Work Mix #2: Understanding ghost kitchens, the rise of niche grocery products and new ways to finance education

Understanding ghost kitchens, the rise of niche grocery products and new ways to finance education

December 6, 2019

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This week's note covers:

  • A look at the emergence of ghost kitchens (part one)
  • The rise of niche brands and products in grocery stories
  • Income share agreements, a relatively new model for educational financing that is gaining momentum
  • Resources for building a successful marketplace business

A/ The rise of ghost kitchens: Plug-and-play facilities at scale for new delivery-only restaurants

One of the most exciting trends shaping the future of work is the democratization of scale across more sectors: new platforms are emerging that give small businesses almost instant-on access to infrastructure that takes advantage of much larger scale. This is creating new opportunities for small businesses and individuals.

Amazon Web Services (AWS) has done this for storage and compute infrastructure, enabling companies of all sizes to focus on their product or service without needing to build their own infrastructure. Shopify has done this for online stores, making it possible for new consumer businesses to focus on building differentiated products and brands.

Ghost kitchen companies aim to enable this same kind of plug-and-play access to scale for restaurants serving the app-based delivery market. As with AWS and Shopify, this has the potential to reduce costs for businesses and consumers, make it easier to start and operate a business in the space, fuel the expansion of downstream sectors and provide consumers with access to more variety and innovation.

Why is this important? The overall market for food is a big one: The USDA estimates spending on food (at home and away from home) represents about 10% of Americans disposable income, and app-based food delivery is rapidly growing share of this market. Restaurants are also a traditionally important category of small businesses. Data from the Small Business Administration indicates there are around one million of them in the US. Food delivery apps are already having a significant impact on the sector, and the arrival of ghost kitchens will have further effects.

In this week's blog post, I explain what a ghost kitchen is, highlight some of the players in the space, discuss the key reasons they create value and examine the implications for small business restaurant owners and entrepreneurs.

Summary points:

  • Ghost kitchen companies are rapidly expanding in the US and internationally. Delivery companies are also getting into the business
  • Ghost kitchens take advantage of several arbitrage and efficiency opportunities that reduce the cost of opening and operating a delivery-only restaurant. These benefits require a certain level of scale (not available to an individual restaurant) to capture fully
  • For small business entrepreneurs considering starting a restaurant, they may offer a more attractive alternative to a traditional restaurant by reducing the cost and likelihood of failure
  • For existing restaurants looking to expand, they offer a way to do this much more quickly and with less investment and financial risk than adding a traditional restaurant location

Click to read the rest of the post on Remixing Work...

B/ "This is not your ordinary supermarket apple": the rise of new niche food brands and products

A combination of today's consumer preferences and changes in supply economics is fueling increasing variety and differentiation of brands and products to address more specific and narrow consumer segments.​

Several interesting pieces in the last week looked at how this is playing out in food and grocery. (Amusingly, two of them discuss separate innovations in apple varieties.)

1/ Planet Money's The Indicator discusses "Niche Products in Our Grocery Stores" in a short 10-min podcast, looking at why brands offer an increasing number of product varieties and how they do it (e.g., they say Kettle Brand Potato Chips 31 varieties!)

Apple link

Episode site

2/ A broader study on the subject, "The Rise of Niche Consumption," was published in September by Brent Neiman and Joseph Vavra, both of the University of Chicago.​

They find that, although our preference for particular things has increased as individual consumers, those preferences have diverged across consumers:​

"over the last 15 years, the typical household has increasingly concentrated its spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly focus spending on different products from each other. As a result, aggregate spending concentration has in fact decreased over this same period."

3/ The first of the apples:The Indicator discusses how Washington State decided to develop and launch of a new variety of apple, the Cosmic Crisp.

Apple link

Episode site

4/ The second of the apples--taking differentiation even further: In a longer discussion on new uses of internet video, a16z's Connie Chan and Avery Segal highlight how Chinese farmers are using short videos to market their produce directly to customers:

By selling directly to consumers instead of through grocers, farms can reach far more customers and earn more money. Meanwhile, viewers can support independent growers—meeting the face behind their fruit—and receive fresher produce than what’s available in local markets.​Ms. Feng, for instance, is a medium-sized fruit influencer in Sichuan province who broadcasts to 218K followers. Her orchard grows sugarcane and pomegranates, but she’s best known for “sugar heart” apples, named after the fruit’s heart-like appearance. This is not your ordinary supermarket apple.

C/ New education financing models are gaining momentum

Income share agreements (ISAs) are a different way of financing education. With an ISA, a student doesn't have to pay anything upfront or take out any loans. Instead, they have to repay a percentage of their salary for a certain number of years after completing their program. But they only have to pay if they have a job paying a certain salary level. If they don't find a suitable job or can only find one below the threshold salary, they don't have to pay anything.​

ISAs are being used by companies like Lambda School and Flockjay to fuel their popular bootcamp programs that help students learn skills and get jobs in computer programming and tech sales. They are also starting to be used by traditional higher ed institutions.​

Purdue University President Mitch Daniels has overseen the adoption of ISAs by hundreds of students at Purdue and published a column in the Washington Post last week, extolling their virtues and arguing for further adoption.​

The primary benefit to students is much better risk-sharing:

"An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity; if a career starts slowly, or not at all, the student’s obligation drops or goes to zero. Think of an ISA as equity instead of debt, or as working one’s way through college — after college."

But an equally valuable systemic benefit is increased accountability for the educational institution and alignment of incentives with their students: if students are not graduating with the skills that make them attractive to employers and provide them with good-paying jobs, the school bears the cost.

This will lead to a positive loop for improving the ISA-financed programs. It will also lead to an increased level of transparency of outcomes than exists today. As more and more people choose these programs to advance their learning and career switching or advancement objectives, it will also force many traditional programs to adapt to become more efficient and effective if they want to be able to continue to attract students.​

As an interesting side note, ISAs are a relatively new innovation as a product, but the idea for them is not. Milton Friedman suggested the appropriateness of this kind of equity investment to support education in a 1955 paper.

The takeaway: ISAs are a welcome innovation in a sector that needs it. They share risk better, align incentives and drive accountability. They offer students what will sometimes be an attractive alternative to traditional education financing and are also enabling new, promising education and training models.

D/ Resources on building successful marketplace businesses

New marketplaces are a huge factor in shaping the future of work. Before the rise of Uber and others, the concept of a "gig worker" didn't exist. Now three in 10 adults in the US work in the gig economy according to the Federal Reserve.

Below is some great content from recent weeks that will be useful to anyone working at a marketplace business or thinking of starting one and anyone more generally interested in how they operate.​

1/ "How to Kickstart and Scale a Marketplace Business"

Lenny Rachitsky has a fantastic four-part series in his Lenny's Newsletter on "How to Kickstart and Scale a Marketplace Business: 🐣 Crack the Chicken-and-Egg Problem."​

It compiles the learnings from the people who built "today's biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more."

2/ Podcast episode: VC perspectives on marketplaces

Sarah Tavel, partner at Benchmark, and Nabeel Hyatt, partner at Spark Capital, discuss their experience investing in marketplace businesses on Erik Torenberg's Venture Stories podcast

​They cover a lot of ground.

One takeaway is the importance of liquidity over growth in a marketplace's early days. (Although, of course, liquidity requires some level of growth.)

But as an example what this means if you're Uber just starting out, it's far more important to focus on building a core market in which riders can get picked up a very high percentage of the time within a few minutes than it is that you achieve a certain level of growth in number of total rides or revenue.

Apple link

Episode link