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Analysis of food tech startups failures

| Category: General    

The idea of merging technology into food industry is now the hottest sector in technology. In the last few years India has seen close to 250 startups in the Food-Tech sector. Each one of these start-ups comes up with a business plan not so different from each other. With a bird’s eye view, the business models of all these companies can be accumulated into basically three types: Food-ordering platforms, delivery only players and cloud kitchens. These start-ups were darlings to investors not so long ago, but recent trends show that most of these companies are finding it hard to attract more funds and are bowing down in pressure. In the below paragraphs, let’s try to analyze the reasons for the failures.

Food tech is an intensive investment sector, where the running capital for the first few months, in some cases few years should be borne by the company. In food industry, the COST of GOODS SOLD should be less or equal to 50% of the maximum retail price. This is the norm in conventional food industry. Which mean when you sell a product, the actual cost of the product sold, is far lesser than the MRP. The reason being, in food industry, the product is prepared and served. And the preparation and service costs are always higher than that of the product. When this is not taken into account, there is a huge burden on the company to be afloat. So with every sale, you go back a bit rather than moving forward in business, which is a recipe for disaster. Many companies when starting use this strategy of selling products below the actual cost incurred to lure customers and try to build a customer base. But the challenge lies in sustaining in the business till you have loyal customers who are ready to pay more than they did earlier, when you change strategy. When this is not considered, and the company tries to attract more invests, without showing formidable returns of the investment already made, the investors are in cautious state of mind to venture further.

Another important calculation which interests investors is the ratio between CUSTOMER ACQUISITION COST and COST FROM CUSTOMER. Let’s first understand the terms. CAC or Customer Acquisition Cost is the amount of money spent by the company for acquiring one customer and Cost From Customer is the amount of money the company gets in return from the customer. This calculation can be arrived roughly by dividing all the money spent on marketing over a period of time by the number of customers acquired in the same period of time. This calculation can give a rough idea on how the business can on a longer run. Start-ups tend to spend more money on marketing their products during initial stages. And in a scenario of a food-tech start up, the companies tend to invest more on marketing in their earlier stages, since the company’s revenue in directly proportionate to the number of customers. Although it is understood that the money spent on marketing over a period of time might yield customers later also, the company should be careful on the ratio.

Next reason for this failure is misreading an age old strategy, the relationship between Demand and Supply. We all know the greater the demand, more the need for supply. There should be an equilibrium between the demand and supply, for the business to prosper. Again food industry’s verdict depends entirely on this demand-supply relationship. Most of the start-ups in the food tech sector were me-too startups and most of the investors who seeded for these companies were those who didn’t want to be left alone. For companies, who were delivery only players, the place of operation is a very important decision to make. Food delivery in India is relatively new and still catching up in cities Bengaluru, Delhi and Bombay. So it is critical to zero-in on the place you need to focus, or in other words you need to match your supply only in the place where there is a demand.

Sometimes entering into food tech sector looks mouth watering, but the companies need to be cautious on these points and many more, to be able to sustain in the business, grow and be a trend setter.

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