a16z Podcast - The Delivery-Optimized Future of Food

Episode Date: March 25, 2020

The spike in online ordering and food delivery—a trend that's particularly relevant now—is evidence of how tech is fundamentally changing how and what we eat. Is this the end of the traditional restaurant experience as we know it?In this conversation between Virtual Kitchen Co. CEO Ken Chong, Snackpass CEO Kevin Tan, a16z general parter Andrew Chen, and host Lauren Murrow, we discuss what's driving this transformation, the infusion of data into the restaurant industry, how take-out and delivery is becoming surprisingly social, and the specter of the "kitchenless home."Virtual Kitchen Co. is a network of delivery-only kitchens that partners with restaurants to expand their reach without opening additional brick-and-mortar locations. Snackpass is a food-ordering app currently on college campuses in which customers can order ahead at restaurants and skip the line. In this discussion, both CEOs explain what their business models could mean for the future of dining and cooking.This episode was recorded on-site at the a16z Summit in November 2019.

The content here is for informational purposes only, should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, and welcome to the A16D podcast. I'm Lauren Murrow, and today we're talking about the delivery optimized, grab-and-go future of food. The spike in online ordering and food delivery, a trend that's particularly relevant now, is evidence of how tech is fundamentally changing how and what we eat. In this hallway-style conversation recorded on-site at the A16C summit, we discuss what's driving this transformation, how tech can cut costs, both to get food delivered

and operate a restaurant, the infusion of data into the restaurant industry, and what this all means for the future of dining and cooking. Joining me and general partner Andrew Chen are guests Ken Chong, CEO of Virtual Kitchen Co, which is a network of delivery-only kitchens that partners with existing restaurants, and Kevin Tan, CEO of SnackPass, a food ordering app currently on college campuses in which customers can order ahead at restaurants and skip the line. The first voice you'll hear after mine is Ken, a virtual kitchen co, followed by Andrew, and then Kevin of Snack Pass. We've seen a shift in the past five years or so, from fine dining, establishments, to the kind of fast casual, to delivery only and takeout only.

What do you think is driving this trend? Millennials in Gen Z is the generation that grew up with a smartphone, grew up with the internet. And with everything at the press of a button on the phone, whether it's a car with Uber rides or packages from Amazon, they're growing up with this behavior and this convenience and this habit. And I think we're seeing that demand and food as well. Yeah, I think if you live in a major city and you're used to the conveniences of using TAC to enable everything in your life, right? you'll almost end up with this baseline expectation where everything ought to act this way. And over time, the question then becomes, is this generation who grows up on this level of

convenience and choice, once they are 21, 22, 23, they move to the cities, are they going to give that up and revert back to maybe what their parents did? Or are they just going to expect that, yes, I do have a remote control for food, and it's my phone. And so for both cities and for college campuses as well, where there's so much density, there's so much choice of different food options around you. That's the best possible setting to begin the food delivery trends enabling all of this to happen. But as they say, the future is here but unevenly distributed, right? So I think the next thing that will end up happening is a lot of this technology that ends up working in these highly urban places can then ultimately go to

places that are suburban and rural the same way that a lot of technology ends up spreading. Consumers love food delivery. They love the convenience of it. And at the volumes we see, and what we're projecting going forward. It just requires a totally new infrastructure layer to power that. So we're building the delivery-optimized kitchens of the future. What Amazon did for retail, we're hoping to do for local restaurants and on-demand food. If you are a restaurant or a local food truck, you can sign on and deliver your food nationwide, nationwide even.

Well, I think a lot of people underestimate the cost of owning an operating restaurant today, and that's whether that's a Michelin Star restaurant or a food truck, right? Traditionally, maybe dining restaurants are limited by how many people they can seat per hour. And then there's also spikes in which times are rush hours. So they really need to maximize and squeeze every dollar out of it to cover all their fixed costs. But at least for pickup and delivery, a lot of restaurants are using that as another revenue stream. And you don't have some of the limitations. You can have a kitchen in the back or in the basement or a virtual kitchen.

And so, yeah, it really helps restaurant owners survive with all these other things that they have to worry about, like rent and labor increasing. I think Kevin hit on a lot of really good points. It's no secret that owning an operating restaurant is really tough as a business. And what we can do is decouple that upfront investment risk, the real estate, build out, lease, and commitment that a restaurateur and a chef has right now before even opening the restaurant, we can remove that and build it into a platform that allows restaurateurs to come in, experiment, expand, and move with food trends, consumer trends really quickly with a lot less turnover overhead.

Because of the digital nature of it, we can change the menus, the concepts in a much more lightweight way. And not only that, when you look at the whole value chain of where all the money is, the costs of delivering food, thus, in my mind, the biggest thing that needs to be solved before this can unlock for people on a daily basis. And research shows that that is a single biggest barrier that is preventing people from ordering delivery is its cost, correct? That's right. That's right. And the industry is moving to an interesting place where the costs are a little bit obfuscated. You have the delivery fee, you have the service fee, you have the tip. They're all kind of separate. You also have the potentially markup on the food. As a consumer, how many times have we been ordering food on one of these services?

And everything seems like it should be okay. And then you look at the bill and somehow you end up with a $60, $70 order. And you're like, how did that happen? Right. It's like, yeah, it happens one screen at a time. So when you add that all together, what that means is it's very, very hard for the current conception of food delivery to be something that you can do every single day. So I think we need a more fundamental solve to that before this can be widely available.

I know both of your companies are largely based on customer analytics and data. How does that translate for your restaurant partners? Yeah. I use an analogy. Restaurant owners right now, when you have customers go to the store and order at the cash register, it's almost like anonymous web visits and you don't know who those users are. Like if you have a website, you're just getting anonymous traffic. Whereas on a digital platform, they can retarget their loyal customers,

they can incentivize new customers, and they can incentivize new customers, and they can incentivize loyal customers, bring new customers in. So that is definitely a big part of the play is helping them have that additional customer relationship layer. What are you tracking? So we actually work with the restaurant brands to figure out the best locations to put these virtual kitchens, what people in those zip codes want,

and then we work really close with them as a very tight feedback loop in terms of ordering behaviors, time of day, what's selling, what isn't. We're bringing what e-commerce businesses have had, the luxury of in the last decade in terms of analytics and tracking to that business as well. So a very data-driven approach. Can you give any examples of an instance in which having that data fundamentally changed away an owner operated?

Yeah. For some restaurants, they'll have a lot of slow hours. And so if they want to target customers during those slow hours, right now they can put a sign on their store or on the sidewalk, saying we have a happy hour. But I think with a digital platform, they're able to market that even better. And we've recently worked with a really great restaurant partner to figure out what are the optimal basket-sized ordering behaviors for delivery and how can they optimize and change the menu to really, really take advantage of what people want, how they're ordering with their friends or with their families, or maybe a dessert with their meal. I think what that means is as the very, very first e-commerce experiences on the Internet, when Amazon were among the first to actually figure out how to use web analytics to present you the right products and all. all of that, the restaurants that are able to think through that and adopt the right tools will

be able to hugely, hugely succeed. And the ones that don't, I think, will remain the restaurant on the corner or maybe not even exist at all. So the food industry is obviously a hyper-competitive place. What is it about your companies that makes people want to partner rather than a restaurant developing their own online mobile ordering app? So we do partner with a lot of restaurants that have their own apps, but I think they have trouble getting people to use their apps. What we bring to them is a bigger customer base that they can tap into and grow their brand

and get incremental revenue. And you're growing pretty quickly now. We've been around for two years. We're at 11 campuses and we plan on being at 100 campuses in the next 20 months and take that playbook that we started at Yale,

brought it to Brown, brought it to Berkeley, and maybe taking a page out of Tinder or Facebook's campus-to-campus model. And Ken, I know there's a lot of competition in the virtual kitchen space. You know, a lot of restaurant

tours we've talked to have considered building their own dark kitchens and have considered all the options out there, but we're really focused on building the best platform for restaurateurs, and we work really closely with them to help them scale and grow their delivery presence in the most turnkey way. What they care about is really how do they bring their food to as many people as possible. And so that's been really our focus, and we make it as easy for the restaurateur to go from their existing three locations to four than it is to go from three to bare. area wide. I was just going to add that I think the proliferation of technology for many of these

small restaurants presents huge opportunities and also there will be also checkout and changes in the industry as a result. First, I think you can see that if you're a neighborhood Italian restaurant, if you do really, really well, if you're like a beloved local brand, what ends up happening is you can serve a much, much larger audience, right? Obviously through food delivery, you end up being able to serve pretty much everyone in the city versus the people that were maybe in walking distance before would have thought to drive over to you. And so on one hand, it really grows the addressable market for any restaurant. There's a regionalization to what a restaurant actually can face.

And then on the flip side, it also means that restaurants competition can come from everybody within the city as well. When you combine that with the complexities around having every restaurant needing social media accounts and you've got to manage all your Yelp reviews, you have to think about what is the whole technology stack for how you're going to do checkout and all this other stuff. other staff, and these restaurants that maybe previously didn't actually need a ton of technology in order to succeed, all of a sudden need to master this very, very different stack of tools and applications to be there.

Let's say your grand vision comes to fruition. What do you see as the future of restaurants? Is this the end of the restaurant experience, as we know, in some ways? But it's also the beginning of basically having every meal become a restaurant experience. How so? I think with delivery and with pickup, you can basically turn food into a process. of a button for every meal. Like, if you're walking on your way to class, or you have a 30-minute lunch break and you don't want to wait in line, or you want to get pasta for dinner, but you don't

want to sit down in the restaurant, take an hour to do that. And I think that's just going to become a bigger part of people's eating habits. I think that in the not too distant future, people will be eating the majority of their meals, either through delivery or pickup, the level of convenience and the ability to give people back their time and really open up the accessibility to different types of foods, healthy dietary options, is really powerful, and I think that trend is going to continue. Yeah, and I think the other angle we're approaching is anytime someone's buying something by themselves, like single player, we're going to make that multiplayer. So right now when you buy something, it's largely a solo experience. But on snack pass,

every time you buy something, you get to share something with a friend, whether it's a discount or a future credit. That makes sense for everybody involved. You, your friend, and also the merchant, and an organic referral. And because it's categorically rational, but also extremely fun and has an emotion attached to it, I think that's just going to become a really powerful e-commerce trend. You bring up an interesting point, which is the role of social and all of this. Can you talk about the growing role of social and where you see that in the food space? I do think there's a misconception when we talk about this delivery-only model that people are kind of holling up in their apartments or homes.

And in fact, you're both telling me it's about expanding access and making it more social to eat out or to eat at home. Yeah, absolutely. Someone posted a meme on the Yale memes page that was, we don't say I love you, we send each other gifts on snack pass. And the social mechanics we've created on the app give people a way to connect that isn't like a text or snap. Actually, food is super social. And so we found a way to weave that together, social and commerce. So people are flirting through food. Yeah. You can send your boyfriend or girlfriend a smoothie. If they're sick, you can even see who's sending gifts to each other. You can see. who's hooking up with other people by who their gifts are being sent to. So, yeah, it's like this other social network that you wouldn't really expect. And it's definitely not going to replace a visual feed like Instagram or Facebook, but it's augmentation of your social life at college. It's kind of like a Venmo of food. Yeah, I guess you can say that. What's the role of social when it comes to virtual kitchens? I think hitting at the parallels with retail and how

that has gone in the last decade from brick and mortar to more digital, you see the opportunity for brands to really experiment and build their presence in a digital first manner. We've seen a lot of direct-to-consumer products rise in popularity over Instagram and social media and really reach and connect with their customers in a very direct way. You can see the same with restaurant brands and food. Food trucks have been doing this because they don't have that permanent brick-and-mortar presence, but with virtual kitchens, you'll see that go even a step further. So if you don't have a physical kitchen, are these brands spending more on marketing then?

potentially. It depends on how you view Instagram and Facebook and Twitter. It's, I think, really just a new channel for the brand to create its presence and to reach their customers in a more direct way. So when we talk about the future of food, it's impossible not to talk about robotics, everything from robot chefs to robot delivery. What role do you think robots will play in the next five years or so? We've seen some interesting things on the kitchen automation side in terms of robotics, but I think that is a little bit nascent. Sidewalk robots and autonomous vehicles, obviously coming later, I think will really reduce the cost of fulfillment, the actual delivery piece, which then makes it even more accessible to more people. The funny thing about robotics

that I've seen, and let's use autonomous vehicles as a good linchpin, I know there was so much excitement about the field just a couple years ago, you'd ask people that were just reading the news and you'd say, hey, how long before we have self-driving cars on the road? And if you're If you talk to some people, they would tell you five years. Some people would say six years. And what I noticed, at least, was when I started to talk to people that were closer and closer to the problem, working on self-driving, the number of years that it would take before it was widely available would increase to the point where the people directly working on it would be like, I don't know, it might be like a long time. And so going back to the question on how automation and kitchens will come together, I think first, as Ken mentioned, there's a lot around what's going to happen with delivery. There's a number of really interesting companies out there like Starship and Kiwi that are thinking about that and are thinking about it in a way that hybridizes human teleoperations in addition to having completely software-based navigation. And then the other big question that I think is super interesting is in the kitchens themselves, do you get to a point where you have robots making the burgers and making the pizza and all that stuff?

Or is this something that humans have to be involved? And what I've seen on the research and the companies that we've encountered is that, yes, that will eventually happen. But each food type is actually very different than the next one. Like, it is an entire company to just solve automation plus smoothies. And it's another whole startup that needs a lot of money to go figure out burgers and a whole other company that needs to be successful to figure out noodles, right? When you look at that in comparison to still being able to have human labor, I think there's still quite a gap before. for we're going to be able to fully realize that robotics vision. Andrew, you look at food, gaming, social.

When you look at the food landscape, do you have some vision for the future of food? Yeah. So much ink has been spilled about the driverless car, but I think more realistic even is the idea of the kitchenless home. And it's really the notion that if this becomes so convenient and you can have amazing food that exactly fits your dietary needs for your whole family and it's at the right price and it's in the right packaging. The everyday need for people to actually have a kitchen in order to do this chore might go away.

And so if you think about that as a general idea and then you say, okay, what actually needs to happen in the entire flow of the customer experience in order to enable that? What you end up seeing is a lot of room for really interesting, great companies. Is this the end of cooking

in that everyone is getting everything delivered all the time? I think what's going to happen with this combination of delivery and dark kitchens is that one day somebody who's gluten-free is going to open up the app and they're going to have dozens upon dozens of amazing high-quality food available to them. I'm sure that once all of these platforms like Virtual Kitchen and Snack Pass have fully proliferated, the kinds of chains that we'll see will not just be burgers and pizza. Very recently, in fact, over 60% of food delivery was just pizza,

just because that was the thing that would keep you could deliver. And Domino's as a stock has performed just as well as the top tech companies. And so when you start to unlock everything, I think that it will be a golden age for food entrepreneurs. The other angle is for those that have dietary restrictions, it can be a huge thing as well. Because if you're gluten-free, if you're keto, if you can't eat nuts or whatever, it's not like you have dozens of choices, right? There's a lot of really, really interesting things that will happen through these platform shifts. So is this the end of the traditional restaurant experience, as we know it? The big thing for me is really thinking about the bifurcation of how people are going to think about food.

There's the everyday sort of utilitarian view of food. This is the quick bite that you want for lunch or for dinner on a day where you maybe have a lot of work to do. And then there's also the kind of experiential evenings that you might want out with your significant other, which is where the presentation of the food matters, the story behind the food matters. So first, how do you up-level food overall in all its different capacities and bring the sort of super-high quality ingredients designed by a chef who really cares about the food to consumers in all forms and even delivery, even fast, casual pickup type experience? I think that bifurcation is going to be really real. We've seen it in the retail space with showrooms versus ordering online. And I think it'll actually be a great world for both sides.

We'll see great restaurant experiences for dine-in. and then we'll have great convenience, great selection, and great price points for delivery. Great. Well, thank you so much for joining us on the A16T podcast.