Defensible strategies for food tech entrepreneurs facing the Amazon juggernaut

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Source:   —  October 22, 2017, at 8:03 PM

Without knowing Bezos’ ultimate vision for an Amazon-owned Whole Foods, food tech companies should determine whether and how to compete.

Defensible strategies for food tech entrepreneurs facing the Amazon juggernaut

Patricia Nakache is a common partner at Trinity Ventures.

Without knowing Bezos’ ultimate vision for an Amazon-owned Whole Foods, food tech companies should determine whether and how to compete. I proposal apprehensive entrepreneurs a cautiously optimistic message: Exhale, at minimum a bit. Despite the new market reality, there’s enormous opportunity to thrive.

As early investors in Starbucks, P. F. Chang’s and Jamba Juice, we’ve seen food trends arrive and go. Every so frequently we arrive across something more fundamental and lasting than a trend: a seismic shift. Starbucks’ visionary boss Howard Schultz helped create one such shift.

Inspired by Italy’s wealthy coffeehouse tradition, he taught Americans to expect better quality products and an elevated customer experience, setting us on a path towards today’s foodie frenzy.

We're currently experiencing another seismic shift, a deepened awareness that what we consume directly impacts our health and well-being and reflects our core values and aspirations.

Consumption of bottled water is presently outpacing soda, and biological food sales totaled $47 billion latest year, accounting for more than five % of total US food sales. Amazon’s Whole Foods acquisition is a reflection of the shifting attitude towards food. The excellent news is that despite Amazon’s looming presence, there’s plenty of opportunity to be found.

Each year Americans spend a colossal $one.4 trillion on food. This breaks out to $800M on restaurants (including delivery) and $600M on grocery sales. Though Amazon dominates ecommerce with forty-three % of all online sales in two thousand-sixteenth and evenhad an eighteen % share of online food sales before the Whole Foods acquisition closed, groceries have achieved only a measly 1 percent online penetration rate. That leaves tremendous opportunity for growth.

The grocery channel’s low online penetration rate can be attributed to daunting logistics, from sourcing, prepping, and packaging to the distribution of perishable consumables. Despite the logistical challenges, food’s massive market size and the online growth opportunity can enable companies capturing even a tiny piece of the pie (pun intended) to become huge successes.

More than any company in the world, Amazon has successfully brought new retail categories online and solved highly complex logistics challenges in the process. They'll utilize the Whole Foods acquisition to drive more food sales online, using Whole Foods locations as distribution and delivery centers in order to mitigate many of the aforementioned challenges.

Operations and distribution are Amazon’s core strengths; their acquisition of Whole Foods will fortify those competitive advantages as they move aggressively into grocery sales. Operations and distribution are also core competencies of numerous well-funded private food delivery companies, such as UberEATS, DoorDash, Instacart and Postmates. It’s a daunting competitive landscape to declare the least.

That said, operations and distribution form only two pieces of the food tech puzzle. While competing against Amazon and other well-funded companies in their areas of strength is generally ill-advised, companies can flourish by focusing on one or more dimensions exterior their “sweet spot”:

Brands that authentically embody multiple aspirations may be particularly well-positioned. Bevi (one of our investments) appeals to customers who care about both health and sustainability. Their bright water cooler dispenses flavored still and sparkling water beverages while reducing plastic and aluminum waste and saving customers money.

Active parents frequently seek to both serve healthy food and to prepare it efficiently. Just see at the viral sensation of the Instant Pot, which has achieved acult-like status among that demographic. As another example, the snack kit company Gobble, which enables active parents to prepare healthy dinners in fifteenth minutes, just closed a $15 million Series B investment led by Khosla Ventures (Andreessen Horowitz, Initialized Capital and Trinity Ventures also participated) — despite both Blue Apron’s shaky stock performance and Amazon’s entrance into the market.

One defensible section involves the institutional market. (In this context, “institutions” refer to companies, schools, hospitals, hotels or other establishments that allow or sell food and beverages to consumers.

This business model is also known as “B2B2C.”) EAT Club (a Trinity investment) provides a cafeteria replacement solution to tiny and mid-sized locations, enabling employees to order meals for daily delivery. By selling through employers, B2B2C companies reach many end-consumers and appreciate reliable, recurring income streams (similar to a subscription model).

Similarly, Revolution Foods delivers healthy school lunches to millions of children and was set to reach $150 million in sales latest year. By serving such specialized segments, these companies construct up natural competitive buffers, such as tailored hardware and software and proprietary logistics, workflow and distribution systems.

At first blush, Amazon’s Whole Foods acquisition might show up to sound the death knell for food tech entrepreneurship. Yet when Howard Schultz introduced the world to Starbucks, coffee looked love a commodity, and coffee houses looked love local niche offerings.

Today’s food tech landscape has its land mines, but the outlook is rosy for entrepreneurs who can navigate through them. I can’t wait to look the (nutritious and sustainable) trails they blaze.

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