While it takes tremendous effort to grow any business, we believe in the imperative that a healthy diet helps (if not 10x) your mental prowess and ability to make crucial decision in business. This article will look at healthy food (including snack) delivery operating on subscription model. We hope that the overall lessons from the aforementioned vertical will be useful to any entrepreneur building a subscription-based business model.
The Business Model
A subscription-based business model is, in a nutshell, exciting due to the ‘hopeful’ predictability of its monthly or annual revenue. However, there are many factors to take into considerations - going from logistics, food preparation in itself is another business challenge, the packing, building the brand and trust among consumers while selling subscription.
We tried a couple of Singapore-based “healthy” food subscription businesses in the past, which prompted us to cover the topic in this article. The sample size of companies consisted of 2 lunch meal and 2 healthy snack.
The Upside -
A. Consumer Benefits
The most obvious benefit is convenience. The consumer simply picks his/her option(s) from the customer’s dashboard, and then wait for delivery. Whether it is food/snack/beauty/clothes, convenience can justify (to some extent) the premium paid by consumer.
Another benefit is the opportunity to discover new products. This approach would mostly benefit subscription businesses covering snacks or beauty or fashion. The discovery process offers new insights to the consumer about what is trendy or what is good (but they did not know about).
Partially, the role of the subscription business is to curate and thus, develop an understanding of the consumer. The latter would build a little bit of excitement in anticipation to the coming delivery. Curating and surprising positively the consumer is great.
B. Business Benefits
In our opinion, the subscription-business for snack is relatively low cost based on the observation. Food, on the other hand, can be tricky. Other subscription businesses for beauty or fashion might have lower barriers to entry in terms of cost. Thus, low cost is a benefit for some subscription-business types.
A subscription model offers stickiness and revenue predictability as long as the consumer does not cancel. This in turn, make inventory management easier -
In some cases, the degree of automation derived from using available software tools can minimize errors and render a few processes, faster.
Subscription-based business also benefits from minimizing the consumer’s effort in having to choose. Analysis paralysis and information overload are two mental models affecting consumers. Thus, a business which is curating its products will possibly and effectively reduce the impact of consumers having to think for themselves.
Lastly, there is an element of novelty to it whereby some businesses can offer new products every month. However, in the case of food, the upcoming delivery was picked in advance.
The Downside -
C. Low Margin Business
In 2016, Amazon lost close to $7.2 billion in shipping, and this is because logistics (and fulfillment) takes a whopping 20% to 40% of the overall cost per order per customer.
Bringing Amazon’s scenario to a much more smaller scale now.
There are multiple costs involved:
- Logistics & Fulfillment (packaging)
- Fixed Costs
If a box costs $35 per month, a time-slot courier service will cost at least $5. That's 14% of the selling price. Assuming a neat $10 gross margin per box, that's 20% of the costs.
At Fairprice supermarket (Singapore), 450g of flaxseed will cost $6.50 to the consumer. The latter would need to buy 8 of those to qualify for free home delivery.
So-called healthy food would need to purchase fresh produce, cook and pack on the day of the delivery itself to ensure freshness and the healthy component of the marketing promise. Assuming courier is time-slot, this is still in the $5 ball-park figure. The ingredients could possibly be used for 2-3 meals and due to economies of scale (i.e. multiple meals per day), the cost of production should be driven down.
We tried an experiment - cooking for one person for one work week on a $50 grocery budget. The cost per meal is roughly $10 and included a variety of options... chicken breast, beef, french beans, quinoa rice, broccoli, carrot...The point remains, if the cost is $10, how much would a company charge their customer?
Hence, it is fair to say that margins are low and chasing volume is king.
D. High Customer Acquisition Costs (CAC) <> Poor Lifetime Value (LTV)
Although the internet has made it easier to distribute information, substantial marketing money has to be spent to educate and acquire new customers.
First, it is already expensive enough across Southeast Asia to acquire new users. Even for a location-focused healhy snacks, say Singapore, the CAC could be relatively very high.
A speculative breakdown of CAC could imply a combination of online and offline marketing. A guesstimate of CAC for Facebook Ads: SGD 5.00, for an offline event (unless it is a free booth): SGD 1,000. All these basic costs exclude the cost of providing free samples and assuming all other costs are minimized by doing it oneself (Facebook Ads creatives, setting up Facebook campaign among others).
Second, the customer's LTV is unpredictable even for a subscription-based business model. Whether it is in Singapore or in Thailand, there are poised to be cancellations for multiple reasons.
Food quality was one main reason to stop a membership from a 'healthy' food delivery. It is not-so-healthy to eat frozen food after all.
Price vs quantity. Someone could easily find 'more' of the same product through other (offline) channels for the same price point.
D. Online to Offline & Vice-Versa Challenge
Healthy food or snack will require the most unsexy business to come into play, i.e. logistics. The cost of logistics is already eating up a lot of the business' margins and it does not stop here.
Logistics also mean to have a broad network of delivery. Otherwise, your Total Addressable Market and eventually, Expected Share of Addressable Market will shrink by a large multiple.
Healthy food / snack delivery is, on the other hand, predictable. Implying that knowing when to send what to whom, does probably make life easier at the logistical level. But this does not change any of the above because a time-slot delivery from point A to point B and this is itself costly to do.
In Singapore, logistics is expensive but easy. What about Malaysia, Thailand or Indonesia?
F. Customer Personas Dilemma
Healthy food/snack business is niche. So, by default, the addressable market is self-limiting a business from achieving a super-profit status. Niche is great, but this type of business segment does not allow a niche business to charge premium (again, we are talking about snack...how much are you willing to pay for 1 packet of grains for instance?)
If the customer persona here is an individual working for a firm, the healthy food/snack business needs to target someone who is very very willing to spend about $35-150 per month to have some of the weekly meals or monthly snack delivered to them. This price point is less appealing to many despite the assumption that an average office worker might spend $3.50 daily on a lunch meal at a hawker centre (or $70-100 for a month worth of lunch meal).
Then, the focus shifts to corporate which is positive market opportunity for these subscription-based business model.
We focused on some of the challenges, this is not to say that a subscription based model can't be successful and become a sustainable business. And, while this article focused on healthy food/snack, similar challenges apply to other subscription-based business model relying on an online to offline interactions such as monthly delivery for cosmetic, clothes, shave kit among others.
We hoped you enjoyed this article, feel free to share it with a friend or two.