Published on: January 27, 2016
Content Guy's Note: The goal of "The Innovation Conversation" since we started it last year has been to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
And now, the Conversation continues...
KC: I'm curious what you think of what seems to be an avalanche of companies getting into the meal delivery business, with Uber being just the latest example. Based on your experience, to what extent do you think this trend is being driven by customer demand vs. venture capitalists looking for the next big thing?
Tom Furphy: I think this trend is being driven by both. In areas of reasonably dense population, meal delivery can work. Our good friend Glen Terbeek would always say, “If a pizza can delivered for a few bucks, grocery delivery should be able to work.” The same logic could be applied to meal delivery.
While there is enough margin, standardization and awareness that allows delivery to work for the local pizza shop, it has historically been more difficult for other types of restaurants to make the economics of delivery work. But now, the business model of thousands of customers being connected to dozens or hundreds of restaurants and connected to masses of drivers is compelling. Everyone with an on-demand app can decide what they want and order it in an instant. That kind of connectivity between customer, restaurant and driver is quite robust. It creates a large addressable market (anyone with a smartphone). It is instant and it can be fed into a logistics and routing system to optimize pickup and delivery paths.
So, scale, marketing costs and logistics all have a chance at working. That’s much better than a traditional model where, if a single restaurant wanted to consider delivery, they would have to do their own marketing, hire their own drivers and work basically from an inefficient hub and spoke model. That’s expensive.
That said, it is still a complex business that will face its share of challenges. Marketing is very competitive with many demands on customers’ eyeballs, it is hard to hire and retain good talent, coordination with the existing customer and product flows of restaurants is tricky, and pricing is competitive. I was speaking with another VC recently, who is invested in one of the fastest-growing meal delivery startups. He admitted that the business, while promising, is a tough battle. He feels that it’s a winner-take-all proposition where one, maybe two, firms will win in any market. I would generally agree with that. In most cities except the very largest, it will be difficult for more than one or two services to scale and make a sustainable profit.
KC: My sense is that this is a lane that traditional food retailers could veer into … that they have the food, the expertise and the existing customers, and it isn't like they have to crate anything from scratch. What do you think might be the opportunities and the obstacles for these traditional retailers?
TF: I agree. Food retailers should be the incumbents to win in this space. At the FMI Midwinter Executive Conference on Monday, Danny Meyer talked about the trust level and emotional connection that shoppers have with their store and its staff. He talked about how food is personal and that supermarkets are in the best position to serve that personal need. I could not agree more. Sure, cooked meals can create some equipment, staff and training challenges at store level. But even stores that would struggle to offer hot meals could offer, assembled “heat and eat” meals or meal kits like Blue Apron or Plated.
This should be squarely in the sweet spot of food retailers today. They have spent the last two-plus decades figuring out prepared foods. All that’s left is for them to get the customer connectivity figured out; to make it easy to answer the question of what’s for dinner with a solution that is at-hand in the app. Why not send an alert to your shoppers at noon, letting them know what will be tasting good tonight? Great food available for pickup or convenient delivery, perhaps along with a basket of groceries!
KC: I sort of hinted at this in my first question, but I want to come back to it. There have been some stories in recent days about how the problems in the stock market may cause a tightening of capital invested in startups, and how companies like Jet or Instacart could face problems when looking for additional rounds of funding. How serious is this, and what do you think the impact will be?
TF: I think it’s fairly serious. Venture capital tends to run in cycles of increasing investment levels (some may call that a bubble) and declining investment levels (some call that a burst of the bubble). In a period of increasing investment, such as the last few years, the market gets competitive in supporting what it thinks are promising companies. Capital is readily available to these companies, in large quantities and often at high valuations. The last time this occurred, in the late 1990s and early 2000s, VCs got hurt badly when the market turned on them. The companies they invested in, and thus their investments, became worth much less, sometimes worthless. That hurt many funds’ performance and several funds that sprung up in the bubble are now gone.
This time around, VCs are investing with more preferential terms that protect them from dilution or “cram down” in their investment value if more money has to go into the company later at the same or lower valuations than when they invested. When these provisions kick in, the investors are protected more than the founders.
For example, say that a company has raised $500M over its life and was last worth $1B. As that money has come in over time, the investors probably own 75% of the company, with 25% left for the team. If the next round has to be raised at anything less than a $1B valuation, under new terms the team gets squeezed first, before the investors do. In reality, everyone will take a “haircut”, but the founders will get hurt the worst. It will be up to the investors to decide if they want to keep a company afloat or if they want to force a sale or let it die.
This is not to say that Jet or Instacart will face this, but their investors do hold the cards. Depending on how these companies grow and how favorably they are being viewed by investors, things could get interesting. Additionally, this overall market condition causes VCs to pull back on making new investments, so we will likely see a downturn in overall funding levels in 2016.
The Innovation Conversation will return ...
- KC's View: