There’s an app for it, but is it really a tech company?

Before I formally started The Chai Cart, I spent months bringing to market another concept — a delivery only food business for healthy, organic Indian food. It was called Green Coriander. Customers could order online their lunch or dinner for delivery (this was in 2010, before the proliferation of smartphones and apps). It gained traction in San Francisco with rave reviews on Yelp and media (like the Daily Candy).

Here’s the truth about scaling such a food business — as the business grows with more customers, it requires more people and more space. In other words, operational expenses increase in line with revenue.

Over the last few years, I’ve seen quite a few food delivery “startups” burst into the market only to close down after burning through the capital they raised. I’ve shared production kitchen space with Munchery and Sprig when they started and could never understand the economics of their business. The number of humans involved in preparing, packing, order processing, managing delivery logistics, and overall operations was too high to make door delivery of $12 meals viable.

Yes, the economies of scale principle can be applied, though it is somewhat limited. It is unmistakably cost-effective to prepare food in bulk (though honestly, you can’t preserve the quality after a certain volume). However, the order processing, packing, and delivery logistics for individual orders are resource consuming.

To maximize resources, you have to maximize sales at a single point of distribution. There are two ways to achieve this: via catering (or requiring a minimum order) or individual servings at high volume distribution points (like the grocery store).

I had applied these learnings to The Chai Cart business model.

1. To serve individuals, I needed the customers to come to a central place

2. To scale beyond a single location, I needed to create a product for distribution.

I obtained permits for The Chai Cart in the dense Financial District of San Francisco. I created a Chai Brew (a liquid concentrate of tea and spices) for distribution direct to consumers (retail) and foodservice customers. My retail distribution was via stores like the Whole Foods Market, and I sold the foodservice size to Google HQ and other local cafes.

The demand for everything to be on-demand.

Millennials want everything to be available on-demand — their transport, their food, their love life. Even with the changing landscape of food delivery, I resisted making decisions that didn’t support a profitable per unit business model. With our catering business, we required a minimum order of $100 plus a delivery fee. For deliveries outside SF, the minimum order was $500. Customers could pick up smaller orders from the carts downtown (or hire Postmates or a Task Rabbit to do it for them).

A food business cannot scale like a technology business.

The founders of Munchery, Sprig, SpoonRocket, etc., wanted to disrupt the food delivery business with technology, the same way Uber disrupted the taxi business. Their vision was admirable; they embraced the risk and undertook a huge operational endeavor to make it work. However, the downside of raising too much money (sometimes referred to as OPM = Other People’s Money, and the pun is intended) is that you lose sight of the basic principles that make a business work. The fundamentals of scaling technology companies are very different from traditional businesses such as Food & Beverage, Retail, Manufacturing, etc.

And just because there’s an app for it, it does not become a tech company.

P.S. Food delivery is not a flawed business model. Many restaurants depend on take-out orders to be profitable. However, every business needs to understand the economic fundamentals that create a viable business—more on this in a future post.