Once the initial euphoria around customer acceptance subsides,
startups are faced with the inevitable challenge of scaling up. While
stability in operations is imperative, it’s proven that sustainable
businesses are the ones that have managed to timely scale up while
remaining profitable. Scaling up is a necessity because of the
requirement of the business model, or to keep up with competition.
However, there have been some who chose to focus on process improvements
rather than scaling up.
The foodtech sector is a perfect example of this. This sector has
been losing its sheen in the investor community over the past few
months, despite the initial surge of interest. News of of setbacks like
Tiny Owl scaling down its operations in four cities, Zomato firing 300 sales employees, SpoonJoy shutting
down and then being acquired by with Grofers – these are just a few
instances of trouble in the foodtech sector. Market feedback suggests
that these businesses were running so much after numbers that they
compromised on services, and failed to sustain the exponential growth. YourStory takes a close look at the operations of two
foodtech startups that have followed very different trajectories to
understand what went right and what wrong with their strategies.
However, we would like to also point out that this is not an exhaustive
study and the learning might not be applicable to everyone.
“Chefs Only” was a Mumbai based food distribution startup, which
started operations in July 2014 and closed down in December of the same
year. Started by three MISB Bocconi graduates, it followed the home
cooked meal distribution model. The business witnessed a dip in turnover
and profits resulting in eventual loss of faith by investors who
provided seed money. Chefs Only’s financials in 2014; Source: Chefs Only
Gaurav Bhandari, CFO of Chefs Only, says:
We admit that we underestimated the immediate need of a
website and investments in social media marketing to increase the
customer base.
Looking at numbers and based on discussion with management we gather:
Overheads remained out of control during the entire course of
operation. The startup, which had gathered a small customer base, was
focussing excessively on improving the quality of food.
Concurrently, investments in technology (website, and mobile
application) were put on the back burner and they failed to acquire
newer customers.
Over time, the unit economics failed to add up and investments dried up.
Ultimately, Chefs Only lost out to competition by failing to
scale up. Though it grew initially, the number of orders served
stagnated at 500 orders in September, increased marginally to 541 in
October and then dipped eventually. “The gap between the overheads and
revenues could not be narrowed over five months of operations, making
the business non sustainable,” says Gaurav.
While running too fast comes with its own risks, stagnation
and deceleration can also push one out of the race. It’s important for
businesses to understand how revenues can be predictably generated and
sustained at the right times, as fixed overhead costs are static.
The bigger question is how to optimise overheads while scaling up.
Fixed overheads are costs incurred irrespective of turnover such as rent
for office space. Therefore, startups need to keep scaling up so as to
reduce fixed costs as a percentage of sales.
In contrast to Chefs Only, Consegna Services, based out of Gurgaon
chose to scale up operations. Founded by IIM alumni, Consegna became
operational in 2014 with the launch of professional food delivery
services (including various value added services) for premium and
mid-premium restaurants. From 30 orders per day in Q2 2015 in Gurgaon,
Consegna clocked 150-200 orders/day on an average in Q4 2015 from 12
hubs in Gurgaon and Delhi. “This growth has been attained by calibrated
expansion and providing personalised services to customers to increase
frequency of orders from every restaurant,” says founder Amandeep Kaur,
an IIM-K alumnus. They are growing 9.5 per cent week on week, and more
importantly, covering over 80 per cent of delivery operation expenses
and over 60 per cent of total business expenses, as confirmed by the
management.
The revenue growth has assisted in keeping the fixed overheads regulated. Consegna’s revenue vs fixed costs; Source: Consegna
For any newly started business, regulating the overheads and
sustaining unit economies is vital before leapfrogging to the next
level. In case of Consegna, from Q1FY15 to Q4 FY16, the fixed expenses
taken as a percentage of sales have only trended downwards. The
management says this was achieved by:
Steadily increasing the topline by leveraging existing customer relationships;
Expanding in Delhi and Noida in less than two years; and
Minimal incremental technology investment to support the increase in customer base as the product was already well-developed.
Consegna’s rentals and fixed costs as percentage of sales; Source: Consegna
Consegna says that businesses must control overheads from inception. Amandeep states:
Our focus has always been to build a profitable and
sustainable model. From day one, we have focused on unit economics and
controlling overheads. While we are inching towards operational
profitability, our target in the next six months is to be profitable on
an overall basis, even after considering all overheads. Hence it becomes
very important to closely monitor costs and minimize them, without
adversely affecting the business.
Clearly if it’s a consumer-facing business whose success is
predicated on scale, scaling up is imperative. While the importance of
continuous innovation for process improvements cannot be denied,
management needs to stay alert and keep up with competition and scale up
while keeping costs in control.
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