One of my favorite maxims is the one preached by Ray Dalio, the legendary investor. Here is how it goes (roughly ):
Source: Ray Dalio’s Principles
What it basically means is, the only way to gain extraordinarily (with some probability greater than zero) is to follow paths untrodden, paths that everyone rejected and no one agrees with. None of us have any idea whether a decision will turn out to be right or wrong?—?it’s usually hindsight. But we can easily see, before taking a decision, whether what we are doing has been done before or not, whether people agree with it or not. If it has been done before and / or is favored by all and sundry, then there is no extraordinary return waiting for you, when the decision will have played out, irrespective of it being “right” or “wrong”.
Today, I can say that we lived up to this maxim at Faasos throughout our 6 year journey. Of course, many decisions fell into the “wrong” column ( in fact, most of them), but because we have always been the contrarians, there have been some decisions, which led to extraordinary turns of fortune for us. Below, I have tried to capture the essence of our contrarian and globally unique approach to food tech and share some of the early results we are witnessing. Of course, this is no guarantee that we will have our place in the sun?—?we are just getting started?—?but, these days I go to sleep with a sense of pride and excitement about what we are building at Faasos.
At a very fundamental level, the role of Internet in Consumer Products is three-fold:
1) greater customer experience
2) easier scaling
3) lower Cost / better economics
This is what has happened at global scale in every consumer category?—?books, fashion, electronics, travel, grocery, almost everything. Amazon and copycats around the world nailed it over the last 25 years of internet/mobility. The only category that remained largely unaffected is Food & Beverage (F&B). We dont have Amazon like global or national successes (yet) in Food. However, not withstanding the bloodbath called Foodtech, a few companies world-wide, including a few here in India, are doing some extra-ordinary work and I am sure the last frontier of Internet will be conquered soon.
There are two distinct models that are prevalent today. The first one is at the “delivery” and “ordering / aggregation” end of the spectrum. A number of companies are taking a crack at it, and I must say, even if the economics is still evolving, their efforts have transformed “food-delivery”, expanded the market tremendously and raised the bar on customer experience manifold. This has been transformative. Also, a few of them have started to think differently to make the economics work in aggregation and delivery. And there could be some extraordinary gains for the ones that are diverging and charting their own path. As a second model, some companies went the cloud kitchen route, which primarily works on the cost structure side of the business, but most US ones have not been able to scale the business at all, and some of them folded up under the gigantic pressure of “inventory” and “wastage”.
We followed a completely different path from anyone in the business. Because, we realized (the very hard way) that F&B is the most unique among all consumer goods and the structure of this 450+ year old industry (First Restaurant in history) offers some incredibly interesting problems to solve.
Now, why is Food (F&B) unique? I (and my co-conspirators at Faasos) think (mostly as a result of numerous challenges we faced / failings we experienced over the years and not some early morning epiphany), there are largely 3 areas of unique issues / opportunities in F&B vis-a-vis most other consumer product categories:
In consumer goods retail, the only intermediate cost to add a brand is shelf space. In F&B, the incremental cost of aggregating different brands would be much more (equipment purchase, kitchen space, training, etc.). Data-wise, Walmart SG&A: 21%, Gross Margin: 30%, while McDonald’s SG&A: 51%, GM 75% ( 2016 annual reports). This basically means, in an off-line world, you could utilize space related costs (e.g. rentals etc) super-efficiently if you are running a retail store, while adding another F&B brand in the same location ( Say a Dominos into a McDonalds real estate) would cost a whole lot of additional SG&A (basically fixed costs).
But one may ask, why do you have to put up a new kitchen space and get more people. Why can’t the same kitchen be used to run different brands and have tremendous SG&A synergy? Here comes the customer perception issue. In most consumer goods, variety enhanced customer experience. But, not in F&B. In everything apart from Food, brands / products and retail space are distinct in customers mind, and hence, variety of offerings delights the customer. In F&B, since brand and retail space are inseparable in customer’s mind, same physical space can’t claim expertise of different cuisines. That’s why you dont have “multi-cuisine” world famous restaurants. You dont expect a Pizza Maker to produce the Best Biryanis, and a burger chain to make extra-ordinary salads. Even your famous local eateries are known for one thing or the other. Do you really think McDonalds dont have / cant buy the expertise of making world class pizzas or burritos and “stick both in” within their current outlets ( they in fact used to own Chipotle for years)? Yum Brands own all of KFC, Pizza Hut, Taco Bell etc, but each one of these brands has totally separate outlets, supply chain and even, management. Its not about real expertise. Its about customer perception.
Also, unlike Consumer Retail, where you expect to see premium brands co-existing with “cheap” ones in the next aisle (or lower down the self), a restaurant is either “Fine Dine” (meaning you will spend about 100$ to remain hungry) or “Value”, or “fast casual” or something in between, with no two of them sharing the same space.
This is opportunity number one. It is the first structural issue that Internet can solve. How super cool will it be if a company has the margin of F&B and SG&A of a retailer?
SKUs / brands could be easily replaced / optimized / overhauled in retail. Non-performing ones are phased out routinely, to be replaced by better / more relevant brands / products. On the other hand, once established, it is very difficult and costly to change the brand / offering of an F&B outlet. This is what we call “tyranny of location”. You spend millions to put up that dream restaurant of your life, only to realize you did your highest volume on day 1 and its all downhill from there (happened with us). In consumer goods retail, you can change the products overnight, but your restaurant is stuck with the name and the cuisine expertise that you claimed in the beginning (even if, for some reason within or beyond your control, it did not work out). And to change all of that, you have to find a second “life’s savings”. There have been many instances where someone put up, say, a terrific “fish and chips” restaurant, only to find after a year or so, that people in the vicinity have now moved on to salads. About 6o% of new restaurants close in 12 months of opening (and 80% before the 5th anniversary) because of this inflexible / committed cost issue.
This is opportunity number two for the internet. Getting rid of the “tyranny of location” and removing the monstrosity of “committed costs”.
You don’t say “the guy at the end of the street makes the best computer. mobile phone or shoe in the world”. But, You routinely say “that Mexican hole-in-the-wall place makes the best tacos ever”. That’s because Food is the most differentiated, most personal, most emotional of everything out there (barring your life partner). If someone makes a terrific muffin or a great kebab, everyone around notices irrespective of how many locations the maker has. In fact, the most endearing brands in Food are small and local. You just have to make great food (and not be an asshole, no, sorry, thats not correct— even assholes are accepted if they create great food). Not true for most other things in life.
This is opportunity number three for the internet, and in my mind, the most exciting. Internet should bring the ability to build small, delightful local brands at scale ( a bit oxymoronic, I must say) and keep the same location growing for ever. Stagnation, a century old problem with Food outlets, can be taken out of the equation.
3–4 years into our business, these realizations started to dawn on us. We also started realizing that we had built a few unique capabilities that could really exploit /solve the above opportunities / problems. These were,
a) We knew food. We knew how to create and scale delightful food across cuisines.
b) We knew distribution, kitchen and last mile, as by that time we had cracked a fairly robust supply chain with about 50 stores / kitchens and last-mile delivery network at the end of it across top 5 cities in India.
c) We had built the tech for a “delivery-only” play ground up?—?from material movement to kitchen management to order processing to delivery management to customer facing apps/websites, all riding on one tech platform built by our engineers.
So, about 18 months back we started our journey to address the above issues / opportunities at their core. We did not go the “delivery / ordering / aggregating / QSR / Single brand cloud kitchen” route. Even now, when people ask us “What are you? are you like Grubhub / Zomato / Doordash / Swiggy / Mcdonalds / Dominos / Munchery/ Sprig?”, it makes us happy that we are like none of the above and that itself means we have a solid chance at glory, irrespective of the outcome?—?not certainty, but at least a chance, based on the Dalio principle.
Here is what we did (not at one go, but slowly, deliberately, stealthily, with numerous iterations), riding on the platform we already had—
a) Expanded our network to 100+ MIKs (Multipurpose Invisible Kitchens) across 12 cities in India ( the Faasos outlets you see are not these, and we are gradually shifting all of our outlets to MIKs). Each of these kitchens are truly multipurpose and infra-wise capable of making great products from wraps to biryanis, from burritos to pizzas, from kebabs to salads. They are far from the high rental high streets; they are usually on the back alley without any expensive signage and hence “invisible”. And yes, you can not walk up to one of them and ask for some takeaway. It’s all delivery.
b) Building upon the supply chain we had, established a India wide logistics platform to move raw materials / ingredients across cuisines, working with our partners.
c) Now that we had the proverbial “pipe” getting ready, over the last 12 months, we built a number of brands in different cuisines (in addition to Faasos )— Biryani, Pizza, World Cuisine, Bakes, Chinese, beverages, desserts?—?riding on this “Network of MIKs and Supply Chain”.
d) and finally, we opened up all delivery ordering channels for each of the brands – our own channels, namely brand apps/websites, Swiggy, Zomato and Foodpanda.
This is how our business looks today (bad graphics):
Faasos Food Services Pvt Ltd. Operations
Now, how does it help address the issues / opportunities I described above? Here is how:
1. From the same SG&A base ( rentals, space, equipment, supply chain, people), we can now operate multiple brands without adding capex or opex for each additional brand. Just a small example of what happened because of this: in F&B, the usual rent / sales ratio is 10–25%, with the delivery businesses (such as Dominos) operating at the lower end of this spectrum. For us it’s <5%, while we have tremendous headroom to grow our sales/MIK by a factor of 5 in the next decade or so. We expect our rent to be around 1–2 % of our sales over time. How can we do it? Since our MIKs are invisible?—?customers have no association of space with brands / products we launch. Hence, our space is not tied to a brand or a line of cuisine. This enables us to offer a great variety of products to our customers?—?from Haleem during EID to Navaratra Thali to Belgian Chocolate Cake during Christmas to Fasting menu during Shravan to Smoked Chicken Roast on New year’s eve. And I must say, this has been a game changer for us. Most F&B companies dread the festivals of India because of dropped sales ( Christmas and New Year are exceptions), but nowadays, we truly enjoy them :). With 60%+ gross margin on food, we can now dream of an F&B GM and a Retail SG&A. That's the power of internet
2. We no longer have any “tyranny of location”, as there is no committed cost for us. We dont fret about losing the capital on account of a bad location. It does not matter where our kitchen is located?—?they could be on the second floor of a nondescript building at the back alley. The catchment matters, not the exact location. It will not matter if there is footfall or not ( in fact, less footfall the better, as it keeps the rent low). It will not matter if there is a new super-mall coming in the vicinity, which will take away all the traffic, or a flyover being built in front that building. We are pretty settled in there for the next couple of decades or so (there is no mad-rush for renting that property, anyway), without worrying about “what if we got the location wrong”. Once established, we can run whatever brands we want and whatever products we want to cook, from the same place. We focus on the brands and dishes. For the brands we launched in the last 12 months, we had many others experimented out, without incurring any costly investment / marketing costs. If we love something coming out of our Product Development Center (basically the bastion of our extremely talented team of chefs) in Mumbai, we launch it in a couple of locations ( remember, we dont have to create marketing collaterals, signages, posters or anything?—?we just make it live on channels), see whether customers like it or not, see if it makes economic sense, and then decide whether to scale. Hence, in some sense, we have become like a consumer goods retailer, where we can optimize our products and brands very very quickly before spending any money, or redoing the location in any sense or manner. If something works, great. If not, great too, because we did not spend any money before knowing it would not work.
3. As I said earlier, the last one is actually the most exciting (and powerful) for us?—?small is as good as big, when it comes to food. We always loved food (to the extent that our first store came up, because we wanted the chef to cook us a different wrap every day), we started the business because of that in the first place?—?not because we were brilliant technologists out to solve consumer internet’s last remaining problem. Now, finally, we have the freedom to create absolutely delightful, unique, memorable food. We dont have to worry about scaling unnecessarily?—?some of our brands will be one location, some city-wide, some pan-India, and, hopefully one day, some global. We can now go to every part of this wonderfully food-centric country ( and beyond), find brilliant recipes and dishes, recreate them and bring them to our customers. In the last 18 months, we launched 500+ dishes (under different and relevant brands)?—?from Nasi Goreng to Dum Gosht Biryani to Gado Gado to Pistou Grilled Chicken, Fritters El Mexicana, American Sausage Wraps, Turkish Shishtouk Salad, Rajasthani Hare Tamatar ki subzi, Kashmiri Paneer Chaman and hundreds of others. Some of them were launched / scaled during festivals only as limited edition and some found more permanent footing. Some in one or two locations, some pan India. What this means is, we dont run the risk of stagnation in any of our locations?—?a 500 year issue with Food outlets. We can keep cooking new dishes, and keep launching delightful new products and brands, and keep the growth machine chugging, without being afraid unnecessarily of the slowing SSSG ( Same Store Sales Growth?—?the metric that sends shivers down the spine of the most seasoned F&B executive in the world).
Now, all that is great. We worked on a hard problem and we have now a semblance of a solution. But what did it mean for our business? How do we know that this will help cracking the puzzle called “food on internet”? Well, to be honest, we don't know yet. But here are some early signs:
1) All our MIKs are now profitable
2) They grew on an average by 110% over the last 12 months, when the F&B industry saw sharp decline in SSSG (not denying the fact that we have the benefit of a smaller base compared to a large F&B player)
3) Each of our 12 cities are profitable
4) Our marketing costs are broken even by contribution margin from 4 orders ( 24 months back this was 22 orders)
5) Our Average Order Value moved up by 40% in last 12 months
6) Capital employed in our MIKs get returned in less than 2 years?—?give or take
7) And most importantly, we don't look beyond our own brands/products whenever we are hungry
The work has just started for us, it's proverbial day zero in every sense of the word. But, I feel tremendously excited that we have taken a totally unique path and sown the seed to build a company that should still be there and thriving decades from now and hopefully even after we are gone. Because, even if /when food habits shift, salads finally take over from fries, vegan becomes the general norm, virtual reality is reality, self driven cars ply our roads, people will still crave for great food in greater and greater variety and they will never be able to download or stream it.