By Nicholas Upton
Couple the tough economics of running a restaurant to the lofty goal of a 20 percent margin and then throw in the human capital of delivery on top, and it’s no wonder half of restaurants fail in the first two years. And even with all the clamor for convenient dining options, the food on demand space is just as perilous.
Jason Demant, the founder of Bento, knew all about the layoffs at Munchery, the leaked documents outlining Maple’s financial difficulties and the numerous shuttered delivery providers when he was ingrained in the startup community in the Bay Area.
“I was exploring a few different things and ultimately got interested in the on-demand food space,” Demant said. “I live in Oakland and SpoonRocket was the first experience; getting hot food in my hands in 10 minutes was a magical consumer experience.”
He said that experience inspired him to found Bento.
“I had a thesis that the instant delivery space would be very big, and if that thesis was correct there would be multiple types of cuisine just like restaurants, so I decided to focus on ethnic food,” he said. “And rather than focus broadly, I focused on Asian food, it’s always been my favorite type of food.”
As industry watchers remember, SpoonRocket was among the 2016 casualties in the food-on-demand space, and unfortunately Demant’s introduction to the industry via SpoonRocket would foreshadow Bento’s own issues.
It started fast; Demant quit his job to focus on Bento and went to market in just six months. “I started full time back in September of 2014, added two cofounders built out our app, designed and manufactured our initial packaging and launched in February 2015,” Demant said. “We raised a bit of money right as we were launching, launched, and then grew like crazy—20 percent week-over-week for five months—then was able to raise a seed round of a little over $1 million.”
But despite the growth and restaurant operational expertise from chef and Top Chef contestant Mattin Noblia, Demant said there were clear issues early on.
“Toward the end of 2015 is when we realized that this model we were pursuing was not something that we were able to succeed in just from a unit economics standpoint,” he said.
High Bay Area rent and delivery personnel were major costs. And because of the instant nature of Bento, food waste was devouring margins as the company tried to predict demand without slowing things down. So Demant and team went back to investors, raised more money just as investments in the space were slowing dramatically. That cash infusion helped the company pivot to an order-ahead model, where customers ordered lunch by 10 a.m., dinner by 3 p.m. It almost completely cut out food waste costs since there was no need to predict demand.
“It went OK, it grew, but it didn’t grow like crazy,” he said. “I think what ultimately happened is we traded one problem for another, while operationally and from a unit economics standpoint it was better for the business, it was less appealing from a consumer perspective.”
It did work well with wholesalers like Zesty, EClub and Cater2.me, which provided Bento’s pre-made meals to offices around the Bay Area. It performed so well, that Demant decided to give up on direct-to-consumer sales.
“That [wholesale business] really took off. It was probably around mid-2016, I was looking at the business and realizing that the direct-to-consumer order ahead was 70 percent of my complications and like 10 percent of my revenue, so we just shut it down,” Demant said. “Things got a lot simpler, and things really grew last year. We went from doing 100 meals a day to doing 700 meals a day by the end of the year.”
But finding Bento’s niche happened too late and the company was still looking at a San Francisco-sized uphill battle.
“It still wasn’t enough. While we hit profitability toward the end of the year, margins were thin, we didn’t have a budget to hire a management team or do R&D and really burned through our capital,” said Demant. “If I wanted to hire a general manager, pay him or her a reasonable salary and then if I wanted to pay myself a reasonable salary as well, we would have needed to almost double—probably somewhere between 1,200-1,300 meals a day.”
Bento couldn’t hit those marks and closed on January 4, 2017. But the concept provides several lessons for the industry.
Lesson 1: Rent is brutal
The real estate market is white-hot across the country, but the San Francisco market is molten. Overall, delivery concepts just need access to roads, going to Main and Main just doesn’t make sense if the concept doesn’t have a storefront. But in San Francisco where so many on-demand delivery concepts start, there’s no such thing as cheap rent. Even among warehouses and parking lots, Bento’s rent was unsustainable, as were labor costs. “If our rent was half what it was and our kitchen labor was 25 percent less, yeah would have made a huge difference,” Demant pointed out.
Lesson 2: Capital is tough to get (and it’s gotten tougher)
For those uninitiated with Silicone Valley, money doesn’t flow as easy as it seems. “Raising money is never easy, all the money we raised was hard. But the initial $1.5 million we were able to raise was definitely easier than the last $500,000 to $600,000 we raised,” said Demant. “We were basically able to get no new investors into Bento after our initial seed round.” And investments in the space have slowed dramatically, but maybe having cash to burn just means burning cash. “I guess we were thankful we got in before everything changed, but it may have also forced us to be more diligent on some aspects,” Demant said. “So there’s good in bad in everything, of course.”
Lesson 3: Delivery is really, really expensive
Nobody in the space has completely figured out delivery. “I don’t think Uber or Grubhub or Postmastes or any of these guys have delivery costs that much lower than we were able to achieve because at the end of the day, there is a person and they need to earn a wage and there’s only so many deliveries an hour that person can do,” said Demant. “I think until we figure out how to take the people component out of delivery, which is coming—DoorDash and Postamates are openly testing this sort of things—then the industry will fundamentally change.”
Growing fast, going viral and getting to the table or desk is a major priority, but the fundamentals are essential when investment capital is burned up. “Focusing on your unit economics is one of the big lessons I’ve taken from this. Delivery is hard,” Demant said. “I think the challenge is, you basically have to hack away around delivery. Some of the businesses I’ve seen doing so are doing weekly subscriptions, or delivering more meals at a time. Those are suboptimal consumer experiences, but basically required because there’s no other way around it to drive down the cost of delivery.”
All that said, Demant is still bullish on the industry.
“Five or 10 years from now, I think we could have this conversation and say it’s just too early, the people component of delivery was just too hard and we needed to have another delivery mechanism,” Demant said. “People are lazy. If I can order a good meal and it shows up 10-15, 20 minutes later, why leave the office and why leave my house? Overall I’m bullish in 10 years, but in 1, 2, 3 years, I think there’s going to be some challenges.”