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What's Troubling Food Tech Startups

What's Troubling Food Tech Startups
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The Indian food tech startups scene after beginning with a bang has been seeing troubled waters since last year. With startups like Dazo and Spoonjoy shutting shop and talks of layoffs and troubled times ahead with Tinyowl and Foodpanda, investors are getting wary about the lack of sustainability and stability.  

Hype or Real Market Potential?

Though, initially touted to be worth $50 billion the food tech startups cumulatively saw investments of a whopping $74 million in the first half of 2015 alone.

These numbers do not even account for the multimillion dollar funding Zomato received. The picture started looking a little bleaker in the latter half of last year with the funding dipping to $19 million. The funding in the later rounds and with newer startups dropped further between $1 and $3 million. The number of deals which started the gold rush for these startups also dwindled from 7 in April 2015 to a mere 2 by the end of the year.

An interesting factoid here would be a select few startups who were immune to the slump in investment and managed to raise more funding in subsequent rounds. These select few players managed to do so by projecting stability, consistency and a sustainable model for growth.

The Indian Food Tech Landscape

While it’s difficult to classify food tech startups on the basis of the solutions they provide, one common criteria is the use of technology in the F&B space to solve problems.

Some are Internet restaurants; some are curated food marketplace and others are trying to be logistics arm for restaurants. Despite the hype, the sizable investments and funding that this domain has seen thus far, the food tech startup sector currently is in a very evolutionary stage in India.

What has compounded the problem further is the fragmented food market in India which yet to grow at the rate compared to the global scenario. A examination of the factors as to why some start-ps are facing “teething problems” while others have already shut shop or are on the road to doing so is needed.

Customer Acquisition and Customer Retention

Apart from the nature of the Indian market, customer acquisition is another challenge for food tech startups. As per data compiled by Tracxn, there were 335 online ordering startups in India at the end of 2015. This makes for a stiff competition within the industry and raises challenges in vying for customers through differentiation and offers.

Customer acquisition is an expensive affair in the food tech space. Prominent food ordering platforms spend anywhere between Rs 400 and Rs 500 for acquiring a single customer.

The strategy of heavy discounting and couponing to acquire customers seems helpful in the short run but it does inflate customer base and numbers initially along with not being observably helpful, in getting repeat customers. The heavy discounting model has now started emerging as one of the reasons that startups in the food tech space have not been able to achieve sustainability.

Until and unless these startups offer value to the clients in terms of basic criteria, which is distance/time, pricing, taste, ambience, health, service, experience etc, it would be impossible to sustain themselves in the market. No amount of initial incentivizing and discounting help in creating a sustainable model unless the players focus on the above mentioned criteria.

The stark differences between these customer acquisition strategies in making or breaking a startup can be summed up in an apt parallel; that of a vitamin and a life saving drug. It all boils down to whether the companies are offering vitamins or a life saving drug. If they are offering vitamins, as most of them did early on, they would not be able to sustain for long, as very few Indians go for vitamins.

Sustainability & Investor Apathy

Though restaurant focussed logistical startups raised sizable funding initially they had it tied in risk capital which then impeded their ability to raise later rounds of funding. The lack of sustainability is slowly getting investors to a point of apathy when it comes to bigger rounds of funding that food tech startups need to stay afloat.

Though angel investment and early stage funding comes due to the first few hundred orders, the next stage of funding completely depends on if the next few hundred orders come in and more importantly on the stability and sustainability food tech startups have built.

Lessons to Learn & the Road Ahead

No doubt, entrepreneurs surely need to put in a lot of time and effort in understanding the eating preferences of the Indian population while focussing on the quality and flavour of the food, but delivery, logistics and packaging also play a central role in the whole experience a customer has.

Today, there is a need for a growth in the delivery segment of the food business. Delivery is central to the experience in this space. The local delivery/distribution has to be built from the ground up like hyper-local delivery companies the logistics of which has been posing a huge challenge to these startups.

Since the market for these startups is operations intensive it takes young entrepreneurs involved through several learning curves. Like Flipkart or Snapdeal, a need is being felt for changes in approaches and management to run heavy operations, as and when food tech startups scale up. Shuffling or change in management and approaches is emerging as a keystone to tightly managing the back end processes and operations in the food technology enabled businesses.

In the end, the players in the space need to keep in mind that ‘food-tech’ is ultimately about ‘food’ and successfully challenging the quality and taste offered by the traditional market effectively is the only way they will succeed. While several players are mushrooming in the market a fact remains that with time, the ones that remain true to their brand proposition and who attain sustainable growth are the only ones that will be seen still standing!