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Flawed business model, funds crunch cripple food-tech sector

Firms spend more money on each delivery than they earn

Raghu Krishnan  |  Bengaluru 

FoodTech industry sees bloodbath in India on flawed models, funds drying up.

On January 8, FreshMenu, a Bengaluru-based food start-up that owns centralised kitchens, raised fresh funds of Rs 110 crore to fund expansion. It has built a model to cook food at its own kitchens, book orders on its app, and deliver it to customers. It makes around 5,000 meals a day and is valued at Rs 380 crore.

However, FreshMenu is an exception in the food technology (food tech) space, witnessing a blood bath after a spurt in firms, backed by global investors.

Firms such as Zomato, FoodPanda, SpoonJoy and TinyOwl that help customers discover, order and deliver food to their places, have scaled down business. Others such as Dazo and Langhar have shut shop, resulting in the sector losing 3,000 people in the past few months.

The primary reasons are funds crunch and a flawed business model — where start-ups offer economically unviable discounts to get more customers on board. Many firms have expanded into newer cities such as Coimbatore and Visakhapatnam, where the concept of people paying for food delivery or service does not make sense because of small distances for service delivery. In 2014 and 2015, around 55 food technology start-ups raised $373 million (Rs 2,450 crore) from investors such as Rocket Internet and Sequoia Capital, according to data compiled by Tracxn, a Bengaluru-based analyst firm that tracks start-ups.

“There was a flood of companies that did not have a well thought-out of business that made sense with unit economics. They were spending more money than they earned from each delivery,” said Pankaj Jain, partner at 500 Startups, in an interview. “The business models would have made sense at the aggregate level, but not at the unit level.”

Flawed business model, funds crunch cripple food-tech sector
In food tech parlance, unit economics is calculated at revenue per food order or delivery minus the cost involved in the transaction. In most cases, it was negative returns as they spent up to Rs 300 as discounts for a food order that earned them Rs 45 per delivery.

Jain says India is a country where a grocery or vegetable store owner still drives business by engaging customers through free delivery and building relationship, a system that would be tough to break with an army of un-named delivery boys.

Some analysts blame not only the start-ups, which are run mostly by fresh graduates from Indian Institutes of Technology, for the turmoil in the market that has hurt businesses. “Venture capitalists have funds that have five to six years to mature and provide returns to their investors. It is unnatural to expect these young companies to scale fast without focusing on fundamental business models,” said Debabrat Mishra, who works with start-ups as director at management consultant Hay Group.

One investor, who has evaluated food start-ups but hasn’t got one in his portfolio, says the lack of innovation in business models is the key reason for failures of most food tech start-ups. “They want to bring a successful business from Union Square in


San Francisco to Bengaluru or Hyderabad, without changing their business model. How can you expect it to succeed here?” said the investor.

The disruption in the food-tech space also spells out positive things for the sector. “For once, people are taking this failure positively, which is good. In India, failing in business was considered taboo... There is a slow realisation that people can fail, learn from mistakes and build better business,” says Mishra of Hay Group.

Jain says there is an opportunity to build a stable and strong food-tech business in the long run. “These businesses will work in the long run. I don’t have a crystal ball, but it can be five to 15 years.”



A FRESH MENU

Acquisitions
  • Tastykhana: Acquired by FoodPanda (2014)
  • Delyver: Acquired by BigBasket (2015)
  • JustEatin: Acquired by FoodPanda (2015)
  • MealsonWheels: Acquired by Antfarm (2014)
  • GetMeFood: Acquired by Monocept.com (2015)
  • SpoonJoy: Acquired by Grofers (2015)
Source: Tracxn

First Published: Thu, January 14 2016. 00:43 IST
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