Do you remember the time when we used to visit these places called Restaurants? They used to serve food and we would go with our friends, partners, family and at times alone to sit and relax while someone would bring our food to our table. So many of you would have looked at the crowd in a restaurant and admired the business, thinking about the money they were making and how one day if you could start your own restaurant, you would be set for life. It isn’t a surprise that for many - owning a restaurant is a dream. At least it used to be in the pre-COVID world.
Contrary to popular belief, restaurants have always been a low margin business and yet you see them everywhere in our cities. Despite what COVID-19 has done to the restaurants, I believe it is fascinating to learn about the industry and companies that started with the sole purpose of serving them. In today’s edition of startup dives, let’s dive into the business of “ChefHero - an online marketplace for restaurant supplies”.
Origin Story
ChefHero was founded by Saif Altimimi and Diego Dominguez Ferrera in January 2015. So far, ChefHero has raised CA$12.6M in a series A round in April 2018. Based on their website, Saif noticed a problem and started ChefHero with Diego to solve it.
Growing up around his uncle's produce business, Saif noticed a broken link in how vendors and restaurants were connecting. With the help of Diego, he envisioned a future where chefs could easily leverage technology to access everything they need in one place.
Today ChefHero is operational in two markets - Toronto and Chicago.
So, what is the business?
In order to understand the business model, let’s first understand the problem that ChefHero is trying to solve. Your favorite restaurants need raw materials to cook meals and a whole lot of other things to clean and maintain the place. When a household needs groceries, you go to a grocery store (physically or online) or log into an aggregator such as Instacart/Cornershop that sends someone to a grocery store on your behalf and you get your groceries. Restaurants need a lot more groceries than a household so going to a normal grocer will prove to be expensive. Therefore, they source their raw materials from food distributors.
A restaurant has two options - either they can go to a large distributor like Sysco that can take an order for produce, fish, meat, dry goods, cleaning supplies, aluminium foil etc and deliver everything OR they can order from separate companies that specialize in each of them. As shown in the poorly drawn diagram below:
Problems for Restaurants
In the first case, a small restaurant is working with a large distributor like Sysco. How much negotiation power do you think the restaurant will have? What if every two weeks the quality of produce delivered by Sysco isn’t upto the expectation of the chef? Do you think the restaurant owner will be able to toughen up with Sysco (a $55B+ company)?
In the 2nd case, a restaurant owner who might also be the chef has to maintain several relationships with each of the vendors - dairy, produce, meat, cleaning supplies etc. They will likely have to spend a lot of time managing these relationships and orders. They will use phone or emails to place the orders and communicate with their local distributors. What if they aren’t happy with the dairy distributor? They will likely have to speak with 4 to 5 different distributors, compare prices, negotiate and maybe switch to another one.
We are thinking for just one restaurant, what if there are 100 restaurants trying to do the exact same thing? This is what ChefHero identified as an opportunity and inserted themselves in the value chain as below:
With ChefHero, Restaurants get to order from one portal for all their needs. They don’t have to maintain 5 separate relationships but can go to one place to compare prices from different distributors and place their orders. ChefHero defines itself as
An online mobile and web application that allows businesses to order wholesale restaurant supplies through one easy & convenient network.
How does ChefHero make money?
In any interaction it is the consumer paying the producer and everyone who facilitates this transaction takes a cut from what the consumer is paying thereby decreasing what the producer is making.
Let’s take a very simplified example of buying tomatoes.
Case 1: Let’s say a farmer is selling tomatoes for $3/kg. A distributor buys 10 kgs for $30 and sells 1kg each to 10 different restaurants at $5/kg. In this case, the restaurants together paid 5x10 = $50. Farmer received $30. The distributor made $20.
Case 2: Now comes ChefHero. For simplicity, let’s say ChefHero is able to get all these 10 restaurants to join their platform. They now go to the distributor and tell him that $5/kg is too high and they will buy all 10 kgs if he prices the tomatoes at $4/kg. The distributor likes the idea of selling them all to one entity. He is also excited about immediately getting the money (don’t have to wait for any accounts receivables). Now ChefHero wants the restaurants to be better off and therefore sells tomatoes to the restaurants at $4.50/kg. Overall, our consumers, the restaurants paid 4.50x10 = $45. Distributor made $40 and ChefHero pocketed the difference i.e. $5. As you can see that the distributor’s revenue is less than what it was in case 1. Either the distributor now has to settle for the lower profit or squeeze the farmer to maintain the same profits as case 1. This is an oversimplified picture but kind of explains the basic premise of the business. I will address my concern with this model in the section on “what makes me nervous about ChefHero’s future”.
What’s the value proposition for Restaurants?
Simplified order logistics - No longer need to coordinate with multiple vendors over phone but can go to one place for all their needs.
Price comparison - Can look at the price of tomatoes across different distributors at one place and make a decision on who they need to buy from.
Potentially lower prices - If there are a 100 restaurants ordering through the portal, ChefHero will have the clout to negotiate better rates with the distributors on behalf of these 100 restaurants.
What’s the value proposition for the distributors/vendors?
Accounts Receivables - The ability to get paid immediately by ChefHero and not having to wait for individual restaurants to pay at the end of the week/month would likely be appreciated by several small distributors.
Access to more restaurants - The logistics that are tiresome for restaurants are somewhat tiresome for the vendors as well. Having the ability to meet more demand would be a nice perk to have.
So, what’s ChefHero doing during COVID-19?
Similar to other businesses, ChefHero is also trying to stay relevant as much as possible. They have therefore started ChefHero Home - a consumer facing grocery delivery service. This is definitely timely and will help them continue their relationship with the distributors who are now looking to sell directly to consumers given their existing customers (restaurants) are running at much lower capacity.
What’s exciting about ChefHero?
ChefHero is trying to bring efficiency to an antiquated industry that runs on paper, sticky notes, clipboards and phone calls. I believe there is a lot of value in phone calls and traditional note taking. However, there is a clear advantage in being able to track multiple orders week over week on one portal. A one stop shop where the Chef can go and place all their orders with a few clicks will definitely help them save a few minutes every night that they can then spend on improving their business or hanging out with their family.
ChefHero brings transparency to an otherwise opaque world. How would a new restaurant know if the prices being offered to them by a distributor are the same as their incumbent competitor is receiving? I think the pricing transparency that ChefHero’s portal brings to new entrants will help them have a slightly higher chance of making it in this competitive industry.
Leadership Change at ChefHero. I went through Glassdoor reviews and was surprised to see that Glassdoor had terrible reviews from their workforce until a particular point last year and then the reviews changed 180 degrees from negative to positive. This timeline coincides with their leadership change. It gives me hope that the new leadership is working towards creating a positive culture at the company which would likely translate into material success in the future.
What makes me nervous about ChefHero’s future?
Leaving aside the impact of COVID-19 on the restaurant industry, ChefHero is an additional entity in the value chain. As I have explained above, ChefHero has come in between the distributor and the restaurants. They haven’t replaced the distributors but want to make sure that restaurants pay less than what they were paying earlier for the same raw materials. The consumer (restaurant) isn’t paying more but now there is an extra entity (ChefHero) that needs to make money. This is hard. Even if they have enough restaurants by their side to negotiate better rates with the distributors. Will the distributors eat up the losses? Or will the losses be squeezed out of the small farmers and dairy/meat producers? Or will the distributors refuse to work with ChefHero and streamline their own processes to continue serving the restaurants directly? These are hard questions and make me a little nervous about ChefHero’s future. I would be interested to see any data on ChefHero’s vendors and pricing over the years to understand the vendor reaction.
That’s all for now :)
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