Google's 2013 revenue is 20x greater than Chipotle (~$60 vs ~$3.2 billion).
To insinuate that Chipotle's higher P/E ratio says something about fast food vs tech is silly. It's because Chipotle is so much smaller than Google that it's easier for Chipotle to increase revenue than Google.
In 2004, Google had about the same revenue as Chipotle did in 2013 but a P/E ratio of ~100, far higher than Chipotle does today.
It's like their mind being blown that Rackspace has a 60 pe ratio, or that Amazon and Twitter and LinkedIn have roughly infinite (or negative) pe ratios - and then concluding that must mean investors love the 7th place (?) cloud provider more than Google, and a profitless social network business model more than Google's ad + search monopoly. It's an intentionally bogus conclusion meant to do nothing but set up an article.
The critique about comparing P/E's is fair, but my point was really that Sprig & friends are restaurant chains vs traditional tech co's--and restaurant chains actually have decent P/E ratios, which totally shocked me. I was expecting restaurant chains to have P/E's in the 1-10x range, not 30-70x!
From a VC perspective, investing in a restaurant chain looks like a good idea if you can actually make the E in the P/E (ie turn a profit). I don't know about you all, but this was surprising to me.
Also, to address another point that some people made: Sprig & SpoonRocket use the delivery drivers as mobile storage units carrying pre-prepped & heated meals in the trunk. They don't do point-to-point pickup & delivery, which is how they can deliver so fast, cover so much geography and leverage their smaller real estate footprint.
It's hard to see how these new startups can compete with existing restaurants. There already are restaurants in cheap-to-rent locations, and it doesn't seem like Sprig et. al. can compete with the prices. I guess my point is that I don't see Sprig doing anything that new, so I don't see what new value they'll bring. But good luck of course, the restaurant business seems to be one of the harder markets out there.
I haven't tried Sprig yet, but Munchery's business model is awesome. They are not trying to be a fast / cheap food service. They hire top notch chefs who prepare high end food. The cost of meal is b/w $10-$15. The quality of the food is what you will expect in a high end restaurant. They are basically getting rid of all the real-estate of a high end restaurant and delivering awesome food directly to you (lots of economies of scale). I am spending roughly about $500 per month ordering food from them. Highest quality food, delivered to you at very reasonable prices (I'm pretty sure I'll pay at least 50+% more for the same food if I went to a high end restaurant).
This makes a lot more sense if you're right about the numbers. It's not the single meal they are targeting but 2-4 meals. That will drive down the number of meals they have to deliver to make a profit. If the meals are of superb quality this idea works. But it might be tough if they are delivering: food doesn't travel well -- your food is guaranteed to be sitting for 5-15 minutes.
Key Munchery operational detail: the food does not travel hot. It arrives refrigerated, with detailed reheating options. Wouldn't be surprised if it is flash-chilled after cooking (otherwise how do they get my steak right every time :))
I think they are targeting dinner for families. I always order 2 meals since they don't deliver lunch. You have to order food before 10am and they deliver b/w 3-6. My food is definitely sitting at least 1-2 hours because it is being delivered from SF to Mt view. I believe they have proper storage in the delivery vans - I don't know the details though.
I haven't tried Munchery since I live outside SF, but I'm surprised the food tastes good reheated. I've never had restaurant leftovers taste very good, particularly in the proteins where the moisture loss in heat/cool/reheat is significant. And the presentation ends up looking more like a TV dinner than the plated dinner shown on the website.
Does the perception around the chef/dishes contribute more to the positive experience than the actual taste of the food?
This makes me think about food carts. Here in Portland, they are are filling the niche for fine food at discount prices. For weekday lunches I pay $6-9 for what would be $12-20 in a restaurant. Clearly many other customers are doing the same. The local weekly recently reported that there are now 750 carts in town.
I agree. The article asserted that only three locations would be needed to serve all of SF, but also states that the food is delivered 'fast'. I am not sure I understand how you move the food further away from its destination, but then it is still 'fast'.
I think looking at a pizza restaraunt is a good comparison on how far away on-demand delivery can be from the delivery point. The range of a pizza place is usually only a few miles.
Because their is not limited by their physical locations. If you've ever gotten a SpoonRocket meal you'd notice that they have a heater in the car and the heater has a whole bunch of meals in it. Combine this with multiple cars.
waitersonwheels.com has been doing that for years. From what I recall consumer delivery proved not to be that economical and now they concentrate on business clients. I believe they're doing fine but I'm not sure it's an explosive growth model.
On a general note, you look at industry incumbents and they're not shy about leveraging technology as things are, so I'm not convinced that software is going to eat their lunch as the article claims.
Consumer delivery is alive and thriving where I live. We personally order from Sunshine Kitchen (as well as a few other restaurants) a few times a week for dinner. Every McDonalds in my city has a fleet of electric delivery bikes and they seem to be pretty busy. All ordering proceeds online.
Oh, did you mean to just limit your comment to the states?
No, I didn't. I didn't say you can't run a healthy business that way, I said 'I'm not sure it's an explosive growth model' ie the sort of runaway success the tech press likes to celebrate, not least because of industry incumbents of the sort you mention who are already embracing technology. You appear to have misunderstood my earlier comment.
Also, while I do live in the Bay Area I'm not American so your condescension is misplaced.
You stated it's not a healthy business model period. Yet there are many places in the world where a lot of money is being made at it. So what gives about your statement?
You probably live in a country where very cheap labor is available or with very high population density, where I live you would not be able to make a living from delivering McDonalds burgers.
This is a limited perspective (mine), but here's how they're competing right now: All 3 are optimized on "home-quality" food, i.e. healthy, homestyle cooking. And they're cheap. Sprig dinner is $12, delivered in 15 mins, warm, tasty, and healthy. There are _very_ few $12 meals out there that meet all of those criteria (Chipotle is almost there, but they don't deliver to my door in 15 mins).
So I see them competing because they're focused on different things (and they're doing it right, at least for me -- I order dinner from Sprig 2-3 nights a week and lunch from SpoonRocket 2-3 times a week).
Traditional fast food restaurants (Chipotle excluded) optimize on price, speed and taste (similarly), but those all come at the expense of nutrition, which (disappointingly) most people don't seem to mind. I hope A) that changes as the US continues to get fatter, and B) these guys don't 'sell out' and drop their food quality because they realize that deep-fried cheap chicken is "tastier" and cheaper than grilled high-quality chicken, etc.
The best way (I think) they can compete is on pure speed and adopting 'obvious' innovations.
If the restaurant business were invented today, this is probably what it would look like. Their primary challenge will be finding out if enough customers like their new approach fast enough to get some staying power.
I think one thing that's missed, here, is that (e.g.) the company that owns "MacDonald's" doesn't actually operate fast food locations: they're franchises. Instead, the company (which has the high P/E spoken of) operates gigantic commercial kitchens-slash-factories and ships patties and other materials to the franchisees. Operating MacDonald's restaurants isn't a cost they bear. In this sense, these large franchises are already even more streamlined than Sprig, et al.
This is not true. McDonalds has plenty of corporate stores in the US (I worked for one as a teenager); not all stores are franchises. In countries like China they do not franchise at all; instead every store is owned by a joint venture.
And of course Starbucks will never franchise (well, Marriott, but look at how that turned out)...they aren't even very happy about joint ventures.
> And of course Starbucks will never franchise (well, Marriott, but look at how that turned out)
Interesting - I always assumed that the "we proudly brew Starbucks" locations at bookstores/college cafeterias/airports/malls/rest stops/etc. were franchises. They look just like Starbucks except on close inspection: they often don't accept Starbucks cards or run the promotions, for example. These are at places where all of the restaurant frontends are operated by Sodexho or Aramark, and occasionally the restaurants are connected behind the counter (sometimes staff may even be observed moving back and forth as demand warrants). Are those joint ventures?
Its one thing to buy beans from Starbucks and sell them back to consumers. "We brew starbucks coffee" is like saying "we sell Coke."
There are "starbucks cafes" operated by big companies who aren't starbucks: Barnes and Noble is the biggest one, then you have Sudexo in the states (wish Sudexo could do that in my office building!), and of course Marriott in some hotels and airports.
Most of the starbucks in China are JVs, but they've been trying to get out of that for awhile now. I'm not sure if they finally were able to throw off their Chinese partners or not. Other countries I'm not sure, but I think Japan is all owned by Starbucks themselves. They also are playing around with the Seattle's Best Coffee brand for some co-run stores (Sudexo has started doing that at Microsoft in Redmond).
I don't think I would call the co-managed stores joint ventures. It is a very specific term with significant political/legal implications.
For a data point, McDonald's owns roughly 7,000 restaurant locations globally, and they have around 35,500 total restaurants (so ~28,500 owned by franchisees).
Your assumption is in line with the underlying principle - money made from collecting licensing and franchisee fees actually is more profitable than money made from selling burgers. This implies that over time large fast food operators should tend to become more and more franchised, and we see this playing out in the market place right now [1].
The reason why fast food brands aren't 100% franchised already is because they need to constantly learn about their customers/products/operating environments/fast moving trends etc. The best way to do this is to actually operate your own stores where you can experiment and learn very quickly. The younger the brand, the few outlets it has, the more it still needs to learn, so corporate ownership will be higher. As the brand matures over time that number is expected to come down to e.g. 15-20%.
Its not really just that. McDonalds is pretty international, and some countries are franchise unfriendly, hostile even. So they do a joint venture in China as well many other countries. McDonalds is at 15% today, but much of the 85% is organized under JVs outside of the US.
Also, while the costs and risks are higher to do a corporate store, they also make more money on it, and since they have capital, why not invest in the business they know rather than outsource in an otherwise finite-growth market? I would expect the opposite to happen: over time, the company collects capital and moves to own its brand rather than lend it out. In contrast, a young company that lacks capital will see franchising as much more appealing as it allows them to extend their brand and reach while sharing risk and investment.
Starbucks was, is, and always be corporate. That they are forced into JVs and partnerships sometimes is completely political (China; Marriott won't let them run stores in some airports where they have exclusive contracts; etc...).
You are right that some environments have draconian franchising rules, and force fast-food operators into alternative operating models (i.e. corporate/JV owned outlets). An important distinction for me is that those alternatives are forced onto brands, and if they had a choice they would swap to the franchise model. We see this playing out with McDonalds in China - as soon as franchising rules have been relaxed slightly, McDonalds went into high gear recruiting traditional franchisees to fuel growth in China [1]. Of course there are other places where operating directly makes a lot more money, but those are very very rare (e.g. Russia).
In regards to McDonalds investing back into the business they know, you are right again. However, what they know best is not running restaurants but investing into property. The self-proclaimed description of McDonalds' business model is that they are in real estate, not hamburgers [2]. The latest available annual report shows that the 7,000 company stores generated ~$3B profits, but McDs made as much on royalties and twice as much on renting out properties to their franchisees [3]. Further, store margins are going down fast while royalty/property margins are going up. This year more than half of McDonald profits will be from collecting rent - flipping burgers and selling royalties is a nice side hobby. So to maximise their core business, they have to maximise how many renters they have, i.e. increase the number of franchisees.
Burger King and Wendy's are attempting to move to a total franchised model. Burger King has managed to dramatically boost their net income by doing this for example, and their market valuation has soared accordingly; so now Wendy's is beginning to chase the same model.
At some point within the next 12 to 24 months, Burger King will be almost entirely franchised.
The franchise model got McDs started and a lot of chains still use it heavily (e.g. subway). But the "chain store" model (centrally owned and operated) is actually an alternative to the franchise model, and seems to be more popular these days with the newer ventures.
The P/E comparison at the beginning sucks but it's an eye-catcher for the average reader.
I guess the real question is whether you believe, at the same value point, delivery costs will be less than prime real estate + customer service costs. At the moment the answer is no. Delivery is expensive at the scale and speed necessary to compete with going out to grab a meal. But if you believe in a future where autonomous cars are delivering people and shipments in a highly efficient way, mixed with a future of resource abundance (ie robots taking all the boring jobs) where human time becomes incredibly valuable... then it's not unlikely that a service like Sprig would beat out the traditional fast food model.
In fact, it's not unlikely that restaurants and most other brick and mortar business would just become API's on top of the delivery model.
However, I personally think Sprig is way too early to the game. Given an autonomous, speedy delivery system is (more than) a few years out, they must be handing out their investors' money trying to compete in the food business in today's market while waiting for the distant future. I bet order-taking companies like GrubHub end up partnering with Uber to fill this gap in the market early on, rather than a startup trying to do food + delivery at once today. But that's just my 2 cents.
Interesting article. I usually view fast food consumers as people who are poor, working multiple jobs, and don't have time for preparing healthier and much less expensive meals themselves. (The excellent documentary "Fed Up" makes this point.)
That is, for my wife and I part of being affluent is having time to enjoy preparing fine meals ourselves. This article made me realize that a lot of people who are well off financially are not well off as far as having lots of free time - thus the market for companies like Sprig, etc.
> delivery ain’t cheap — Sprig pays their SF delivery workers $16 an hour.
It's odd that they have their own drivers. Why hasn't someone (uber) commoditized moving things via car within a city on no notice? I'm surprised at least that there's no app integrating various services that require drivers. If you can drive people, can't you drive a pizza?
Sprig drivers carry a supply of the evenings 3 hot meal options (in a heater?) and then are dynamically routed based on incoming orders (or at least this is what I assume is happening based on the regular sub-10 min delivery times to my neighborhood far from downtown.) This seems harder to Uber-ize than point-to-point trips: your drivers would need special equipment to keep the food hot, and would need to be available for an extended period of deliveries.
Would love to see a business model like this that accepts EBT. Everyone should have access to these kinds of meals. Plus it would give Sean hannity something to get upset about. "How poor could they really be if they have refrigerators and good food?!?!"
To insinuate that Chipotle's higher P/E ratio says something about fast food vs tech is silly. It's because Chipotle is so much smaller than Google that it's easier for Chipotle to increase revenue than Google.
In 2004, Google had about the same revenue as Chipotle did in 2013 but a P/E ratio of ~100, far higher than Chipotle does today.