Food-Tech's Win/ F&B lose!

About 4. 5 years back, I had published an article – https://www.dhirubhai.net/pulse/beginning-end-food-delivery-start-ups-aditya-somani/  which talked about the challenges of food-tech and why delivery costs can’t decline below a certain limit. There has been a lot of consolidation among food-tech players since then and present food-tech landscape looks much different. Under profitability pressures, the food tech aggregators had been cutting down their losses, both by reducing unit level losses as well as by reducing common costs. Most significantly, they have been cutting down their super bloated corporate staff count, a situation exacerbated by compensation levels which this business cannot support for a single day.

I think the time has come to say, that Covid19 has become a combination of Intent, Opportunity and Action for Food Tech Aggregators. Fundamental changes in any industry structure happens only when all these three - Intent, Opportunity and Action combine. If utilized well, they should emerge unit profitable and healthier post the Corona epidemic.

I have to come to a few conclusions in the last section of this article. I have also laid out my assumptions which will help you understand my flow of thought. All inputs, comments and criticism are welcome. You can also write to me, if you have something else to add.

Assumptions

1.      Corporate Business wont trickle in before 30th May, 2020 - Even if the businesses and normal life starts to open up post 3rd May, I don’t think that the larger corporates will be able to give a fully confident green signal for the employees to come back to office before 30th May. This means that consumers would still not start getting mentally comfortable with the idea of taking risk of physical proximity to anybody or outside food deliveries.

2.      Residential Deliveries will build up only after 30th June, 2020 - Even when they start taking deliveries, they would give first preference to Food-Tech brands rather than unorganized F&B businesses. There will be much less time to cook unlike now, when they start going to offices. Many of them who rely on cooks at home, would not be comfortable having them come home for many months.

3.      Student and Singles – Low AOV business will not return before 30 June, 2020 - A significant portion of unorganized F&B businesses caters to young employees and students. A lot of these have gone back to their homes and are not coming back substantially before 30 June, 2020. The employees of the F&B businesses who are mostly migrants ( and have returned back to their homes) would not be able to start returning back from their home towns before 30 June, 2020.

4.      Footfall in unorganized F&B outlets to be minimal till 30 June, 2020 -This would mean that customers would not start coming back to unorganized F&B businesses in sizeable numbers, lets say 60%-70% of Pre Corona volumes before 30 July, 2020. This would be a very long time for unorganized F&B businesses who were already facing a consumer slow down and increasing pressure to share margins with food-tech aggregators to survive. Most of them would shut shop and wait for both the customers and their employees to come back to their pre Corona levels. And the situation would be even worse for F&B outlets inside busy markets and shopping malls.

5.      Significant pressure on Food-Tech aggregators as well as Food-Tech consumer brands to be profitable. Hopefully they are internally serious about it this time.

6.      Fresh competition in Food-Tech Aggregator may just spoil the party. Amazon is entering the space. Paytm has also expressed its intention to enter the space. If companies view this as a pure lead gen opportunity, than I would not be surprised if Google or Whatsapp enter this soon.

Implications

1.      Market share and AOV of food-tech consumer brands would increase significantly. They will be catering to less price sensitive customers as well as to families. Therefore, their AOVs will increase and food-tech aggregators may see genuinely profitable unit economics, that is if they do not start chasing low AOV business again.

2.      Low AOV single product kitchen models which have sprung up to plug into the Food-Tech aggregators would face existential crisis, that is if they were not facing one till now.

3.      40%- 50% Unorganized F&B businesses will shut shop for a long time. Will reopen only around the Puja times and festivities which will be around September 2020. This will help organized F&B businesses and Food-Tech Consumer Brands.

Food-Tech consumer brands and larger F&B companies would become stronger for the longer run. Food-Tech Aggregators will have a real chance to be profitable. I am hoping they will not let it go.