I spent the better half of last year consulting and working with restaurants from a strategic position. It was definitely a really interesting and unique experience for me. Being that the food business is hot right now and every company spent 2015 and 2016 pouring money trying to disrupt it, I thought it would be fun to share some of what I gathered from the experience.
*This is more of a data dump than a refined post. I've left out a lot of information and a lot of the thoughts are not organized; a lot of thoughts will probably trail off into tangents and continue in another section.
Before I ever got involved with tech, I dabbled in a bunch of different positions in the restaurant business. I was a busboy, a waiter, a bartender, a bookkeeper, and even worked as a line cook in some kitchens. What people don’t realize when they think “food” or “restaurant” is that the business is essentially existing in a blue collar world. The food industry, the hospitality industry, the service industry, is blue collar. From a consumer standpoint (the perspective of most of these founders of food+tech companies) that fact is often clouded because the point is to make it seem white collar. But Michelin-star or local diner, it’s a blue collar world.
The Restaurant Delivery Business is Indeed Crowded
First off, delivery is important. Especially in a city like New York City, everybody delivers. And historically, deliveries were always a necessary evil for restaurant owners. The delivery person often doubled up as a dishwasher, porter, or cashier. It didn’t make sense to hire a dedicated delivery person when delivery times were concentrated at predictable times of the day. Nobody is going to work 11:30 AM - 1:30 PM and come back at 6 PM to work until 8 PM. Conversely, nobody will hire someone to sit around between the hours of 1:30 PM to 6 PM doing nothing and taking up valuable square footage in the retail space.
Enter a company like Relay. A small company who understood this pain point and recruited a small team of couriers to be shared among a group of restaurants. This way, restaurants no longer needed to worry about managing the workload of a delivery person. However, by outsourcing, there was no way to make sure that the food would be delivered on time. There was no way to call these couriers without having to call HQ and have them track the person down. uberEATS recently entered this space and allowing their couriers to be tools for outsourcing (restaurants can call uberEATS to deliver food even if the food wasn’t ordered on the uber platform), albeit expensive.
uberEATS and DoorDash are probably the best lead-gen restaurant products out there, successfully chipping away at GRUB’s market share. Caviar can be up there as well. Though they are losing money by the second, they seem to be pouring money in the right places. Consumers are buying on their platform and restaurants are fulfilling orders. Amazon and Eat24 are struggling. At least in NYC.
What’s funny about Amazon is that, although they are experts in that online marketplace game, they seem to be overlooking a lot of factors in the delivery marketplace. First, Amazon requires restaurants to accept Amazon orders with a Kindle. Literally nobody uses a Kindle as their default POS tablet and oftentimes you will see restaurants having to go back and forth between two tablets to make sure Amazon orders are being fulfilled (not that there seem to be that many). Second, on the consumer side, nobody really thinks of Amazon and food. Major branding confusion there, it seems.
The Restaurant Catering Business is Indeed Crowded
Catering is essential to NYC restaurants. I would assume for SF restaurants as well. Tech companies are catering lunches for their employees on a daily basis. This means the restaurants get to cook in bulk, order ingredients appropriately, and have predictable sales. Catering is the best for any restaurant in terms of profitability and often the key to staying alive amid rising rent prices.
Off the bat, Zerocater seems to make it as easy as possible for restaurants to fulfill orders. They provide easy-to-read labels and order forms. They also keep the restaurants accountable and make sure that they are on time. A little too late? Charge an extra % fee. Too late or get too many orders wrong? We won’t push you to our biggest clients.
But with the rise of other catering companies, it’s impossible for a restaurant to successfully deliver quality on all of these orders. They all have different labels. They have different requirements. Everything is too unbundled that multiple people need to work on multiple catering orders to be truly successful and consistent.
The catering business is also very much a networking business. There are many companies who feature their own cafeteria or large enterprise companies with more than 1000 employees who outsource their catering and leave it up to another company to have it taken care of for them. Companies like Aramark are the incumbents here. Upset anyone here once, you’ll have a hard time ever even entering the building to visit a friend.
The Restaurant Business is a Relationship Business
There are only a handful of companies (single digit) that control the food options of all the major venues across the country. Barclays Center, Arthur Ashe (US Open), and Nassau Coliseum, for example, have their food court controlled by one company. These companies control who gets to serve food in any of their venues, what prices they are allowed to post, what they need to sell in addition to their offerings, how much of a cut they take on each daily sales, how much rent is charged, etc. The plates, the utensils, the cups, the drinks, are all purchased by the restaurant from these companies to sell.
There’s a monopoly on this.
Even if there’s a new opening at one of these spaces, there’s no way for you to get in without sucking your way up to a decision maker.
There’s heavy sales involved in this process. How can you pitch it? What do they need? What are they looking for? Who do you have to know to provide the right intro?
Labor Costs are Being Heavily Overlooked
Though labor costs are already rising, the discussions of a Universal Basic Income and raising the minimum wage will continue over the next several years. Despite who the president will be for the next four years, these topics will not go away. In fact, because of who the president is for the next four years, these discussions might be more prevalent than ever.
Owners are not organizing for this right now nor do they have a contingency plan in case legislation were to change soon.
Restaurants are Being Courted for No Reason
Restaurants do not have loyalty to any tech company. They will pay whoever brings them the most businesses. Yet I know of at least two businesses creating an “Advisory Board” of restaurants as “consulting partners.” I get it. Making restaurants feel special is a way to generate interest and participation. Nike did it with its players and college sports coaches (outlined in Phil Knight’s Shoe Dog).
But honestly the restaurants themselves have no idea where they are headed. There's no restaurant group that is eliminating tipping in all of their restaurants. No they are experimenting that model. There's no group strictly pursuing sustainability in all of their restaurants. No they are experimenting with only a few of their restaurants. Nobody knows anything and not one is big enough to truly influence a lasting trend.
Fast Casual Is Here to Stay
With the rising costs of food, retail, and labor, fast casual is currently the best way to stay alive and have a future. With fast casual, it’s easy to develop a systematized process that can be taught and repeated from location to location. Unlike tech companies, restaurants have a cap number of covers per kitchen per day. There’s just no way to increase the number without expanding to a new kitchen. Space is limited. And because the margins are so thin, it’s impossible to invest in a huge kitchen without having guaranteed orders. Restaurants simply cannot expand quickly without having enough evidence to show that the new kitchen will reach its maximum number of covers within a very short amount of time.
There is a very popular restaurant in New York City that was growing very quickly in popularity and nearly every event was ordering from it for catering. They were cozying up with a bunch of tech companies and killing it in marketing. They were on TV with the likes of Martha Steward, Mario Batali, and cooking live on the Today Show. They thought it was important to invest heavily in a commissary kitchen in Brooklyn that would be used exclusively for catering and potentially even fulfilling orders for a possible CPG push. They lasted a year in the space and scurried quickly to find someone to take over their lease. They tried to scale too quickly.
What I am not sure of is whether a successful fast casual, or even fast food, chain can be founded in New York City. Chipotle started in Colorado. Kentucky Fried Chicken started, you know. Burger King started in Pittsburgh. Five Guys started in D.C. Chick-Fil-A started in Georgia. McDonald’s was created in Nowhere, California but really started expanding when a few locations were first planted in the outskirts of Chicago. All of these franchises waited many, many years before even canvassing a New York City location.
As a side - Ray Kroc’s Grinding It Out is one of the best memoirs I read in 2015. Michael Keaton is starring in a film based on it coming out this month.
Shake Shack was very unique. Shack Shack was founded by famed restaurateur Danny Meyer, with the capital and expertise of Union Square Hospitality. There was tons of hype and it was easy to understand. Having a line stretching around Madison Square Park like Shake Shack had a major appeal to it, especially with the endorsement of many celebrity chefs, coming from Danny Meyer tapping heavily into his network. All that to say, even Shake Shack had to start with a cart. And even Shake Shack struggled with setbacks over fries. Fries.
There’s simply too much noise of other food options to properly test a product in New York City or any major city. But it seems like the only thing that makes sense right now.
The Food Industry is Not Done Being Overhauled
Expect lots of regulation. Expect lots of smarter technology being pumped in. It seems very much like the beginning of the oil industry where the most clever will succeed. Everybody is trying to get in the game but only a very select few will survive--most of these through alliances and strategic partnerships.
Delivery-only restaurants have yet to prove themselves but it will be entertaining to watch. Good Uncle Foods is staying away from major cities and trying to execute in low cost college markets. The rights to these recipes would be valuable too, in case of an acquisition.
Consider a company like Aramark buying these licenses. They no longer need to have relationships with these restaurants in their cafeterias. They can invert the pricing structure and give 8-10% of every order and make the food themselves while advertising the restaurant rather than taking a larger cut of every order.
Consider a company like Amazon that can leverage a meal kit delivery system with AmazonFresh and these licenses without the work of building relationships with these restaurants.
Ando Food is equally interesting in that they are investing heavily in R&D. Food delivery, by definition, means that the food will be sitting out for some time before it is consumed. In other words, the quality of the food that is delivered needs to be, at best, inedible in any other context. If the food you ordered at a restaurant has been sitting out for 30 minutes before it is served to you, you will complain. Ando is manufacturing food in a way that, hopefully, the food gets better the longer it sits out. This is the exact opposite of how people view food. Yet anything I've ever heard about it from friends who have tried it had nothing but good things to say about it. Equally interesting is that they seem to be slow yet methodical in expanding locations with more kitchens.
R&D will play a critical role in the future of food. I believe this is what gave David Chang and Momofuku an major advantage over the years by smartly investing in this to cut costs and continue to innovate. Most restaurants simply do not have the capital to invest in such tests nor do they have the foresight to think of changing consumer trends. Expect sustainability to be deeply researched here too. New breeds of plants, new recipes and uses of parts of foods previously dismissed as waste will be a major trend in the years to come.
Restaurants have always existed through ingenuity. Expect a revival here with or without R&D.
Food trucks, for example, are dying. But they can be reimagined not as compact and portable storefronts but as nodes for restaurants. By definition, as long as there’s no physical exchange of funds presented on location, the food truck is no longer a store. Cooking can be done on premises but introduce an app and suddenly you have an equivalent to a UPS or USPS pick up truck where it can be parked anywhere and there's no loitering complaints. Consumers can either pick up or deliveries can be made in and out of that location.
Dig Inn is a fast casual restaurant I intentionally left out in the list above. More brands will get smarter about the Dig Inn model and take over that. Where before it was Chipotle for X (though it was Subway’s model, Chipotle made it hot), Dig Inn will start to be recognized for its ingenuity: no food is cooked on premises. There are ovens to keep the food hot but the food is prepared in a separate kitchen and delivered to its locations. This means that the food they make must be limited (though that list seems endless) to foods where the quality improves the longer it is heated. But this also provides the advantage of having a wider range of locations to choose from. They don't need to pay for hoods or sprinklers. It's less of a restaurant and more of a retail location with minor tweaks.
If you made it this far, kudos to you. Tweet at me or shoot me an email only because I had a headache attempting to proofread this before giving up in the first paragraph. I’d love to post something more organized down the road (internal logistics of opening up a restaurant, conceptualizing new food concepts, politics behind hospitality groups, CPG and retail, etc.) but I’m excited for how the business side of food plays out this year until mid next year.
