What is the Future of Food Technology and Innovation?

Bite of the Future: Unlocking the Potential of the Food Industry

Written by Alex Yancher

In the 1960s, the microwave’s growing prevalence opened the door for the frozen meal industry. Women were entering the labor force in record numbers and, when the gainfully employed did come home, they were more interested in relaxing than cooking. TV dinners filled a consumer need. A quick way to heat them made the right solution finally feasible.

Arguably a more powerful enabler than the microwave, ubiquitous mobile devices have unleashed the epoch of food delivery. Not only are there more opportunities to interact with your phone than with your desktop, but the mobile experience is also superior – just look at the old version of online grocery ordering, as seen in Webvan’s obstacle course. With increased demand comes increased scale and competition. Both of these factors serve to lower prices, driving even more demand in the virtuous cycle of building a new market.

As a founder of Pantry, a food-tech company, it’s my job to go beyond the current trends and understand what’s coming next. There are two predictions that I want to share, because these strike me as particularly important shifts with long-term implications.

Instacart Eats Whole Foods.

Whole Foods has mastered the grocery shopping experience. But Whole Foods’ mastery is only relevant in the physical world. If you have to go to a grocery store, Whole Foods is a great option. But what if you didn’t have to go because all the products that you typically buy can be delivered? With online ordering, you don’t have to visit a physical store — ever. This conclusion leaves Whole Foods and other supermarkets in the precarious position that Blockbuster and Circuit City found themselves in during the early days of Netflix and Amazon.

Without the physical store, Whole Foods is relegated to a name of a list on the Instacart app and site. If Instacart can offer the same products as Whole Foods, there isn’t a compelling reason why one should care if those products bypass a physical Whole Foods store. For a growing percentage of the population, the benefit of saving an hour of hassle outweighs the cost of not being able to see and touch the groceries purchased.

Whole Foods and other brick and mortar supermarkets are in-between a strategic rock and a hard-place. Doubtless, supermarket executives realize a significant portion of grocery sales will be moving online, like everything else. They have three options: 1) Do nothing 2) Build their own delivery service or 3) Partner with a delivery service like Instacart.

The danger in doing nothing is that customers looking for the convenience of delivery churn to a competitor carrying a similar set of products. For Whole Foods in the Bay Area, that would be a store like Bi-Rite, which is offered on Instacart. Option #2 is for Whole Foods to divert from its core competency of building beautiful stores to building a delivery business. This may prove to be expensive, and ultimately low-margin. The price of delivery will gradually equal the cost to deliver as competition eats away at any margin. And, if others offer a delivery option, Whole Foods shouldn’t expect to win incremental market share by doing the same. In other words, building a delivery option can cost a lot and leave the company in the exact same position as before.

Following this logic, it’s easy to see why partnering with a third party delivery solution like Instacart makes sense. At the very least, this option buys time, and appears innocuous, given that Instacart describes itself as a grocery delivery service. Of course, I’m guessing at Instacart’s true intentions when I say they want to be a retailer. Regardless, an assassin wouldn’t announce himself.

Instacart and their investors understand their leverage over the grocery retail industry. Ben Horowitz, an Instacart investor, is quoted saying: “he [Instacart CEO] already has Whole Foods, monster of monsters. It’s the biggest market of all time, incredibly huge.”

The “biggest market of all time” is not delivering groceries; it’s selling them. Whole Foods has the highest markups in the industry. On some products, the markup is over 50%. There’s an opportunity for Instacart to seize this margin. The more orders Instacart gets, the more leverage they have to ask for a piece of that markup. But with Instacart’s $2 billion dollar valuation that investors expect will double…or 10x, it’s possible that nothing short of the whole markup will do.

However, Whole Foods has earned that markup not only with its brand loyalty, but also with its sophisticated supply and logistics network. For Instacart, or another online-only grocery service, to compete with the likes of Whole Foods, Kroger or Safeway, solving for the “last mile” delivery will not be enough. Building up the necessary relationships and supply network will take years and hundreds of millions of dollars. Zooming out, this feels like the Chicken and Egg Problem. How will Instacart attract capital and product relationships if it lacks consumer demand? And how can it build consumer demand if it lacks the products that consumers want? From Instacart’s vantage point, Whole Foods provides endless supply, thus enabling Instacart to focus on demand for its online grocery empire.

Non-Venture Funded, Online-Only Restaurant Becomes a Thing.

The restaurant industry has traditionally belonged to restauranteurs. However, some of the most popular Bay Area dining brands, such as Munchery and Sprig, have recently been started by tech entrepreneurs. A significant portion of the food business has moved to on-demand delivery, in part, thanks to the proliferation of mobile. The new skill-set required to attract paying customers has shifted from things like choosing a great location, where common sense reigns, to a core competency in online marketing and mobile app design, where specific skills are required. This is why the first crop of companies to take advantage of the movement to mobile ordering have been venture-funded tech companies.

But there is a crossover point where a mom-and-pop restaurant can get enough online traffic via delivery marketplaces, like GrubHub, to justify being online-only. When Sushi Friend can be found inside Supreme Pizza, it becomes clear that the more important address for Sushi Friend is its online one at Eat24, Menufy, GrubHub, Delivery.com, etc.

In the restaurant business, one of the most important factors for success is location. There is an online analog to the benefits of a good location: an abundance of relevant page or app views. Buying clicks is the equivalent of renting billboards to redirect cars to a restaurant off the­ beaten path. Mom-and-pop restaurants don’t want to expend time or money to buy billboards, they just want to cook delicious food. Venture funded virtual restaurants can hire growth hackers and have a strategy for social, but traditional restaurant entrepreneurs don’t have this expertise, nor the funds to outsource it.

Much like mall food courts, there are now online destinations that bring together a fragmented marketplace of eateries. These aggregators of consumer demand make it feasible for mom-and-pops to enter the virtual dining space without any venture funding. In 2016, it will be possible for an online-only restaurant to get as much traffic from DoorDash, Postmates, and Caviar as they could from foot traffic in a mall food court. And if that traffic isn’t enough, there’s a burgeoning corporate catering marketplace with Zesty, ZeroCater and Cater2Me. Since a physical location is no longer the product or a prerequisite for sales, a brick and mortar build-out will have to be relegated to the same ROI calculation as any other marketing expense.

In the brick and mortar world, restauranteurs have found it advantageous to specialize in a specific cuisine. As orders move from offline to online, the underlying benefits of focusing on a particular cuisine do not change.

All things constant, this new online-only restaurant model will have a structural advantage over competing food delivery options. A restaurant that is solely focused on cooking, rather than acquiring customers or delivering food, can nail it because that’s all consumers ask of them.

This post originally appeared on Medium.

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