Apps and algorithms can't solve all business problems.
Silicon Valley is learning the hard way that the food business isn’t as simple as it seems.
Bloomberg published a scathing report on Monday about Munchery, a San Francisco-based startup that cooks and delivers meals, amid a leadership shakeup in which SimplyHired’s James Beriker took over as CEO from co-founder Tri Tran. Bloomberg reports that the startup had been cooking about 16% more meals over the last two years than it needed while struggling to retain customers despite big spending on marketing.
Munchery’s struggles are not surprising, however. As Fortune has reported previously, Munchery has tried a slew of different products and services in a search for a sustainable business model. It added meal kits last year—essentially boxes of ingredients that customers assemble and cook themselves—as an alternative for those who want to do basic cooking but don’t want to deal with finding recipes and shopping. In April, the company shifted to a monthly subscription model—similar to Amazon’s Prime program—that involves customers paying a monthly fee in exchange for “discounts” on each individual meal they order. It was clear that Munchery hoped monthly fees would create predictable revenue while also encouraging customers to order more often so they feel they’re getting their money’s worth from the fee.
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Then last month, the company finally added a lunch service—but only for office workers ordering multiple meals, once again highlighting the company’s hope to increase efficiency and better forecast demand since corporate orders must be made the night before.
Though a Munchery spokesman declined to comment on the specific figures in the report, there are a few important themes to note for so-called “on-demand” startups:
Forecasting demand: Tech startups tend to think that because they can build a few algorithms and financial models, their business will be more efficient than their traditional counterparts. However, Munchery seems to be finding out the hard way that it’s not necessarily true. Despite the company’s various attempts to steady its forecast for customer demand, it reportedly wasted food at a rate that was two to three times the amount of an average restaurant.
Discounts and subsidies as marketing: Bloomberg reports that Munchery’s discounts and subsidies aren’t really working, though the company denies it’s having troubles retaining customers. Still, it wouldn’t be the first time this has happened in the on-demand economy. Home cleaning startup Homejoy, which shut down last year, fell into a similar trap, according to a report by Backchannel. Its steep discounts successfully attracted new customers, but those customers stopped using the service as soon as they had to pay full price.
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Opacity: The tendency to share little information, even with employees, investors, and board members, isn’t limited to startups like Munchery, but rather to the tech industry as a whole. It seems that more than the rest of the business world, startups fear admitting their struggles. Everything is always going great, growth is through the roof, and the world is really becoming a better place—one meal or social media post at a time. But according to Bloomberg, Munchery overstated the health of the business, something La Boulange cafe founder Pascal Rigo, who briefly joined Munchery, said he was disappointed to see. Even board member Jeff Housenbold told Bloomberg that he doesn’t know much about Munchery’s unsold meals. In some cases, this aversion to being fully transparent can cause real dangers, such as in the case of blood-testing company Theranos, which eventually voided a large number of its tests after a series of reports by the Wall Street Journal that questioned the company’s lofty claims about its technology.
The reality is that companies like Munchery are setting out to compete with established industries—like restaurants—but take on tech investors who are accustomed to rapid growth and big returns. Unfortunately, that pressure often leads to misguided attempts at running non-tech companies as if they were software startups or photo-sharing apps.