
Munchery Stiffs Early Backers and Cuts Staff in a Bid for Survival - frgtpsswrdlame
https://www.bloomberg.com/news/articles/2017-03-29/munchery-stiffs-early-backers-and-cuts-staff-in-a-bid-for-survival
======
metaphorm
personal anecdote: I signed up for munchery after receiving some discount
codes via marketing email, and a few more discounts from referral incentives.
I found the food to be high quality and the delivery service to be adequate.
However, once my discount codes were used up I stopped using the service
because they could not provide competitive pricing even in my very expensive
zipcode (a nice neighborhood in Brooklyn).

I really wonder what was going on. At a fundamental level, when competing in
an ultra-competitive market (food delivery), you have to take price seriously,
and they just didn't. Everything they were offering was 25% more expensive
than similar delivery options from neighborhood restaurants.

~~~
vkou
The problem with competing in an ultra-competitive market, like food delivery
is that you don't have the margins to pay multiple software engineers
~$100,000/year. (Not to mention office staff, executives, VCs, and all the
other costs of running a firm.)

Pretty much everybody involved in food works like a dog, and gets paid an
absolute pittance. That nice restaurant down the street? Their head chef
probably makes ~$34,000/year, works 100 hours a week, and sleeps in the
kitchen. Oh, and the restaurant is as likely as not to go bankrupt and shut
down in <2 years. (And he's not doing it with the hopes that Ricky's Pizza
Joint will IPO as the next Facebook.)

Yet, for some reason, people think that this business model has the margin to
pay a team of developers, working out of a hip, air conditioned Market Street
office, complete with a free beer fridge and a Foosball table.

~~~
metaphorm
well, they aren't running a restaurant. it's a delivery only service and the
economics are very different.

For example, in the Brooklyn branch of the service the prep kitchen and
delivery center was located in Gowanus (low rent, industrially zoned
neighborhood) and they were certainly not running a full-compliment of front-
of-house and back-of-house staff the way a restaurant would. They also don't
have to pay high rent for a good location. They also don't have a head chef on
premises, and they aren't locked in to a specific menu style.

I'm not totally familiar with the economics of it but I can easily imagine
that it could, in principle, be a profitable operation even with the overhead
of having a technology division to produce the website and app.

for point of comparison:
[https://order.andofood.com/](https://order.andofood.com/)

that's David Chang's delivery-only food service, which also has a technology
division that produces a website and app. the prices on ando's menu are in
line with their competitors in NYC. Munchery was always overpriced. I don't
know if ando is taking a loss on every order or what, but I doubt it.

~~~
vkou
That's the problem - they don't think they are running a restaurant. But they
are - a restaurant with a ton of expensive, unnecessary overhead. That's why
they will be out of business as soon as VC patience runs out. (And why Ricky's
Pizza Joint, or a nearly-identical business will still be around.)

The lack of head chef isn't an upshot for their business. It's a symptom of
the problem. Compared to the cost of an engineering team, it's penny-wise and
pound-foolish.

If no-front-of-house-delivery-only could afford this kind of extravagance,
then street food trucks would have gold-plated steering wheels.

------
SomewhatLikely
I recently canceled my membership after a year. I love the idea, and the food
is good too, but the dish prices have skyrocketed recently. Now I know why. I
liked to order 4 or 5 dishes and eat them over the next couple days for lunch
and dinner. It tastes way better than frozen food, and is better quality than
prepared dishes I could pick up at the grocery. However, their model seems to
actively punish ordering multiple dishes. They have raised dish prices rather
than delivery fees, and their rewards program rewards you per order rather
than for dollars spent. Regardless, $10 is a psychologically significant limit
for me per meal, and while they used to have a number of dishes under this
price point, very few are now.

~~~
Analemma_
And that's why all of these companies are going to go under: as soon as they
start having to charge real prices, instead of the artificial, VC-funded promo
prices, people bail. Because, whoa, food delivery is actually expensive.

Did _none_ of these companies check, before moving in to "disrupt" the
restaurant industry, that there was actually anything to disrupt? Restaraunts
are not lazy incumbents growing fat on their unchallenged dominance: it's a
cutthroat business. And their costs are almost entirely the food and the
labor, which are, for all practical purposes, fixed. There are no margins to
steal from here.

~~~
rhizome
They're not going to go under per se, because I think the customers are
probably pretty valuable. I think a more vivid hint as to their future is in
their choosing someone from Simply Hired as their new (7/16) CEO: positioning
Munchery for acquisition in a crowded marketplace.

~~~
Analemma_
Honestly, I don't agree that the customers are very valuable. There doesn't
seem to be either loyalty or lock-in with these delivery startups: as soon as
they raise their prices, people just uninstall the app and grab another one. I
don't see anything worth acquiring here, so an IPO is pretty much it for an
exit strategy, if they can last that long.

~~~
rhizome
Could be, but the fact remains that they chose a new CEO whose most recent
experience was winding a company down into acquisition.

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coldcode
To me this seems like a dead end business to be in, too many competitors in
limited markets (like SF or NY), competition with brick and mortar options
(Joe's Deli etc), and enormous cost of acquisition trying to outdo the
competition. This seems like a market for one winner and lots of losers. Is
investing $120M in such a business a good idea? You have almost zero ability
to innovate and produce something better than your competitors, so why even
get into this?

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coenhyde
We used to order Munchery all the time back in ~2013 because the food was
really high quality. Then they dropped the price which I was fine with, then
they the dropped quality too. At which point we stopped. There are a lot of
options available for shitty food.

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blizkreeg
It's hard to fathom how no one at any point just presses the pause button and
says, guys, everybody STOP! Let's take a step back and make this damn thing
profitable in one city before we scale it.

Sheer VC-fueled insanity.

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RyJones
650,000 prepared but unsold meals? I hope they were able to direct them
somewhere worthwhile.

~~~
Someone
That is not the number to be worried about; that it is _" an average of 16
percent of the food the kitchen was producing"_ is, because _" Wasting an
average of 16 percent of food produced is above the typical 4 percent to 10
percent that most restaurants waste"_ (both quotes from
[https://www.bloomberg.com/news/articles/2016-11-21/munchery-...](https://www.bloomberg.com/news/articles/2016-11-21/munchery-
s-struggles-show-how-hard-the-food-delivery-business-is))

Also, that was over a period of almost two years, so 'only' about 1000 a day,
and the company claims most of it was donated to charities.

From those two Bloomberg articles, I don't think that's the main reason they
need more money.

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jtchang
What exactly is a recapitalization? It says the round doesn't value them but
doesn't the $5MM note have a cap of $80MM?

~~~
clairity
a recap is when the company issues new shares to change the capital structure
of the company (i.e., the ownership percentages). the early investors aren't
getting any new shares, so their stake in the company gets "crammed down".

it might be to make room for a new shareholder to get a larger stake of the
company for a given dollar amount than might otherwise be implied by the
current capital structure (a down round).

~~~
lawnchair_larry
Why is it legally easy for them to do this, but in other high profile examples
it was difficult for companies to dilute a now-unwanted partner? For example,
Gates and Ballmer pushing out Allen, or Zuckerberg pushing out Saverin.

~~~
mvpu
Legally very easy because it's a down road (read up on "VC cram down"). They'd
raised $120million prior, and now they're doing a $5-$15million convertible at
a $80million valuation (significantly down round). All existing investors will
either "play" (invest more at this valuation) or "pay" (suffer significant
dilution). When valuation takes a down turn, all rules are off - the board has
the fiduciary duty to do whatever it thinks is right for the company, even if
it means getting rid of all previous shareholders who are not pitching in to
help. VC backed companies are like drugs - feels great as long as you're high
but could die in a second.

------
pg_bot
This seems like it will be an extremely difficult business to turn around.
Food delivery is an extremely competitive and low margin business with highly
price sensitive customers. I've seen coworkers rotate to whichever new service
was offering a discount to juice their adoption numbers. I don't see this ever
being a lucrative investment, just good money being thrown after bad.

------
ilamont
The other Bloomberg article gets into the details of why this company has
burnt so much cash (1). Shaking my head after reading this:

 _In August of 2015, Munchery held a party at the Line Hotel in Los Angeles to
celebrate a new partnership with chef Roy Choi. He 's known for his Korean
taco fusion food truck, Kogi, and for his L.A. restaurants, including two in
the Line Hotel. Choi's new contract promised him more than $100,000 a month to
design his own line of meals. He was also consulting on branding.

At the party, people lined up around the block for free kimchi pork fried rice
served in Munchery's cardboard containers. Pishevar, Munchery's chief hype man
and a major investor, arrived wearing a black cowboy hat. Hollywood filmmaker
Jon Favreau attended.

By the end of the year, the startup ended Choi's contract. It cost the company
more than $500,000, according to people familiar with the matter. Choi had
provided Munchery with just two recipes. An agent for Choi declined to
comment.

Around the same time, Munchery also terminated a contract with marketing
agency West, according to former employees. The firm had helped Munchery offer
free meals to attract new customers and to strategize about its branding.

Munchery spent heavily on direct to consumer marketing ahead of fundraising
rounds, former employees said. In a month, the company could easily spend
hundreds of thousands of dollars putting flyers on people's doors offering
discounts on Munchery, they said._

1\.
[https://www.bloomberg.com/news/articles/2016-11-21/munchery-...](https://www.bloomberg.com/news/articles/2016-11-21/munchery-
s-struggles-show-how-hard-the-food-delivery-business-is)

~~~
pvg
A party and half a mil on Roy Choi recipes doesn't seem like a significant
factor compared to a peak burn rate of $5mil/mo or millions in prepared but
unsold meals.

~~~
zdean
Well, that gives you two solid data points...a few more and you've got a
pretty reliable trend to explain that burn rate and wasted meals.

~~~
pvg
A data point and wishing for a few more does not give you a 'pretty reliable
trend'. It does the opposite of giving you that.

~~~
zdean
You're absolutely right. Except that I said 2 data points and then waiting to
see if there are more...in which case you would be able to argue for a
reliable trend.

~~~
pvg
Yes, if you knew the company was throwing expensive parties every weekend and
spending millions of chefs on a regular basis, maybe. But you don't. The point
was, the stuff the commenter highlighted doesn't really explain their losses.

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palakchokshi
"The startup has been trying to muster a turnaround effort under the helm of
new Chief Executive Officer James Beriker, the former head of recruiting
company Simply Hired. He has cut jobs across the company this year to stop the
bleeding."

Ironic that the former head of a recruiting company has cut jobs at Munchery

~~~
HillaryBriss
i wonder if he sent their resumes over to SimplyHired

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I_am_neo
eww, processed snack food is gross, do they deliver fresh fruits?

