Agricultural Supply Chain
One of the most interesting markets I’ve looked at is the agricultural supply chain. This came out of our investment in Kitchensurfing this time last year, and subsequently trying to figure out if there were marketplace opportunities within the food supply chain itself.
The current state of the supply chain is best shown by a simple graphic:
At USV we look for markets in which the internet can act as a signalling network for parties that previously could not be efficiently connected at scale. This perfectly describes the journey most of our food makes from farm to end-user. At each stage, inventory is bought and sold, often after holding produce in market timing strategies. Middlemen shouldn’t be exercising this power, they should be fulfilling a logistics need. An online marketplace could disintermediate these players by allowing farmers and end-users to transact.[^1] While farmers only earn 19% margins from selling their crops wholesale, they can earn up to 90% from selling direct. (There are also, of course, potential non-economic benefits from eating local, organic food. Many of the companies I’ve talked to consider that core part of their mission.)
There are quite a few companies approaching these problems from different vectors. As an introduction to some of the more interesting players, I’ll slice by consumer vs. restaurant as the end-user. Keep in mind that many of these companies will (hopefully) quickly expand to serve both types of end-user.
Following that, I have a couple of investment theses which is (hopefully) the interesting part of this post. These reference some of the companies as examples, which is why the market map comes first.
At the end, I’ve written up a brief primer on food distributors, aggregators, and hubs, in case anyone else is interested in the current state of agricultural supply chain logistics.
Market map
Good Eggs is probably the market leader for farm-to-consumer. It is an online marketplace to order directly from farmers. Food can be delivered to your home for free, or picked up at a local drop-off point. The company is leveraging existing businesses to act as these drop-off points. The company is also the farthest along from a geographical perspective, serving 4 metropolitan areas.
Wholeshare is group buying from local farms. Anyone can appoint themselves a group coordinator or join a nearby group. Once that group has collectively ordered a minimum shipment, food is delivered to the coordinator. This group purchasing power creates a bigger incentive for sellers, which range from individual farms and fisheries to regional food distributors. The “last mile” problem falls to the group coordinator, who is compensated with 5% of the transaction. The group coordinator may deliver food to his/her neighbors or have them come to their home/business to pick them up.
Fresh Nation is an early stage team in Connecticut building off of existing farmers markets. Farmers list what they bring to those markets online and buyers can pre-order. This is great for farmers, who are typically only able to guess how much of each item to bring each day. They’ve also taken a page from Instacart and TaskRabbit, crowdsourcing a group of personal shoppers who will pick up your order at the market and deliver it to your door.
There is also, of course, the recurring box strategy. Blue Apron has had remarkable success shipping weekly dinner boxes, each containing recipes and the exact amount of ingredients. Quinciple will deliver a box of fresh, locally grown produce each week. The box features a diverse selection, but subscribers cannot choose any of the ingredients. I consider this a nice edge case, but to make a meaningful impact on our food networks we need to have selection.
Turning to companies starting with restaurants as the end-user, Provender enables farmers to sell directly to restaurants and just use food hubs as the delivery infrastructure (rather than a marketplace participant). They have created an online marketplace for farmers and restaurants.
Foodem is a marketplace for wholesale food distribution. Based in Maryland, they’re trying to help smaller distributors get market vision and eliminate the need for them to have a sales team. Farmplicity, in St. Louis, has a similar model.
It’s also worth mentioning that the original entrant in the space, Local Dirt, was founded in 2005 and started by focusing on B2B. The company raised venture capital from OATV as well.
Lastly, Plovgh is taking the most head-on logistical approach. The have built an online platform for farmers, logistics providers, retailers, and individuals to coordinate trades without intermediaries. This disintermediates brokers and merchants from the process. Unlike any of the other companies mentioned above, Plovgh isn’t trying to define relationships that should exist in the supply chain: it is enabling all actors to buy and sell from one another, setting up lightweight commercial exchanges for buying and selling. As the market “figures itself out” Plovgh can react to the submarkets that show promise.
Finnicky consumers
Selling to end-consumers scares me. We are very finnicky, particularly around the last mile problem (see below). In tech-historical terms, it’s interesting to think about online grocery shopping vs. online apparel shopping.
At the dawn of online retail, i.e. the beginning of time, i.e. ~15 years ago, there were many arguments against buying your spring wardrobe from Gap.com: 1) How do we know if the clothes will fit? If this color will look good on me? 2) How will retailers deal with customer returns? What will the rates of return look like? Will this be too high for consumers to deal with / too expensive for retailers? 3) Lots of people enjoy shopping for clothes in person, and 4) Questions/concerns about credit card payments, online fraud, interstate taxation, etc.
Fast forward a few years, and more than half of all Americans have shopped for clothes online in the past year.1This is in addition to the higher gross margins and increasing reliance of the industry on apparel e-retail.2
A priori, the arguments against buying your clothes online are stronger than the arguments against buying your groceries online. Much of the food you buy is a commodity, and if it’s not a commodity, you have a 100% expectation of what the product will be like (all Honey Bunches of Oats boxes are fairly identical). Food, especially staples, can be a recurring purchase. There is little potential for having to return delivered groceries. And, purely anecdotally, I think more people enjoy shopping for clothing than they do going to Stop & Shop every week.
But buying food online is a much, much smaller part of our society than buying clothing online. It is currently less than 1% of the food retail market.3 And there have been major endeavors, from early ventures like Peapod to recent major entrants like Amazon Fresh.4 I would argue that the societal impact of companies like Peapod and Fresh Direct (not necessarily their investment returns) have been a surprising failure.5
The reason for the lack of market penetration mostly boils down to consumer behavior. The business model has been tried enough that, except for the key lack of market desire, it can work from a logistical and economic perspective. And it’s an open topic for discussion as to why consumers haven’t been more excited by getting food delivered to their home. But as an investor, the takeaway is a natural hesitance towards investing in any consumer-focused business that has not already shown significant user traction. Put another way, I think seed investors should be extra discerning here.
An interesting case study here is Instacart. Of anyone so far, consumers have responded the most favorably to their product experience. (I really haven’t mentioned Instacart in this post because they are not fundamentally disruptive to the food supply chain. They add on an extra step, rather than taking out any of the existing steps).
Contrast this to restaurants, which as a business will be much more willing to jump through hoops for either cost savings or “localness”. While it’s niche, the highest end restaurants actually employ people full time as “food sourcers.” Their entire job is to talk to farmers, using spreadsheets to track their procurement of the best local ingredients. There are sections of the pyramid immediately below which can’t go to this trouble/cost, but may be interested in an online platform that enables this kind of sourcing at a much lower economic and logistical cost.
Another way to explain it is that companies tackling both the supply chain and selling directly to consumers are tackling two difficult problems at once. I am much more comfortable with a company focusing on one of these two areas. Success in either of the two can be a massive return, I happen to be more interested in the former problem as an opportunity with a wealth of nascent technology-driven approaches. I am bullish on companies developing disruptive supply chain models by initially catering to business end-users before entering the consumer market.
Logistics and the Last Mile Problem
Ultimately this is a massive logistical problem. Some companies are taking on the entire supply chain, others just part of it. It is particularly tricky to figure out the last mile problem, i.e. how to deliver to end-users. Good Eggs has a few options. Whole Share is betting that each community will have a single “coordinator” who is willing, whether for free or for a fee, to act as a mini-aggregator between the farmers and the community. Some are outsourcing to existing delivery networks. Others are seeing if the farmers can just take all the logistics into their own hands.
How far down the chain?
A big question is how far down the chain a startup should go. Should they be interfacing with farmers directly? Or is that too big leap, and should instead be innovating on only part of the supply chain.
Most of the companies on this list, including Good Eggs and Fresh Nation, are connecting directly to the farmers. But Wholeshare, for example, purchases from wholesale distribution networks. These distributors normally sell to restaurants and grocers, the latter of which adds a 25-55% markup. So clearly there is still room to innovate and pass savings on to the consumer without dealing with food producers themselves.
Can there be a winner at scale?
A big question with any geographically constrained marketplace is if there can be a major venture capital return. The biggest internet businesses are essentially re-aggregators (Google for finding pages, Amazon for finding products) made possible by the internet’s ubiquitous reach, which is naturally at odds with real-world geographical constraint.
Most of the companies mentioned in this post are starting off locally, so it’s hard to see much competition between them yet. Provender is starting in Montreal, FoodEm in Maryland, Good Eggs is in SF, LA, NY and NOLA, etc. Unfortunately, there is a real concern that this sector will always be fragmented, and it is way, way too earlier to tell.
Examples of successes in other geographically constrained verticals have lock-in that food may not have. While you take most of your Ubers in your hometown, it’s has homescreen lock-in so that you use it whenever you travel somewhere else. AirBnB needs local supply to be relevant, but by definition people use it when they are traveling.
Brief primer on wholesale food distribution
The food distribution market is highly fragmented. There are about 50 big national distributors. Each one works via regional branches with separate P&Ls. The regional market is even more fragmented. For example, Maryland alone is served by 1,600 regional distributors.
Food aggregators/hubs are the physical locations out of which food distributors store produce (i.e. a staging ground). The distributor moves food from the farmer to be stored at an aggregator before being shipped to the end-customer.
The aggregator/hub is it’s own corporate entity, renting out space and materials to distributors. This is not a fast moving market; the aggregators I looked at have rented out the same parts of their warehouse to a particular distributor for decades.
For example, the Hunt Point Terminal Market in the Bronx, the largest aggregator in the world, serves the New York metropolitan area. It has acres of food storage, serviceable by rail and trucks. It houses $2.5B of fresh produce in climate controlled environments. 62 market merchants operate out of Hunt point. For example, A&J produce sells wholesale food in three categories: vegetables from the Americas; mushrooms from upstate NY, Pennsylvania, and Canada; and fruit from all around the world. The is the scale of industrial agriculture.
Food hubs are smaller versions of aggregators. They tend to serve local farms. Some are non-profits backed by government initiative.
- This stat is from 2012, so it’s certainly higher this year.https://www.internetretailer.com/2012/01/24/books-clothes-and-electronics-are-most-shopped-categories ↩
- A secondary (but important point) is that most of these models have only innovated on the “last mile” problem. Meaning that they are really just taking groceries from a grocery store/warehouse to the consumer’s house. I find companies that are trying to shake up the actual supply chain itself, not just adding a final step, to be much more interesting as well as potentially disruptive. But these companies are still illustrative of shaky consumer behavior. ↩
- That all these companies are privately owned is frustrating, as I can’t give much supporting evidence (but also indicative of lack of success). ↩
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