Naysayers are casting gloom over the nascent on-demand industry after a spate of startups struggling with provision of services and products as and when desired. Some of them even had to shut up shop. The latest to do so is SpoonRocket, a food-delivery platform, which eventually crossed the great divide after starving for funds. The media frenzy that ensued has termed the phenomenon as an “on-demand apocalypse”.
For the uninitiated, SpoonRocket was another poster child of on-demand economy, having raised USD13.5 million in multiple rounds of funding. Its value proposition was centered around dishing out under-$10 meals in less than 10 minutes. From the business model perspective, it was a full-stack restaurant on the cloud based on the order-cook-deliver model. SpoonRocket would deliver its own cooked meals as against other similar platforms which are just aggregators of existing restaurants.
Failures thus far don’t indicate any systemic fault-lines in the broad On Demand value propositions –
Its a known fact that 8 out of 10 startups fail. Given that On Demand platforms have multiple stakeholders with complicated relationships makes things more difficult. Pre-mature scaling across any of the dimensions – business model, money, customers (supply/demand) or team makes startups unsustainable. Lets quickly analyze the reasons for failure of some of the On Demand startups over the last few years starting with SpoonRocket.
- Virtual Full stack restaurants – SpoonRocket having started out of San Francisco was also the centre stage of food-tech innovation. Infact it was directly competing with the big giants Sprig (which has become the largest restaurant in San Francisco if we go by the number of orders delivered last year) and Munchery among many others.
- Traditional Restaurants – SpoonRocket and other such virtual restaurants directly compete with hundreds of thousands of traditional restaurants. These restaurants generally have their own loyal set of customers in their defined catchment areas. With maturing of online ordering platforms such as Seamless, Delivery Hero, Just Eat, etc. and the advent of ordering + logistics based platforms (bring in extra traffic and also manage their delivery), the barrier to entry for restaurants to start delivering at the doorstep is small.
While the news floating around states that SpoonRocket had just about managed to become operationally breakeven but it is safe to believe that it was too little too late. Food delivery in general is a low margins high volume game. Becoming unit economics positive as soon as possible is absolutely critical. More so, as we are seeing a fundamental shift in how the investors are approaching new investments in the last 1 year.
Here is a quick look at some other on demand startups that have failed in the last 2 years
Clearly, the failures/shut downs don’t point to a specific problem but it’s safe to assume that scaling these platforms is a marathon. Most of the problems stem from a mine field of operational hazards that are associated with offline and online interactions. Unit economics problems might ease as the cost of convenience associated with some of the verticals becomes clearer. Suffices to say that optimizing the number is a critical factor associated with establishing the product market fit.
Related Reading – 11 Uber for X Startups that Failed – are you making the same Mistakes?
On Demand Businesses can be configured in multiple ways – we are still in the experimentation phase –
Going back to the SpoonRocket vs Sprig vs Munchery discussion – while all three of them provide cooked food at the click of a button, a closer look explains the differences.
Sprig – slightly higher prices, higher delivery times
Munchery – cold pre-cooked meals, schedule few hours in advance
Sprig has been focussing a lot of energies on logistics optimization. In addition, slightly higher prices go in its favour given the laser thin margins. Munchery, on the other hand saves a lot on the ability to schedule deliveries and reduced risk of spoilage on supply side. It’s impossible to come to any conclusion on the food quality but clearly it will be a big factor in deciding the LTV of customers and the associated network effects.
ODMS as a business model bridging offline and online is a super set that finds application across business verticals. On Demand platforms come with a promise of doing one thing absolutely right and then scaling it once the right playbook has evolved. Evidently the potential of disruption lies beneath the efficiency with which the existing transactions take place.. But at the end of the day, once at scale, a particular business model’s playbook must be unit profitable. There are some key variables that need to be configured depending on the vertical, geography and existing competition.
Related Reading – Food On Demand : Business Models of Meal Delivery Startups
Enterprises to rely on On Demand Economy for their next phase of growth
Uber Syndrome was a term coined to represent a condition where a competitor with a completely different business model enters and disrupts your industry. According to research, Uber Syndrome is one of the biggest concern among several C-level executives. To leverage the trends that form the core of On Demand Economy’s potential, many enterprise have already taken steps by building, investing acquiring or partnering within the eco-system. Booking.com, Audi, Nordstrom, Macy’s , Expedia, 7-eleven, among many others, have taken some steps in this direction.
Lets look at the underlying trends that’s making existing businesses jump on the On Demand bandwagon.
- Customers expecting an omni-channel treatment and a more efficient, transparent way of accessing the services they want. Platforms like Uber, AirBnB, GlamSquad, Instacart, etc. have been successful in demonstrating to the customers that they just need to click a button to access different services at their doorstep. As long as customers want to get something to eat in 10 minutes there will be platforms who will figure out how to fulfill the need profitably.
- On the supply side as well with more flexible employment models becoming a reality, we are no longer constrained by traditional employment terms. This gives the end service providers a much needed flexibility to connect with multiple employees (important when we talk about hyperlocal). This in a way increases the overall utilization rate.
- But the biggest change is taking place in how we view asset heavy and asset light businesses. Here, once again we are seeing more focus on higher utilization from existing assets rather than continuous focus on creating newer assets. This is associated with a larger shift in competitive advantage from resources to ecosystems.
Existing businesses and enterprises generally have well established demand and supply chains making it easier for them to scale the new initiatives and reach a critical mass. These platforms will co-exist with several entrepreneurial initiatives who have weathered time, figured out the right value propositions for all stakeholders at the right price points. As long as enough customers want something in a particular fashion and are ready to pay a slight premium, someone will devise a business model to serve that customer set. On Demand is here to stay!
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