Competition | July 2016 | By Kevin Hardy

At Your Service

Meal-delivery services are booming. Here’s what operators need to know about this new crop of competitors.
Meal delivery services threaten fast food restaurant industry with on demand dishes.
Meal delivery services are expected to clear $1 billion in sales this year, according to market research firm Packaged Facts. PeachDish

When it comes to foodservice competitors, the limited-service restaurant industry has generally been in a class of its own. While convenience stores and nontraditional outlets like retail stores increasingly offer fresh food on the go, the threat has so far been minimal to quick serves and fast casuals that specialize in serving fast, delicious food.

Today, though, a new crop of companies is posing a serious threat to traditional restaurant operations. Meal-delivery services—including companies that deliver prepared meals, as well as those that deliver ready-to-cook food kits—are quickly expanding across the U.S. These services threaten to steal market share by conveniently bringing cheap food right to customers’ doors, usually with the press of a smartphone button—and all without hosting a traditional restaurant storefront.

Mark Wittman, cofounder of the San Francisco–area meal delivery service Farm Hill, started his company with the simple goal of making healthy foods more accessible, especially during the hectic workday lunch hour.

“It was too hard to find a healthy meal,” he says. “And it was too tempting to stray into eating something unhealthy.” Getting into delivery was almost an afterthought. He zeroed in on delivery “just because it was a way to get our food in people’s hands.”

Diners who order by 10 a.m. receive a Farm Hill boxed lunch delivered to the office in time for their lunch break. The meals cost between $10 and $15 (plus a nominal delivery fee). Farm Hill launched in 2014 in the dense suburbs surrounding San Francisco and San Jose. Now the brand is moving in on the city proper. And with skyrocketing growth in the delivery space, Wittman believes the model will work in the nation’s top 20 metros—at least.

“Convenience, first and foremost, is the major driving factor. I think people are looking to have food experiences in all aspects of their lives. They see a lot of these different food delivery services as opportunities to have experiences they might have at a restaurant, [but] at their homes or at their office,” he says. “And it’s typically a better experience than what they would get at home or at work. For some people, it’s purely based on convenience; for some it’s

purely based on that experience. Above all, we’ve found the food has to be really good.”

Delivery is booming, both inside and outside the conventional restaurant industry. An ever-growing fleet of third-party apps like GrubHub and UberEATS allow even the smallest of restaurant operations to jump on the delivery bandwagon while avoiding the logistics of rolling out an in-house delivery program. And mail-order concepts like Blue Apron have introduced a completely new way to shop for and prepare meals at home.

“If you think about the customer base of takeout and delivery online and offline as a whole pie, currently these online food delivery companies are only going after a small piece of the pie. There is this huge market out there that is ultimately going to become customers for online delivery,” says Eric Kim, CEO of RushOrder, a Los Angeles–based takeout and delivery provider for the restaurant industry. “That’s why you see so many people throwing money at it. Because if it goes the way of one company growing to dominate the market, that’s a huge opportunity. It’s not just that online is taking over offline. It’s not just that transition, but the pie itself is growing.”

Samir Bhavnani, area vice president at 1010data, credits technology innovations—smartphones are now nearly ubiquitous among American consumers —with fueling the delivery boom. He expects delivery apps, now mainly focused in cities like New York, Los Angeles, and San Francisco, to make their way into dozens of local markets in the coming years.

“Think about what happened to Uber several years ago. They also started in major markets. Over time, when that model is proven, you’re going to see it expand nationwide,” Bhavnani says. “You’re getting to the point where everybody has a smartphone of some kind and the ability to very easily order whatever it is you’re feeling at that moment.”

So what does this mean for restaurants? Bhavnani says most concepts should think about offering some form of delivery, whether it’s with in-house staff or through a third-party provider. Smaller and independent restaurants, he says, don’t need their own app, but can partner with a company that has the infrastructure—and the customers—already in place.

But this expanding delivery space isn’t just for restaurateurs.

Meal kit titan Blue Apron is working to reinvent the grocery supply chain by mailing fresh ingredients to consumers’ doorsteps at competitive prices, says chief marketing officer Jared Cluff. The company ships more than 8 million meal kits across the country each month, opening up access for rural customers and cutting down on shopping time for urban dwellers.

“We believe that in addition to the convenience of receiving meals and recipes, Americans have the desire to get back into the kitchen and cook incredible meals at home,” Cluff says. “The positive feedback we receive from our home chefs week after week shows us that people want to continue to cook with us and share their recipes and experience with friends. To us, this engagement demonstrates that we are solving an unmet need for our home chefs.”

With specific recipe cards and perfectly portioned ingredients, Blue Apron allows home cooks to bolster their culinary cred by learning new techniques and trying new foods like pink lemons, Thai basil, and nasturtium leaves in their own kitchens. “Our home chefs have told us that we’ve helped them learn to cook, reconnect with family, and even save their marriage,” Cluff says.

Fellow meal-kit company HelloFresh has zeroed in on serving the growing demand from customers living in suburbia. U.S. CEO Ed Boyes says this includes households with at least two people, often with children, and adds that the company’s target customer is anyone looking to have variety in their home cooking while also eating healthier.

Boyes says customers like the convenience of mail-order meal kits, which erase the stresses of meal planning, grocery shopping, and ingredient prepping. Others choose HelloFresh for health reasons; the company boasts a registered dietician on staff and includes nutritional labels on all kits.

“Many customers come to us because they’re bored and stuck in a recipe rut. They’re tired of making the same four or five recipes over and over again,” he says. “HelloFresh offers an array of different ethnic cuisines every week, featuring new ingredients, spices, flavors, and techniques to help beat boredom in the kitchen.” 

Judith Winfrey, president of PeachDish, a Southern-inspired meal kit subscription service, says technology has ushered in a sea change in terms of how people buy food.

“Buying a kit that has a recipe and all of the ingredients you need to cook premeasured is a new and innovative way to buy food,” she says. “But it also is disruptive, because we’re shipping perishable food in the mail. Food has become e-commerce. This is really the first time people have been comfortable purchasing perishable food in the mail.”

PeachDish meals cost $12.50 per serving. By focusing on wholesome foods, Winfrey says, the company allows people to eat well without a week’s worth of recipe planning and meal prep. She says busy yet food-conscious consumers are signaling “a shift in the way people are buying food and thinking about food.”

“I think that there is a lot of room in the market,” she says. “I think this is a sector that’s here to stay and there’s a very loyal market. We know somewhat anecdotally that we have customers that subscribe to multiple meal kit services.”

But it’s unclear how much of a threat these mail-order concepts pose to brick-and-mortar restaurants. The most obvious competition to meal kits is the neighborhood grocery store, which also sells a similar array of raw ingredients for home cooks. And meal kits serve a different niche than the spontaneous order of Chinese food or pizza delivery.

But the cost and prep time involved in these services might limit their growth, says Bonnie Riggs, a restaurant analyst with The NPD Group.

“It’s going to be in major metropolitan areas. It’s not for Middle America,” she says. “There’s a market for that, but it’s not a big market.”

Riggs says restaurant delivery is definitely having a moment. As of December, delivery accounted for only 1.7 billion of 61 billion total restaurant visits in 2015, Riggs says. But between 2012 and 2015, total restaurant traffic grew 1 percent, while delivery traffic increased 9 percent.

“It’s a relatively small share of the market, but it happens to be where the growth is the strongest,” Riggs says. “It’s occurring for a number of reasons, but a lot of it has to do with technology. Typically, you didn’t have many options when it came to delivery. You had pizza and you had Asian.”

Research shows consumers who order digitally are more satisfied with their meal experience than those who have a face-to-face interaction, she says. Plus, delivery offers a boost to the bottom line.

“What you really need to know about delivery is it brings in a higher check,” Riggs says. “That can be a good thing for the operator, maybe not so good for the consumer.”

Delivery providers are more optimistic about their potential growth, touting a convenience factor that’s difficult for restaurants to match.

Tri Tran points to his own hectic life as the spark for his delivery concept Munchery, which delivers both ready-to-eat and ready-to-heat meals in four metropolitan areas: San Francisco, Seattle, Los Angeles, and New York.

“My wife and I were both working, but cooking dinner was my responsibility,” he says. “I knew there had to be a way to help people more easily plan their meals, especially when varying schedules make getting dinner on the table at a reasonable hour extremely difficult.”

Tran, who now serves as Munchery’s CEO, believes busy consumers need easier ways to put better food on the table.

“Everyone needs to eat, but as our schedules and commitments grow, eating well becomes less of a priority—and many opt for convenient, greasy takeout,” Tran says. “Munchery offers a convenient solution for delicious home-cooked meals to diners on their own schedules. Diners know exactly what they’re eating for dinner and when, which is a big draw for people trying to stay on top of their meal planning during the week.”

That’s especially true for families, and today, as the coveted Millennials settle down and have kids of their own, families are an ever-important customer unit to capture.

Farmbox Direct founder and CEO Ashley Tyrner says meal kit companies that target young foodies are often cost-prohibitive for wider audiences. Farmbox Direct ships fresh produce and plans to start offering proteins at prices competitive with the grocery store.

“We don’t have a specific customer. With a lot of the meal solution companies, the Millennials are their customers. But we really modeled the box to be affordable,” Tyrner says. “For my family to eat a meal kit, that’s $10 a plate and I still have to cook it. That’s $30 for one meal for our day. That doesn’t make economic sense for my family.”

Perfecting the procurement and shipment of the produce hasn’t been easy for Farmbox Direct, Tyrner says. That’s why she sees little in the way of competition for home-delivered groceries.

“My supply chain is extremely tight,” she says. “Produce comes into my warehouse at 4 a.m., and it’s out by 6 p.m. We store no produce. I learned during my time figuring out how to do this why no one else has done it.”

Whether food comes in a FedEx box or from a delivery driver, delivery services have seen a massive infusion of venture capital and heightened competition. But many in the space still see plenty of room to grow.

“As we’ve seen the industry evolve, there’s been a lot of people who are playing in the space,” says Stan Chia, GrubHub’s senior vice president of operations. “The market’s huge. We are the market leader by far, but we don’t even have 5 percent of the market. So there’s a lot of room to expand.”

GrubHub’s mobile app allows customers to order takeout and delivery from some of the 40,000 restaurants partnered with the company. While some restaurants want to maintain control, Chia says, third-party providers like GrubHub can quickly get them in the delivery game.

“Generally, restaurants want to focus on making great food. If they didn’t have to, I would say the majority of restaurant owners would say, ‘I don’t want to worry about hiring a driver,’” he says. “They just want to focus on making great food.”

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