Advances in technology and changing consumer preferences have long been transforming the way food is created, distributed, and consumed. Now, as COVID-19 revolutionizes much of what was “normal” before March, several trends in foodtech are experiencing tailwinds. We can’t dine at restaurants, so we’re cooking and ordering takeout and delivery more frequently. The food supply chain has been rattled with distribution shifting from restaurants to grocery and with food production bottlenecks resulting from fewer employees at work.
The foodtech space is well-positioned for significant technology-driven growth, with companies in the sector raising $5.3 billion in VC funding in Q1 2020, according to Pitchbook. Below are three trends that I believe will stick once we emerge from our kitchens.
1. Food supply chains will modernize with technology, creating more options for consumers.
Much of the food supply chain has operated the same way for years, and technology has created ample opportunities for innovation and improvement across the entire supply chain. Farmers need to know how much to grow, distributors need to know how much to order and sell to maximize sales and reduce spoilage, restaurants need to order more efficiently, and consumers are demanding more transparency and less waste. Tight margins at restaurants and throughout the supply chain further underscore the importance of innovation through technology.
Pepper is one of several startups founded to address these problems. Co-founders Bowie Cheung and Chetan Narain spent years helping restaurants leverage technology and data to improve their operations as part of the leadership team at Uber Eats. In doing so, they discovered that many restaurants wanted to improve the way they source, purchase, and take inventory of their ingredients. To address this, they built an app to help restaurants order, communicate, and reconcile with their suppliers. Weeks after launch, they had millions of dollars flowing through the platform. But just as Pepper was gaining traction, COVID led to a virtual shutdown of restaurants across the country; many suppliers had warehouses full of fresh ingredients with no restaurants to sell to, while many consumers were struggling to get groceries both in stores and online.
In response, the Pepper team launched Pantry, a platform for suppliers to sell directly to consumers. Narain explained, “For the first time, the same folks supplying some of the best restaurants in the region – from Eleven Madison Park to Tao to many other Michelen-starred restaurants – opened their doors to the general public. We launched in classic startup style, floating the idea with suppliers and starting an all-hands-on-deck effort to spin up a website, grassroots marketing initiative, and customer support center over a weekend.”
In reflecting on the historically slow-moving advancement in restaurant supply chains and on Pepper’s pivot, Narain shared, “Inertia and comfort can lead to locally optimal solutions that trade the benefit of one party for the advancement of another. A jolt out of the norm can pave the way for entire industries to revisit themselves from first principles and find a new peak better for everyone.” Once restaurants reopen their doors, many suppliers will continue selling directly to consumers leveraging these COVID-induced foundations, while simultaneously reestablishing relationships with restaurants. Technology can help build these connections at scale while helping cash-strapped restaurants operate more efficiently, automate processes, reduce waste, and focus employees on the highest value tasks.
2. Online ordering and payment will replace the physical menu and check as we knew them.
Since restaurants have been forced to close their doors to dine-in customers, those that chose to remain open are leveraging technology platforms to facilitate online ordering and payments for both pickup and delivery. Restaurants that had previously avoided partnerships with third-party platforms are pivoting to stay afloat, and many will realize and appreciate the ease and efficiency that comes with technology – albeit at a cost. With the potential for additional consolidation in the delivery space, platforms may gain pricing power and further put pressure on restaurant margins in return for convenience and growth.
Restaurant technology companies are pivoting their focus to help struggling restaurants adapt to these trying times. Yi Chen, who leads the Consumer/Guest team at Toast, shared how his team has shifted focus: “One area that we hadn’t previously considered was building a standalone digital ordering suite of products that was decoupled from our core software platform so any restaurant could use it to run digital ordering and get a robust eCommerce product designed for restaurants in [a matter] of days to accept takeout and delivery orders from guests.” This enables restaurants to benefit from Toast’s online ordering and payments platform even if they do not use Toast’s POS hardware. In a similar move, Upserve, a Toast competitor and NextView portfolio company, is offering free online ordering and contactless payment options for restaurants for one year.
As of a year ago, 58% of restaurant occasions were off-premise (drive-thru, takeout, and delivery), and that number has only grown since, with a forced escalation to 100% during the COVID crisis. To complement limited capacity as restaurants reopen for dine-in, restaurants will need to continue relying on takeout and delivery services to survive, and the off-premise trend will only continue to increase as more and more consumers realize the convenience of eating restaurant-prepared meals in the comfort of their homes. In order to compete in an increasingly off-premise world, restaurants must optimize their menus with travel-friendly items and utilize packaging that maintains food quality and temperature.
Meanwhile, to compete for dine-in customers, restaurants will need to focus on the diner experience, getting creative with special ambiance, unparalleled service, and engaging entertainment. In more casual and less experiential restaurants, I predict the demise of the physical menu. Now that many restaurants already have their menus uploaded on third-party platforms, restaurants can push customers to view the menu, order, and pay through these platforms. This will enable restaurants to save money on menu printing and edits (digital edits are faster and less costly) and on the service required by wait staff to take orders and collect payment.
The restaurant world has been turned upside down in a matter of months, and it will be incredibly difficult for many restaurants to recover. With optimism, Chen believes that “restaurateurs are resilient and embody the entrepreneurial spirit, so whatever challenges that are thrown at them, they will overcome, survive, and then thrive.”
3. Alternative animal products will continue to take market share from the meat and dairy industries.
Over the last several years, we’ve seen a rise in alternative animal products as consumers increasingly care about health and wellness, sustainability, and animal rights. According to Pitchbook, billions of investment dollars have been poured into this space, and investors have more than doubled the amount of money they’re putting into plant-based food startups over the past five years, hitting $659 million in 2019. UBS estimates that the market for plant-based proteins could expand from under $5 billion to $85 billion over the next decade, at a roughly 28% annual growth rate. COVID-induced meat supply shortages combined with an increasing grocery footprint of plant-based alternatives will accelerate this growth.
As alternative animal products are gaining traction, actual animal products are experiencing supply shortages. Meat processing companies across the country have paused operations at plants where workers have tested positive for COVID. As a result of this processing bottleneck, beef production is down nearly 25% year-over-year, and pork production is down 15%, according to the USDA. Consequently, prices for meat will likely increase, which will decrease demand for meat for a set of cost-conscious consumers who are increasingly facing unemployment. During this time of supply shortages and rising prices, consumers may opt to try plant-based alternatives – especially now that plant-based meats are, for the first time, competitive in price with ground beef.
Alternative animal products can be grouped into three main categories, each offering a unique set of benefits relative to traditional animal products:
Plant-based meats have leveraged several innovations to mimic the look, feel, and taste of meat using plants. This category has become somewhat mainstream in restaurants, with partnerships like that between Dunkin Donuts and Beyond Meat. Beyond Meat’s successful IPO last year proved that plant-based meat companies can thrive in the public markets, leading to massive funding rounds in other alternative animal product companies. Impossible foods, Beyond Meat’s biggest rival, recently raised $500 million in funding and announced that its products will now be available in more than 1,700 supermarkets owned by Kroger, representing an 18x increase in its grocery footprint in 2020. This growing grocery placement will advance the plant-based meat category at a time when consumers are grocery shopping more than ever before.
Unlike plant-based meat, lab-grown meat is an animal product using animal cells. Its cell-based production has numerous benefits relative to traditional meat, including a reduction in animal cruelty, the removal of slaughterhouse-related health risks, and a positive environmental impact. The environmental impact is particularly important, as animal agriculture contributes almost 15% of all human-generated greenhouse gas emissions, and consumers are increasingly concerned about the environment. To become commercially viable and compete with incumbents, lab-grown meat companies must dramatically reduce costs and continue raising capital to fuel innovation (cost per pound has decreased from an original cost of $18,000 down to $2,400 by early 2018). Memphis Meats recently raised $161 million in funding, and I anticipate continued interest and competition in this space going forward.
The third category, dairy alternatives, has been growing for years, with milks made out of nuts, oats, soy, peas, and more, expanding to claim 13% of the dairy market. While alternative dairy companies like Califia are thriving, traditional dairy businesses like Dean Foods have filed for bankruptcy.
COVID is adding tailwinds to the already up-and-coming alternative animal products space, and in the coming months and years, we will likely witness expansion into new areas (e.g. alternative seafood), action from large incumbents (pivots or acquisitions), and other types of technology-driven innovations.
All in all, technology will continue to play a growing role in the way food is produced, distributed, and consumed. Continued investment across the spectrum of foodtech will help upstarts innovate to meet consumer preferences, transform foodservice operations, and ultimately build a healthier, more sustainable food system.