Pando

I wondered why grocery stores hadn’t taken on Blue Apron. Perhaps because they hadn’t met Gerry Hays

By Sarah Lacy , written on March 2, 2016

From The Disruption Desk

“We’ve done a lot of focus groups around fried chicken.”

That’s a line you don’t hear tech entrepreneurs utter every day. Even amid a wild frenzy of funding in the glutted “solving dinner” category that includes meal prep services like Blue Apron, pre-made services like Munchery, and delivery companies like GrubHub, Postmates, DoorDash, and UberEats.

But Gerry Hays, founder of DinnerCall, knows fried chicken. He knows fried chicken better than I do, and I grew up in the South. He may even know fried chicken better than the Colonel, rest his animated Confederate soul.

Hays came from a long line of food distributors and, in 2004, his brother saw an opportunity to make and distribute their own product to grocery stores instead. To disrupt the people their dad used to distribute. Their killer app of the grocery store deli counter? Fried freaking chicken.

More on that in a second. Point being, Hays knows how to sell to grocery store deli counters. He knows their typical staff, the hours the manager works, what kind of equipment they have, what sells, and how expensive it is to make.

I found myself talking chicken with Hays, because a few weeks ago I wrote a story asking why Whole Foods-- a company that desperately needs a new growth area-- didn’t just take on the Blue Apron/ Munchery business model with way better assets, efficiencies, and inventory already on hand. In theory, I wrote, it could be the same business but without any of the inventory and spoilage risk because the grocery store already has 70,000 SKUs to work with and commercial grade kitchens. Most already make pre-made meals from this inventory or pre-marinated meats, sold in deli counters. And many, like Safeway, already have their own delivery arms, or relationships with Instacart.

It makes total sense on paper. But even at the time I wrote the piece, even I wondered if the two worlds-- glitzy on demand apps and slow moving grocery stores-- could actually work as one service. Is a Whole Foods really going to build this out in house and write good software? Would an acquired meal prep startup understand the cost pressures and scale of a legacy grocery business? Who could actually pull this off?

And then I spoke to Hays. A guy who knows not only fried chicken but knows grocery stores.  A guy who has been working on this exact problem for two years, burning through some $1 million of his own and friends and family’s cash to get there. A guy who is launching a service doing exactly this in a four-store pilot later this month.

A guy who actually could do it.

This guy. The fried chicken guy.

BROCK! BROCK!

“The grocery store economics of fried chicken is a really long, involved story,” Hays sighs, sensing he’s made a mistake by bringing up the whole fried chicken thing. I assure him, I’ve got the time.

It goes something like this. Back in the 1980s, Tyson went around to grocery stores making a pitch: Fried chicken is really messy and annoying. Why don’t you take our pre-breaded pieces, throw ‘em in a fryer for 23 minutes and sell ‘em in your deli counter at a nice mark up? “Sold,” said pretty much every regional chain.

It worked great until Wal-Mart had the same idea. And, being Wal-Mart, it astoundingly slashed the price. An 8 piece of fried chicken was $3.99 at Wal-Mart versus $7.99 at grocery stores, Hays says. We are talking about the exact same product just tossed into different identical fryers around the country. Grocery stores couldn’t compete.

Hays and his brother sensed an opening. They started doing research on fried chicken, doing focus groups, even publishing white papers on the topic. Better, double-breaded, freshly-prepared fried chicken would justify the stores’ higher prices. They knew it. “People love fried chicken,” Hays says. “Grocery stores are not gonna compete on hamburgers or pizza, but you can win against KFC. Focus group after focus group showed us that.”

They finally got one small chain to bite (har): And the Hays bros. fried chicken-- which went by the folksy name Charley Biggs Chicken N’ Sauce-- took that chain’s chicken sales from $2.3 million a year to $12 million a year. Word got around. Grocery chains were suddenly welcoming the Hays bro.s in with open arms. Private equity shops who were rolling up small grocery chains would say to new acquisitions: “Make sure you take that chicken program over there,” Hays says.

Charley Biggs Chicken N’ Sauce (slogan: Kickin’ it up!)  was on a role, helmed by its folksy/macho mascot who looked like a mix between Johnny Bravo and Poochie:

Charley Biggs' chicken is sold in 3,000 grocery stores across the country. This is what VCs like to call “a nice little business.” But Hays hadn’t wanted any part of his dad’s food distribution business, and he still had aspirations to do something more than a “nice little business” going back to early forays into tech during the dot com bubble. At heart, he was a tech guy not a chicken guy. And by 2008, he had an idea to do more than just chicken in grocery stores.

MORE THAN TWENTY ENTRANTS TRYING TO SOLVE DINNER, NONE FULLY DOING IT

Before we continue with Hays story, a word about why there’s still opportunity in a market that looks like this...

… and yet only has one public company in GrubHub and only one private unicorn in Blue Apron.

The problem isn’t that dinner isn’t a huge opportunity, it’s that it’s almost too big and too many of these solutions don’t really solve it, or only solve it for some people for a period of time. The non-demand companies like Plated and Blue Apron require advance planning… and all too often throwing away ingredients because you didn’t pause your subscription before a busy week.

As anyone who’s used these services: Meal kits go from fun to a sisyphean chore pretty quickly. I don’t have a bad word to say about Blue Apron’s recipes or the resulting food. It’s absolutely foolproof and some of the best stuff to come out of my kitchen. And yet in a matter of months the boxes went from mini-Christmas to “Oh god, what version of pan seared salmon did they send this week?” and “How much cauliflower do I need to grate now?” Watching Blue Apron’s beautifully produced new commercials, I didn’t get hungry. I got PTSD dinner prep flashbacks.  

While these services all say “cancel any time!” in reality cancelling any of these services requires a full-on scavenger hunt around the site just to find the right link, and frequently follow up emails after the fact. Several times we’ve mysteriously had meals show up again even after we thought we’d cancelled. No doubt, it’s because churn at many of these companies has to be out of control.

There’s no way to pick your favorite meals to enjoy again and limited ways to customize your order. And yet there’s a feeling of repetition because so many of the recipes seem similar: A slightly different bavette steak with a different green vegetable, a slightly different seared chicken with a slightly different Asian-inspired pan sauce. In short, the services are just too restrictive to please a wide population as an on-going, three-times-a-week dinner solution.

I recently spoke at an ecommerce conference called eTail West where I talked about the limitations of the on demand and non-demand food world. Afterwards, one of the founders of PeachDish approached me and said I was dead right about the space-- his space. While he says PeachDish enjoys a nice fan base, he agreed that there simply was a limited number of people who wanted to cook three times a week, and that he was relieved they hadn’t capitalized his entrant with huge amounts of venture capital expecting unsustainable volumes. He, too, expected grocery stores to be the ones to take these services truly mainstream, if anyone could.

The subscription-free Munchery is great in a pinch and is at least on demand, but there’s not enough variety. Postmates and DoorDash are expensive, and Grubhub is limited in the number of restaurants it delivers from.

And none of the options are particularly healthy or low calorie. Average calories per portion are a whopping 700 calories and up. Add a glass of wine and you’re pushing half of what the government recommends you consume in a day in one meal. We tested these services for a few months and -- no joke-- I gained 15 pounds.

So here we are in 2016 with hundreds of millions invested, venture capital constricting, and the dinner problem still isn’t solved.

Grocery stores on the other hand have tens of thousands of SKUs to make meal kits, restaurant quality commercial kitchens, and need additional revenue opportunities. But grocery stores hardly want to be in the app business.

Hays first started thinking about this in 2008. He saw the challenges grocery stores were facing from the inside, the potential of the iPhone to change consumer behavior, the increasing prevalence of SMS, and knew there was an opportunity for grocery stores to do more in prepared foods. He did a focus group. It was way too early. So he went back to fried chicken and waited.

But he couldn’t shake it. “40% of the population doesn’t know what they are going to have for dinner by 4 pm everyday,” Hays says. “Start with that. There’s a reason that fast food is a $100 billion a year dinner market. There is a default switch that gets hit.”

In 2011 he examined the idea again. It was still way too early.

Then, finally in 2014 he determined the time was right. Charley Biggs was a nice little business that didn’t need Hays anymore and he was bored with it. So he made his brother a deal. “This company has reached a point where it doesn’t need me,” he told him. “I want to go build DinnerCall. You’ll have enough equity that if I kill it, you’ll never have to worry about money for the rest of your life. If I don’t, you have to make sure I get my mortgage paid.”

EITHER THE BEST POSSIBLE TIMING OR THE WORST POSSIBLE TIMING

The bad news is: Look at that infographic above. Everyone determined the same thing about the meal kit/prepared meal business at the time Hays got going. And Valley and New York companies flush with venture capital move a lot faster. As we wrote about Uber-challenger Juno a few weeks ago, this is either the best or worst time for a new entry in these over-funded, (n)on demand markets.

It could be the worst because everyone else meaningful has a lead and raised mega-cash when the venture spigot was fully on. It could be the best because those unit economics haven’t worked, and late stage rounds at high prices are a lot harder to raise this year than last year. If a company like DinnerCall can look at a market with fresh eyes and can build something that isn’t based on burning a Series A a month, something that prioritizes revenues early on, it could still find an entry.

And Hays has certainly gone at this from a different direction. For one thing he’s not starting on the coasts. He’s piloting the service in Indiana and Tennessee. And he’s targeting suburbs and families, not hip, young urbanites with plenty of disposable income.

Hays isn’t a rube. He had experience from the late 1990s as a tech entrepreneur and is a professor of entrepreneurship at IU Kelley School of Business. But he isn’t a Y-Combinator style founder who moves fast and breaks things. He builds first. He tests. He sells. This man loves focus groups. He wants to prove something works before he pitches VCs. He doesn’t want to be embarrassed by his first product.

Over the past two years, he has scraped together $1 million between himself, his small seed capital fund Slane Capital, and friends and family. He and a team of five have built out their Android and iOS apps, and written hundreds of thousands of lines of code for in grocery store software. They’ve done focus groups, and they’ve laid the foundation for future deals should the pilots go well.

But while all of this may seem like a very un-Silicon Valley approach, in a sense his product should appeal more to tech investors. He’s 100% relying on software. “For the unit economics to work, we have to keep this at fast food prices and that means we can’t put people in the stores,” he says.

Imagine! Unit economics in the on demand economy that work! No risk of unions and angry workers! It’s an actual tech company.

But there’s a reason most on demand companies throw low-income workers at the problem. it’s a lot for software to do. Deli managers typically work a shift from 7 am to 3:30 pm, and that leaves high school educated part-timers mostly working in the deli during the DinnerCall’s rush.

So Hays built a system where the manager says in the morning what meals they have available and how many and then the last thing he does before leaving is check all the orders coming in and make sure there’s a simple production schedule to “kit these meals up.” When the customer arrives they push a button and the deli staff is alerted and walks the meal or kit out to the car.

“This is not shopping cart software we’ve built,” Hays says. “This is demand aggregation software. The grocery store may say they are only going to make twenty meals today and once that inventory is gone it’s gone. They aren’t putting something on there they can’t fulfill.”

In addition, it’ll track every meal that’s “kitted” and provide analytics to see what meals sell better on Tuesdays versus Wednesdays, even cross-pollinating meal ideas across chains, Hays says.

In theory it’s all upside for grocery stores. It’s additional income, with no inventory risk. The stores have everything to make the dinner kits in house already, and it knows by 3 pm-- when the manager leaves-- how many it’s sold and needs to assemble during a normal afternoon lull.

He’s aiming the service initially at families, who typically don’t head to a grocery store when they need to solve a last minute dinner problem. “When you walk into a grocery store at 6 p.m., you don’t see a lot of families,” Hays says. “You see a lot of adults, and singles and couples. Families are running from activity to activity. They don’t know what to do for dinner and don’t want to cook. What’s available is fast food or pizza.” That means in theory, DinnerCall is incremental income for the stores.

“There is so much competition in urban areas,” Hays says. “In a suburb your choices are limited. You can only eat at Jimmy Johns and Chick-Fil-A so many times.”

Urbanites may sniff at the idea of a food app that is merely walked out to your car, not delivered your front door. But suburban families operate differently. They are already doing school and soccer pickups, so the kids are already loaded in. As a divorced mother of two let me assure you: There is a big difference between driving to a store and getting your kids in and out of cars seats, through grocery aisles, and successfully through a check-out line without candy.

Hays expects the meals to be comfort food like rotisserie chicken, fried chicken, ribs, pork tenderloin, and lasagna, paired with fresh bread, salads and vegetables. Not exactly healthy fare and not as gourmet leaning as a Blue Apron. But better quality than fast food. Hays expects the price to be about $21 to $24 a family, cheaper than most meal kit and prepared meal services. That’s also cheaper than feeding the family at Chipotle and other higher-end fast food chains.

Because the company hasn’t raised a venture round, everything hinges on how these pilots in Indiana and Tennessee go in the next few months, Hays says. He’s spoken with other chains who are watching it closely and hopes to be in more discussions this summer.

Then-- if all goes well-- Hays will look to raising more traditional venture capital, even moving his family out to the Bay Area for a month to test the waters of relocating here.

“We’ll see whether this is a tremendous opportunity or a dog,” he says. “I’m from the Mid-West. We grind away. If our grocery stores are doing well, we will land chains. If our grocery stories aren’t making money, what’s the point?”

That, too, is not something you hear in the Valley everyday.