The future of food

Stop and take a look at what you’re wearing for a second. A shirt? Pants? Shorts or a skirt? Most likely it was stitched in a factory far away, shipped to wherever you live, and bought at a retail outlet for anywhere between $10-100, with a majority of the price accounting for the overhead and the marketing of the ‘brand’ rather than any significant differences in raw material or production costs. Nothing here is news to most of us, buying clothing from a store is the most ordinary thing for us, as is the multitude of brands, styles, and price points available, and is in fact a decent majority of what we refer to as ‘shopping’.

Except none of this was the case even just a hundred years ago. Your Depression era great grandma most likely wore clothes stitched at home, and unless you were part of the ‘gilded’ from the Gilded Age, so did her parents before her etc etc. But in just a couple of generations you’d be hard pressed to find anyone around you that makes their own clothes, no matter how frugal or fashion conscious they might be (statistically more people raise their own chickens).

So what changed? Mostly that clothes became a lot cheaper to produce en masse in factories (first in the US, then eventually abroad) making people realise no one really cared all that much about making their own clothes in the first place. There were massive new economies of scale with producing tens of thousands of clothes together at the same time, leading to much lower prices and a host of other advantages. It freed up more time: Why spend a weekend at home making and altering a single dress when an afternoon at an outlet mall could accomplish the same for the whole family at a lesser cost and better value? It also led to the rise of the whole apparel industry- we started desiring new clothes at greater frequency and in more unique styles, and a whole host of clothing brands and retail concepts sprung up to cater to that demand.

We’re at a similar point in the food production cycle today. If you’re skeptical you’ll ever be further intermediated from your food, remember it’s already happened to to the majority of the food production cycle. A 150 years ago 85% of humanity worked in agriculture. Today almost none of us grow our own food. We don’t catch our own fish or grow our own corn, but we don’t even so much as pick our own berries or even fillet our own chicken. Most of the food cycle is already professionally produced and managed, and it’s only a little time before the last mile of picking up groceries and cooking them goes that way too.

There are some usual arguments to this inevitable future: I like cooking, it’s fun to throw a dinner party, I enjoy looking up recipes etc etc. All of these can and will continue to happen. [After all, nothing’s stopping you from making your own clothes even today]. Just that for a majority of your meals it’ll be easier, cheaper, faster, healthier, and more convenient for someone else to feed you. And if history’s any guide, when that happens a majority of us probably won’t mind it so much (especially if you’re the one currently responsible for cooking for your family).

Well how? The most obvious alternative we have to cooking today is eating out. And it’s big business. Restaurants are a $800bn industry in the US alone annually, and growing every year. Every couple of months we have a millennials killed the kitchen report, and even if we haven’t yet (we haven’t), the trend is certainly increasing every year. The biggest impediment to eating out more? It’s generally a lot more expensive than cooking at home.

Why so much more expensive? There’s 3 main reasons:

1- The food cost. This is pretty straightforward- there’s a cost of the ingredients that go towards making your food and it’s pretty non-negotiable no matter who’s cooking.

2- The labour cost. This is the most obvious added cost to eating out and what makes dining out so expensive (and appealing). There’s someone else not just prepping and cooking for you, there’s someone serving you and bussing your table and cleaning your dishes. All these people add up and you’re the one paying for it, making eating out so expensive.

3- The overhead. Restaurants are notoriously expensive to start and run. Everyone knows the first rule of restaurants is location, and that location usually means a premium rent. In addition to that recurring monthly cost there’s a slew of bills from utilities to furniture to inspection costs to cutlery to random permitting issues. [Restaurants are a notoriously hard business to be successful in, and these costly overheads are a major reason why].

Food Delivery

Enter the magic drug: food delivery. Delivery is to restaurants what e-commerce has been to retail. We still like stores, but when you already know what you want, it’s so much easier to just choose it from the convenience of your home and have it shipped to you. Delivery is by far the fastest growing segment of dining out, but it’s still a minuscule slice of the overall pie: $30bn annually (in the US). That’s because until recently, food delivery exclusively meant pizza (or Chinese if we’re pushing it). This however has radically changed in the last few years with the advent of apps like UberEats, DoorDash, and Postmates- meaning suddenly every single restaurant also delivers. Restaurants no longer need to have their own riders to be able to offer delivery, in fact they have to do nothing extra- just sign up on an app and start receiving orders.

Why do I call food delivery a drug? Because despite its relative recency, restaurants are hopelessly addicted to delivery (in popular urban areas, as much as 20% of a restaurant’s business can be delivery). That kind of increase in business is hard to turn down, no matter how much you dislike delivery. Yet food delivery disrupts restaurant’s day to day operations, makes the experience poorer for customers dining in, and kills restaurant’s already thin margins further (most delivery apps take roughly 25% of each order).

The trouble is, so far almost all food delivery takes place out of existing restaurants. This is like e-commerce became the trillion dollar industry it is today except without warehouses or any dedicated infrastructure, and every single shipment was still packed in an individual retail store, which is itself this chaotic mess of actual shoppers and employees packing random inventory off shelves while simultaneously shipping delivery orders.

Cloud Kitchens

Well restaurants basically realized that’s what they’ve been doing this whole time and that delivery couriers are taking up their floor’s already limited real estate, and the increased orders are overburdening kitchens that were struggling with the dinner time rush to begin with. So the last couple of years started changing that.

Enter ‘cloud kitchens’. A world of restaurant infrastructure for a new food delivery future. The cloud part is a complete misnomer here except I guess it makes them sound like tech businesses and helps them raise money so whatever. Cloud kitchens are restaurants that don’t actually serve any retail customers, just ship delivery orders. As such they don’t have seating or expect walk-ins, really they don’t even have to be in typical retail locations (and often aren’t). Essentially they’re just glorified commercial kitchens.

Wait so what’s the hype all about? Well remember the 3 major restaurant cost centers we discussed earlier? Cloud kitchens make a significant dent in two of them, bringing us ever closer to that holy grail of where food delivery is cheaper than cooking at home.

1- Overhead. By eschewing the retail part of restaurants entirely, cloud kitchens don’t need expensive real estate with high footfall. In fact they don’t even need to be on the ground floor, making rents significantly cheaper. Additionally no need for expensive furniture, cutlery, or any part of the ‘dining experience’. Because you’re never going to actually see this restaurant, they don’t have any of the build out costs typical to most restaurants.

2- Labour. No one dining in means no front of house staff required: hostesses, servers, bussers are all out. Plus fewer people are needed in the kitchen too: there’s no one to plate food or wash dishes. All of this translates to a lower cost per meal.

Additionally cloud kitchens bring in other benefits too:

a- Flexibility: Starting a restaurant or changing the concept of one is radically cheaper. All you need is to rent a kitchen and place a menu on a delivery app, and voilà your establishment is up and running.

Restaurant not working out? Change the entire brand by simply uploading a new one on the delivery app of your choice and replacing a few ingredients in your kitchen. With the costs of starting a restaurant in popular urban areas between $500k - $1 million, this really opens up the pool of restaurant entrepreneurs as well as significantly lowers the chances of failure.

b- Monitor customer demand and increased efficiency: Apps have the ability to point out areas that are underserved by certain cuisines, allowing entrepreneurs to quickly respond with new ‘restaurants’ and take advantage of the latent market demand. Additionally, grouping together restaurants in giant commercial kitchens can allow them to group order ingredients and other raw materials, increasing buying power and thus decreasing costs.



The prize at stake in food delivery is enormous

A trillion dollars is a big number but remember that clothing example from earlier? Well apparel is a $320b market in the US annually. Restaurants + groceries + food from convenience stores? $6.5 trillion industry. We’re already talking 20x the size and a market where the biggest disruptor (food delivery) is a near insignificant sliver today at about $30bn annually [but growing 15x faster than the rest of the restaurant industry]. Food is the second biggest expense across American households (after rent), and by far the most time consuming of all the everyday ‘chores’. As schedules get busier and both parents work full time, we’re literally craving food options that are convenient but yet also healthy and most importantly as cheap as trudging to the grocery store ourselves.

The sheer size and expansion potential of food delivery is why you’ve probably been hearing so much about about ‘ghost kitchens’ in the news lately, that and $5bn valuations for a year old company probably doesn’t hurt.

And it likely isn’t a winner take all market either. After all, there isn’t just one brand of clothing. It’s extremely unlikely we’ll all be eating Amazon food in 10 years. That being said, just like there is a minimum economy of scale required to successfully run a clothing brand, that’ll probably increasingly become the case for cloud restaurant operators too, especially as competition heats up and you need a certain amount of volume to make the margin economics work.

Concerns and Part II

For all the potential of food delivery and cloud kitchens, it’s not all rosy. I’ll touch on a few of the concerns below, but will elaborate on possible solutions in a later post.

1- The biggest issue? Delivery. Just like e-commerce brought with it shipping costs, the biggest impediment to hastening the food revolution is the fact that every single meal has to be delivered to your door and that convenience adds a significant cost to the overall enterprise. Everyone’s current favourite solution to this is self driving cars (every 5 years they’re just 5 years away) but till that magical day arrives, there’s some short term solutions that I’ll delve into in Part II.

2- Centralization power in the hands of the ordering interface. If you’ve heard any restaurant say anything regarding food delivery, you’ve probably heard some version of this argument. With customers not directly ordering from the restaurant anymore, there is a legitimate fear for restaurants that their brand gets disintermediated and the diner is loyal to the app first. This would not only give much greater pricing and revenue control to the app, it would also mean increased competition from fellow restaurateurs for limited app real estate. A customer who walks in off the street is all yours, a customer who discovers you through a delivery app might not even know your restaurant’s name.

3- Labour: Restaurants are one of the biggest employers in the US, with more than 16m people working in the industry in some capacity. A rise in food delivery will be a boon to some, but there’s concern that many main street restaurants might be left struggling to compete with these nimbler outfits, and that plus any rise in automation could lead to a nasty fallout in an industry whose workforce is already notoriously underprotected and almost never full time.

4- Unprofitability: Uber is still bleeding money, as are most on-demand companies. Marketing costs to acquire users remain high, and one could argue that discounts are the big driver in an increase in food delivery volumes. What the landscape will look like once the money runs out is anybody’s guess, but a high price for attracting, converting, and retaining customers seems a given and unlikely to change under the current model.

5- Inconsistency: One of the most annoying things about food delivery can be the variability of delivery times, and just as much when your order is wrong or some small thing is missing. There’s no easy way to return or fix your order; and there’s few things more frustrating than waiting hungry at home staring at your phone and willing your food to arrive. Quality control around both delivery times and order accuracy is a relatively cheap and easy way for both delivery apps and cloud kitchens to set themselves apart.

I’ll get more into possible fixes for these issues in Part II of this post, but one way or the other- cheap and convenient food delivery looms large as the most dominant trend in our food consumption pattern this century.