Mealco is a fantastic business whose core business model is an intrinsic and compounding advantage in the food industry. However, a few core risks may prove difficult for us to evaluate towards conviction.
How to think of MealCo
MealCo presents itself as a technological layer that innovates on the business model of restaurants to monetize excess kitchen capacity. To do this, they partner with physical restaurant kitchens to make white-label food for digital-only brands, served through delivery platforms to end customers. This multi-stakeholder model makes sense, but I prefer another framing.
A food establishment is comprised of two parts: the kitchen (operations), separated from the customer-facing restaurant (sales and marketing).If a kitchen has excess capacity, then the restaurant section of the establishment is suboptimal. In other words, the existing sales and marketing cannot match the capacity of the operations. Were this a service business, the solution would be to find a lead-gen business, e.g. a struggling gym would hire a salesman to drive customers to sign up, under some commission financing structure. Similarly, MealCo is effectively a secondary lead gen and sales channel for kitchens, that have suboptimal sales and marketing (their restaurant front).
This framing should be applied when considering MealCo’s pricing structure, operating costs, and expansion strategies.
Currently, MealCo runs this lead-gen business by leveraging various brands and partnerships that appeal to an audience that has otherwise passed on a restaurant’s lead-gen business. Crucially, I see this method as secondary in describing what MealCo does, because it is easy to switch out once the foundation has been set. It is possible (and likely) that this part of MealCo’s operation will look very different in the future, although their core partner (kitchens) and intermediate customer (consumers) will largely remain the same. The innovative layer of MealCo lies not in their brand partnership model, but in the creation of a novel intermediary between kitchens and consumers, which used to be filled exclusively by restaurant fronts.
Initial success
With the current model, MealCo needs to appeal to three stakeholders: kitchen owners, brands, and consumers.
- Kitchen owners: the value proposition of MealCo is easy to explain and relatively low-risk. The owner of an industrial kitchen (read, restaurant owners) is promised excess profits, at no significant investment costs. If MealCo makes good on its lead gen and sales promise, the owner pays a percentage of those excess profits. Although the margin owners keep is lower than the business they bring in themselves, it is better than the alternative (zero) and can always be scaled down should their own lead gen and sales component (the restaurant front) improve.
- Brands: the value proposition to brands is easy to explain and relatively low-risk. Brands have a certain reach, and MealCo offers a way to provide a new product offering (food items) to that audience, without needing to invest in the capex of an industrial kitchen.
- Consumers: the demand of consumers on online delivery platforms is massive and proven. Food items that are marketed well (for example, in partnership with a known brand) and deliver on the promise of quality will appeal to consumers. This is not always easy, but is the problem that every restaurant attempts to solve.
MealCo is thus well positioned to deliver value to each one of these stakeholders, contingent on the final delivery: selling large quantities of food to consumers. Again, this is no easy task, as shown by the high rate of failed restaurants (close to 30% in the first year). But herein lies the entire thesis around the success of MealCo: the model of MealCo means it is better positioned than any single restaurant to capture the demand of customers, i.e. to win the lead gen and sales battle, due to three advantages:
- Rapid feedback: because MealCo has a large pool of industrial kitchen equipment to pull from, it can perform experiments with new or different food items in ways that would otherwise require the purchase of new equipment or the full rebranding of a restaurant.
- Large-scale visibility: because MealCo can be the intermediary through which data flows, MealCo can collect and react instantly to consumer behavior. This is an advantage that single restaurants do not have access to, and one that even franchises cannot easily tap into, because their visibility only extends to their own branches. The only players with more data here are online delivery platforms, whose interest is aligned with that of MealCo.
- No capex needed: MealCo doesn’t own industrial kitchens, meaning the only bottleneck to scale is its own operations and sales process, not massive capital investment. While other players scale up or down in discrete, chunky, and wasteful steps, MealCo can shrink or expand smoothly and efficiently.
Due to these advantages, MealCo can iterate faster and more often to find options that appeal to consumers, find out more quickly and accurately where excess demand and supply are found, and flexibly fill the gaps to capture value. This is why MealCo is positioned to win, much like online delivery platforms have, in an industry that is usually characterized by infinite demand coupled with a high failure rate.
Abstracting to the second phase
MealCo’s success, however, lies in the long game.
Consider a restaurant chain with two characteristics: access to an unlimited number of industrial kitchens, and zero ties to any particular type of food. The chain can open up a new location anywhere, anytime, and can change the face and offering of their restaurant anytime. Who would you bet against, them or any other new restaurant chain?
My money would be for them, not against. There is little uncertainty about the fact that some minority of new restaurant chains will rise up and crush it. MacDonalds, Chik-Fil-A, and Subway will, without a doubt, make room for some new kid on the block in the next 7-8 years. And MealCo has tremendous advantages over whoever that winner will be.
However they choose the channel their marketing (through brands or otherwise), MealCo will always have better odds than any other food brand. Earlier, I mentioned that I believe brand partnerships are likely to be temporary - because it actually doesn’t matter how MealCo succeeds with their lead-gen business. All that matters is that they are the only ones positioned to secure those leads.
Over the next 5-10 years, MealCo will evolve from a ghost-kitchen provider for specialty brands, to the largest lead-gen provider for the 340,000 restaurants on Doordash, or the 500,000 restaurants on Uber Eats. As available kitchen equipment increases, MealCo will begin to experiment with a myriad of ways to capture consumer demand. The bet is not on a specific method, but on MealCo’s ability to find creative ways to continue to bridge the gap between “unlimited amounts of industrial kitchen equipment” and “people ordering food online.” But the constraints of the bet make it an easy one - whoever is at the wheel to bridge that gap, will be a fantastic business. And MealCo is already driving straight there.
Risks
Naturally, MealCo will face challenges on this path. The first of these core risks has already been addressed, but the remaining two I consider still unproven.
- Ability to generate GMV [proven]: Initial traction to date, over the past 12 months since launch, has been seen over $3.5M of meals sold, with over 200 restaurants onboarded. This is the core engine of MealCo, and is considered effectively validated.
- Ability to maintain quality standards: mitigant - MealCo holds a high bar for which restaurants it onboards, and delivery platform data makes feedback immediate. Having the right top-of-funnel filter is the easiest and most effective way to guarantee quality. A filter that is too tight, though, will hamper MealCo’s expansion, while a filter that is too loose will hamper their ability to generate and close leads in the form of consumers. Quality will inevitably be a major issue, and will eventually require clever and simple systems. MealCo has put serious thought and effort towards this problem, and will need to continue to optimize in order to finalize their solution.
- Ability to scale seamlessly: MealCo currently puts restaurant onboarding at 6-8 weeks. This means several things: cost of acquisition is not low, ability to expand is not frictionless, and involuntary churn of restaurants is not cheap. As far as strategic direction, I hold that this metric (time to onboard) should be a guiding metric to track and minimize for the next phase of MealCo’s growth.
- Platform risk: MealCo is currently aligned with the most relevant stakeholders: restaurants and delivery platforms. In this sense, both are incentivized towards MealCo’s success. However, beyond a given scale, there is a high likelihood of a delivery platform deciding to take this solution in-house and offering it as a competitive value-add service in their marketplace. This might be in the form of an acquisition (a valid exit strategy), although it is difficult to reach assurance around the chances of MealCo specifically being acquired. Additionally, should a delivery platform decide to develop this themselves (which we consider less likely, but not impossible), MealCo runs the risk of being deplatformed. In this sense, it is difficult to envision a future for MealCo other than acquisition or deplatforming. This is, however, the area that is furthest from our considered core competency, so it may not be possible for us to evaluate this option to any level of certainty.