Technology has already changed the way we purchase nonperishable goods. Now, consider how it may alter how we purchase, prepare and consume food.
Americans spent roughly $1.4 trillion on food in 2016, a figure that represents 25% of all U.S. consumer spending. And just as technology has changed the ways people shop for nonperishable goods, it’s worth considering the capacity of new technologies to alter how we purchase, prepare and consume food.
Though relatively few people have shifted to online food technologies so far, the sheer size of the food market means there is ample room for growth among companies in this space.
The percentages of people who have moved their consumer food habits to the online space range from roughly 10% for online takeout to 2% for online groceries, according to a report by Raymond James Equity Research. But younger consumers are more willing to enter the online food space and will be key drivers.
Americans spent roughly $1.4 trillion on food in 2016, representing 25% of all U.S. consumer spending.
In general, online food technologies are more effective in areas of high population density, given the logistical challenges of food delivery in rural markets. As a result, the adoption of online food technologies has been greater in high-density markets, including Korea, the United Kingdom and Japan.
Here, we’ll examine four subsectors of food technology.
The most proven food technology model is online takeout, with Raymond James research estimating 10% of the market is online. Takeout marketplaces, including companies such as Grubhub and UberEats, take advantage of network effects, a fragmented supplier base and a transaction-based payment model, with transaction take rates in the 10 to 15% range. Attractive financials include roughly 75% gross margins, low capital requirements and small sales forces. In the survey, 64% of participants ages 18-29 preferred online takeout to ordering by phone call.
Meal Kit Delivery
A recent phenomenon, meal-kit services such as Blue Apron and HelloFresh deliver fresh, pre-portioned ingredients to consumers’ homes. These services offer convenience (no planning, lists or shopping), the chance to try new foods, and the potential to eat healthier. As an added bonus, far less food is wasted because ingredients are precisely measured. Growth in this space has been robust, though recent reports suggest it is slowing and that retention rates are a concern. With plenty of competitors in this space, Raymond James expects the market to consolidate. And with operating margins similar to traditional retail companies – in the sub-10% range – investors likely will want to see higher gross volume sales, with Blue Apron, HelloFresh and Plated the largest at present in this developing space.
Prepared Food Delivery
Providing an alternative to local restaurants or cooking, prepared food delivery companies such as Munchery offer the convenience of fresh-cooked food, typically in less than 30 minutes. Compared to restaurants, these companies are able to operate centralized kitchens and avoid costly rents. Key challenges to success in this segment include estimating demand, with meals typically prepared in advance of orders; the ability to offer a variety of meals so consumers don’t get bored; fixed costs similar to restaurants, including chefs, packers, food costs and delivery costs; and pricing models.
Consumers will need to weigh the cost of additional service fees and the inability to personally inspect food against the time it saves not to do the shopping. Again, while there are challenges, younger consumers are more willing to order groceries online, suggesting it could be a matter of when, not if, consumers make this shift. Success in this segment likely will come with companies disruptive to traditional grocery markets, such as Amazon or Ocado; technology/delivery companies that partner with traditional grocery stores, such as Instacart; and online companies focused on nonperishable goods, such as Boxed or Thrive.
So far, online technologies have only a modest impact on the food industry, but there is tremendous opportunity for growth in this space. Currently, the number of companies across the many market segments is too large to sustain. As with most internet sectors, there is great advantage in economy of scale, as well as brand awareness.