‘take-out’ world, growing this base of enterprise relationship is paramount.
Doing this will be no easy task, however. While Sprig and SpoonRocket both offer food that caters to taste buds craving quinoa over white rice, there are still many taste buds that want those fries on the side. And that kind of craving just doesn’t have space on these start ups’ menus. Convincing the bands of bankers, lawyers, engineers, and sales guys that they should trade in for healthier grub might be harder outside the Bay Area. For Sprig or SpoonRocket to gain massive market appeal consumers will need to complete a paradigm shift away from what can commonly be found on the menu at Thai, Chinese, or Italian restaurants.
So, to recap: prepared but frozen food delivery systems like Blue Apron and Munchery seem to have a good model where they’ve reduced the risk of over-supply and food spoiling, however, as a result, they’ve tapered the market to which they can cater. And, as a result, their model is fundamentally different from Sprig and SpoonRocket.
So, assuming investors want to hit as big a market as possible, why would Greylock and Social + Capital go after Sprig versus SpoonRocket? Between quality, speed, and variety their products are hardly discernable. Outside of an outsized commitment to locally sourcing produce, Sprig seems to differentiate itself in one main way: it is highly committed to improving the logistics of their delivery systems. Having hired several former Uber and Lyft operators and using programs like delivery fare reduction when demand is low (think the opposite of surge pricing) this seems to be what the company is banking on as a differentiating factor. Looking at the paradigm Uber set forth, the ability to speedily satisfy demand is key. Indeed, even minimal improvements in this department will certainly help sales for the one-off order — and enable it to be the Uber of the food delivery space. However, if the companies need to target institutional customers to reliably satisfy sales minimums, marginal speed improvements are likely less important than marginal cost reductions or even marginal quality improvements. SpoonRocket generally cuts below Sprig’s average meal price by one to two bucks. Taste, though, well that’s in the eye of the beholder.