After months of stiff competition, the on-demand meal market in San Francisco has seen its first victim. Not surprisingly, the one company that hadn’t raised a massive war chest of millions in venture is the first to bow out of the running.
Chefler, with its the silver platter bearing delivery people, its five star Yelp rating, and its seal of approval from Gilt Groupe, has stopped its San Francisco service after seven months. It couldn’t hack the price war that started when SpoonRocket’s $8-a-meal service expanded to SOMA. The margins on each meal were too small, and Chefler plain ran out of cash.
“It’s as much an offline play as an online play and it doesn’t scale like a Google. That’s just a fact,” says founder Omar Restom. “Our business doesn’t even scale as well as an Uber. It’s a whole mother of complexity you have to handle.”
He spoke candidly and frankly with Pando about his experience, and within Chefler’s story are plenty of lessons that food startups should pay heed to. It didn’t take long for all the potential issues with sourcing, cooking, and selling food to manifest themselves. If Chefler struggled, so will Munchery, SpoonRocket, and Sprig as they pursue their goal to revolutionize the way we eat.
A quick primer on the sector, which doesn’t have a very good name yet so as a placeholder I’m calling it the “on-demand meal space.” These companies are vertically-integrated meal providers, meaning they source ingredients, hire chefs, rent kitchens, cook meals, and deliver them to customers. For those of you who are thinking, “Wait isn’t that just a restaurant?” the answer is, “Sort of.” There’s no physical retail location, so these are restaurants “in the cloud” so to speak. Furthermore, these companies — with the exception of SpoonRocket — focus on serving healthy, fresh meals that will leave you feeling less greasy than the Thai takeout from down the street. They also all — with the exception of now defunct Chefler — have raised millions upon millions of venture, with roughly more than $60 million put into the space, so they have plans to go big, take over the United States, or go home.
Chefler had high hopes for this too and hasn’t exited the scene entirely. Restom and his three person founding team are in the process of raising venture for a pivot vision. Instead of trying to take on the likes of SpoonRocket and Sprig, it’s going to differentiate itself by focusing on healthy meal customization. “The meals we would make are designed to be modular and we would match the macro and micro nutrients of that person’s health goals,” Restom says. As an example, he explained that if someone was on a high protein low carb diet they could swap out rice for cauliflower, or if they’re vegan they could have tempeh instead of beef. “We want to be a premium service and brand,” Restom says. “We don’t want to compete primarily on price.”
In that way Restom hopes to bow out of the cutthroat price wars that started when SpoonRocket entered the SOMA market. At originally $6 a meal, including delivery, it immediately shifted consumer expectation of what the cost of an on-demand meal should be. It commoditized the market. “SpoonRocket changing the price point made [consumers believe], ‘Hey delivery services ought to cost single digits,’ whereas you can hardly find a restaurant in SF that charges less than $12,” Restom explains.
Although cheaper prices are great for consumers, it’s not a good development for the health and sustainability of the sector. These companies are likely operating at a loss on each meal at this point, subsidized by venture capital, hoping to develop efficient enough operations to squeeze a bit more profit from each meal down the line. But they can’t operative on a negative cash flow forever.
It’s interesting because the price wars in the on-demand meal space have happened so quickly. By contrast, in a similar space — ridesharing — it took awhile for UberX and Lyft to start bidding each other down. With Lyft’s new boatload of venture, the two are now locked neck-and-neck in a battle of chicken to see how low they can go. Consumers win, but in the process they get used to far cheaper prices than might be sustainable in the long run for the ridesharing companies.
In the food space, the experience still varies dramatically from company to company. SpoonRocket is by far the fastest and the cheapest, but the food is greasy and low quality. Customers revolted en masse on Yelp when the company raised its prices from $6 to $8, saying, “Food tasted better when it was $2 cheaper.” It showed what a dangerous game it is to play, to get consumers accustomed to one price point only to raise them.
With all this competition in one city, Chefler’s Restom drew another important lesson from the struggles he faced: Screw starting in San Francisco. “Why follow the herd when you could do it in a whole other part of the country where you can hone it and get it right, in a less saturated market, where it isn’t subsidized by VC money,” Restom says. If he and his team raise venture for Chefler’s pivot, they’re going to launch the service in another city, and eventually work their way back to the San Francisco market.
Restom personally invested $35,000 of his own money to launch Chefler, so the struggles of the company hit home for him both financially and emotionally. He says he’s still bullish on startups, but next time he’d be a little more careful about taking the plunge without raising venture. “I think the last startup humbled me,” Restom says. “I don’t love running out of money and having to borrow from family. That sucks.”
He has a lot more admiration for accelerators now and believes that despite their bad rep they’re a far better path to take. They help founders without connections meet the right investors, and they create urgency for closing a funding round with multiple bidders.
“Your identity becomes so entwined with the startup, you think something is wrong with you of it fails,” Restom concludes. “But the truth is, 90 percent of startups fail. It’s part of the process.”
[illustration by Brad Jonas for Pando]