More food start-ups may bite the dust this year, but there is scope for growth for players with the right business model, says Jacob Kurian, Partner at private equity firm NSR, and CEO of fast food chain Vasudev Adiga's.
Food start-ups, which attracted around USD 160 million of funding last year, have been in the headlines over the past few months for all the wrong reasons.
Bengaluru-based Dazo shut shop in October, a Mint report showed how Foodpanda was being gypped by food suppliers, and companies like Zomato and Tiny Owl laid resort to mass firings to cut costs.
In a telephonic interview with moneycontrol.com
, Kurian says too many startups have cropped up with hardly anyone having the size or scale of efficiencies to keep the business afloat.
“Food startups are trying to do too much without specialising in any one particular task,” he says.
Besides stiff competition, the startups are also facing heat due to the delivery system followed. Not only the cost of delivery is high, but the demand for delivery people is also on a rise, which inflates wage bills for start-ups, he says.
Also, Kurian says while earlier deliveries were paid for, now options of paybacks and discounts are offered to attract customers. While this is a good technique to bring in crowd, it is not feasible enough for the delivery startups as usually the cost is borne by them.
Another issue is that these food startups are active mainly twice a day – lunch and dinner. Besides these time slots, food startups hardly have extensive work throughout the day.
“Those who set up a business do not know what to do with rest of the time,” Kurian says.
While there are issues, there are solutions as well that can be implemented to improve the situation. Little changes in the business models can create momentum for these startups. Currently, there are largely two models that companies in the online delivery space are following. There are startups which try to do everything from getting raw materials to preparing food to delivering while there are others which are mainly delivery platforms.
Each business aspect of a food startup is complex, Kurian says adding that “startups who try to do everything hardly have synergy in each of them.” It is important to specialize in one or two main segments instead of trying to grab everything, he says.
Despite the shortcomings and slowdown in the space, Kurian expects the business to grow. But, he says, the number of players will shrink. While the ‘urban phenomenon’ of food startups will continue to expand, there is a big question mark of its survival in small cities. There hardly is traffic in small cities, where people still prefer to go out and eat unlike the big cities, he says.
Rebranding is needed to bring in more life in the space. “Food is high performance (easily perishable), which will remain the focus area,” Kurian says. The companies will need to focus more on logistics and operations aspect.
Speaking about his own food start-up, Vasudev Adigas, Kurian says the concentration is more on saturating the market in Karnataka (where it has outlets in four cities) before moving to other states. The startup manages to draw in close to 1.5 million customers every month, he says.
Kurian says the management does have plans to list Vasudev Adigas, but not right now. “Listing is still 18-24 months away,” he says.