‘They need to solve a problem’: Why prepared food delivery startups are failing

San Francisco-based Munchery, is the latest casualty, shutting down this week after raising $125 million. Its core business was to “change the way people source fresh, prepared meals at scale” with organic produce and antibiotic-free meats. Other companies that took on food preparation and delivery also encountered similar challenges with growth: Sprig, also based in San Francisco, closed its doors in 2017, after raising nearly $57 million; and Maple, which focused on the New York City market, closed its doors and was acquired by U.K. company Deliveroo the same year.

Some food delivery startups were ultimately acquired by grocery chains: Plated was acquired by Albertsons and Home Chef by Kroger.

Entrepreneurs and industry sources say these businesses face more than just competition, but an uphill battle generating a return on thin margins. They say managing food preparation and delivery can be a losing proposition when customers demand prices that compare to fast-casual chains.

Making the unit economics work is tough. “People don’t want to pay hefty margins on food,” said Morgan Springer, one of Sprig’s co-founders. “When you’re vertically integrated, you take on the challenge of the entire [food] system; it’s not necessarily the food that was difficult, but the challenge was more on both delivery and food, which are lower-margin businesses that are tricky to get right.”

Springer said companies that specialize on one part of the picture have better prospects for success, including Sweetgreen, which specializes in preparing food at physical locations, and DoorDash, which focuses on delivery. One of the problems at Sprig, he said, was that people were expecting to pay the same price they would pay at a fast-casual food vendor and have it delivered. This pushed meal item prices down to the $10 to $14 range, which squeezed margins even further.

Munchery did not respond to a request for comment, but prices for menu items roughly fell between $8 and $23, and members who paid a $6.95 membership fee got a discount, and orders with a subtotal of at least $60 evaded the $5 to $7 delivery fee. It’s not clear how many users it had.

“There’s a lot of complexity on both ends, and you have to get the system really optimized if you want to make money when you have a human delivery driver,” Springer said.

Sean Ammirati, a partner at Pittsburgh-based venture capital firm Birchmere Ventures, said he has hesitated to invest in these types of businesses because of their difficulties getting to longer-term profitability, and whether or not the business case is compelling enough to solve a problem for the consumer.

“They need to solve a problem for the consumer by having the meal delivered,” he said. “How much better is this than the substitute? Either a classic [restaurant] delivery service or going out and getting the stuff and making the meal yourself.”

Subscription meal kit services could face similar headwinds, although it’s more complicated because of the nature of their businesses. Plant-based food delivery service Purple Carrot, which so far raised $15 million, is bullish about its prospects for success, with CEO Andy Levitt saying in a recent interview that the potential of the subscription-based meal kit market has yet to be realized; while Blue Apron faces falling revenue and is selling its products through retailers to expand reach.

While meal delivery startups struggle and some close down, retailers may be the best placed to make this kind of business model sustainable, given their lower production costs and existing logistics and distribution networks. It’s a space Amazon and Walmart are trying to take over with meal kit deliveries, and it’s an opportunity for others to follow suit, said digital agency T3 president Ben Gaddis.

“A lot of the growth will go back to the retailers,” he said. “The winners are the retailers because they have both sides figured out, logistics and delivery — they have infrastructure that would not be possible to build through venture capital funding at the level that Munchery did.”

Despite the scaling obstacles, if last-mile delivery costs were brought down, possibly through automation technology, these business models may have a fighting chance, said Springer.

“I could see these businesses back up when we have relatively efficient drone delivery,” he said.