Food Tech Startups Race to Find Their Spouse

Huge national restaurant chains across the United States continue to announce partnerships with food tech startups challenging the American drive-thru model as the easiest, most convenient way for customers to get their food.

Given the significant growth of companies like DoorDash and Postmates (both of which have recently announced national deals with Taco Bell and Chipotle, respectively), it’s clear customers are price insensitive when it comes to convenience. And it’s obvious why these startups are dying to partner with national brands – these brands are the most recognizable and help drive incremental volume through their platform for their other partner restaurants (where they generate greater margin).

However, why are national chains deciding to partner with these relatively unknown food tech startups?

Margins are tight in the restaurant industry and, in theory, any tactic that drives incremental volume in food and beverage sales is a positive. Partnering with these startups is at zero cost to the restaurant; the cost is passed along to the consumer by way of delivery fee (and tip) that DoorDash or Postmates charges, on top of the bill. The restaurant takes zero margin hit while getting the full benefit of the additional volume.

Now there are downsides, the restaurant risks quality control of the food and also insight into the end customer, but ultimately the franchise owners want to increase their revenue in an increasingly competitive, saturated market.

What I think you’ll see next in this segment is similar to the competitive dynamics you’re seeing with Uber and Lyft. It is a race to whoever has the most volume (driver supply). Here it is all about the most (and best) restaurants, but if restaurants start partnering with every food tech startup, it will come down to whatever is cheapest for the consumer.

Assuming these national chains are comfortable assuming the risk that comes with outsourcing delivery, they have no reason not to partner with every food tech startup. Why turn down the incremental volume by being “exclusive” with one partner? As a result, you’ll see plenty of price competition across startups where it will come down to fees.

And while today, I think you’ll see certain restaurants partnering with company A vs. company B, it’s a race to who can sign up the most “Tier I” restaurants and national brands in a given geography as quickly as possible, boxing out the competition. If it turns into a non-exclusive price war, I think startups fighting over the same geographies will run into problems and consolidation in the space will have to occur.

About

Bobby Ocampo

Bobby is a Partner at Revolution Ventures and focuses on identifying, investing in, and helping to build innovative and impactful early-stage companies. Bobby serves or has served on the boards of Booker, HelloWallet (acquired by Morningstar), Homesnap, and OrderUp (acquired by Groupon).

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