Online Restaurant – Difficult Problem to Solve!

Last week we had news of SpoonJoy shutting down operations in parts and also of Dazo (Tapcibo earlier) shutting down its operations due to lack of ability to make a profitable business.

Having closely been observing Food/Restaurant industry during the last 5 years in Bangalore ( <Starting a restaurant >) and also deeply involved in starting up an online food delivery startup around 7-8 months back for a friend. I think I am qualified enough to comment on the major problems which need to be solved by having a successful Online Restaurant and why it is not very different from running a typical restaurant.

Online Restaurant – Great Food + Convenience 

The online restaurant though seems like a novelty it is still essentially a restaurant which is driven by the quality of food and then followed by timely delivery, payment options, mobile apps etc. So it is still a food play where you need to be able to convince the customer to order your food as frequently as possible (ideally daily, but we will come to that later). The solution and the odds of getting this mix right is the same as you would have in a traditional restaurant, but we will talk more about that later.

The second part of the online restaurant is the convenience of delivering food to the customer. We are facilitating and adding a convenience to the user by delivering food to him.

Problems to be solved: Delivery

As mentioned earlier the big draw of the ‘online restaurant’ is the amount saved in real estate costs. But what is saved in real estate will come back to haunt in terms of delivery boys. The biggest problem of food delivery startups is that while they need to pay for the delivery boys salary (12k-15k) they have only a small window of time to use them. Let me explain, most of the food delivery would be restricted to 12:00 – 2 pm time window and 7:00 to 10:00 pm window in the evening. A typical delivery takes 25-30 mins (even Domino’s guys tell us that this is best they have been able to achieve). Thus in each delivery boy can make a maximum of 8-10 deliveries (let’s take 10) per day but his monthly cost is 12k (least), thus each delivery would cost Rs 40 !. This means that if you have to deliver food daily to a consumer and hope to have him order daily we need to have food cost at Rs 60 and then factor in Rs 40 towards delivery to make it Rs 100/meal.  This is quite a challenge as you need to address other costs which I will explain in my next section apart from just food cost. According to me with such high costs of delivery, only gourmet food which has larger margins can sustain or you have to find a way to cut the delivery costs.

  • FreshMenu has taken the route of Gourmet food by charging a premium so that they can easily absorb delivery costs.
  • NutriTown has done a bit of both by going on the platform of health foods and having a semi-premium service along with a subscription. Subscription service allows them to deliver 20 food packets in 2 hours due to better route planning.

The reason for SpoonJoy, Dazo etc to close down lies here, cost of delivery is way too much for their price of food costing ~ 100 Rs per meal.

Problems to be solved: Food

The second end of the problem is the ability to create food choices which encourage users to order your food as frequently as possible. Many entrepreneurs in this section believed that the lure of the online restaurant is because we can get the user to order food more frequently due to the convenience factor of delivery. This is quite a challenging affair because the only food which you would not mind eating regularly is your own home cooked food, else with a restaurant food you tend to get bored with the same flavouring and cooking style. Thus even if you make fantastic food in your central kitchen the user is going to get bored soon and is less likely to order the same kind of food. To solve these many online restaurants tried to increase their inventory by having many types of offerings which left them handling unsold inventory at the end of the day thus eating into their already precarious position in terms of margins.

According to me one way of solving this issue of boredom of food would be to get homemade food made by entrepreneurs in their own homes and then serve them to people. But this has its own problems of scalability as sourcing of food becomes a challenge. So solving the food problem by trying to be a replacement for daily food is quite challenging. The other route would be going the Gourmet route which means serve specialized food at premium prices which is the route which FreshMenu has taken and been happy with being ordered once in a while.

Problems to be solved: Packaging

The 3 rd problem which needs to be solved is that of packaging. The typical packaging used for serving a meal costs ~ 20 Rs , but even with this high expenses, one is not able to serve the food to the user so that it is hot after he/she receives it at his place. The warmth of food is something which we have always associated with fresh food and we often make a fuss at restaurants if the food is not warm.  Thus even after accounting for costs of 20 Rs towards packaging it still close to what a restaurant serves you because it is not warm.  Many online restaurants have gone the route of offering microwavable food packaging which adds to the cost of the packaging as microwaveable packaging is more expensive. Despite attempts by many startups we are yet to see a solution which makes a cost-effective way of packaging while keeping the food warm.

Solutions?  – Possible ways to solve them.

The above are all the problems which need to be solved? But what could be the solution to this?  I believe that there are many ways to solve this problem, a couple which spring to my mind.

  1. Go the premium way (Rs 150+) in offering and then get entrepreneurs(housewives/chefs) to make Gourmet foods to offer a decent variety every day. By going premium, we can tackle the high cost of delivery and packaging and be getting housewives/chefs into the mix addresses the boredom part of the mix. Would like to mention that InnerChef is using this route by having entrepreneurs to make gourmet offerings.
  2. The second approach would be to offer a niche product which enables the user to sign up for a subscription to a unique product. The niche offering is something for which the user yearns for and values so much that he/she is willing to subscribe to this by paying in advance comes to mind as it offers healthy food for diet conscious people looking to weight. I think there is scope for offering regional specific food which people would yearn (Bihari/Oriya).

Do leave your comments below if you think  I  have missed some aspect of this problem. The above article is a summary of findings during the creation of the food startup and wanted to share this because many of my friends are still evaluating to start a restaurant or getting into it. In the last couple of months have got calls from 4-5 friends regarding the same hence this article to help them.

PS: This article was written in 2015 when I was contemplating to open an Online Food Delivery startup.

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