Virtual Kitchens

The WSJ had a piece recently on the rise of virtual brands in the restaurant space. Such a novel idea. Given the rise of super delivery apps (DoorDash, UberEats,GrubHub, etc), legacy restaurants such as Chili’s and Applebees can quickly develop new brands that cater to a digital audience. In one such example, Chili’s was able to spool up a completely new virtual brand with no physical stores called ‘It’s Just Wings’ and grow it to $150m in one year –  that’s roughly 5% of Chili’s total business. Furthermore, they can keep their costs to a minimum with no massive advertising budgets, additional leases or significant overhead. Even after accounting for fees tacked on by the delivery apps this business is likely highly accretive.  In fact, the majority of customers had no idea that this food was even being prepared at a Chili’s restaurant which shows having a virtual brand can help create new, non-cannibalistic revenue streams, and serve as an incubator for new food concepts. Startups and ad agencies should take note as there is ample space to create new businesses around this changing landscape. 

What’s at stake is a massive TAM expected to hit $1T by 2030 made up exclusively of virtual brands and ghost kitchens.  Similar to the private label business in grocery, get ready for a crowded, opaque market where it’s harder to tell where or by whom your food was created. 

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Rollups – How to Build a Modern Day CPG

When I was at Jarden (now Newell Brands), we always had clear acquisition criteria when it came to M&A. 

  • Strong cash flow characteristics
  • Category leading positions in niche markets
  • Products that generate recurring revenue
  • Attractive historical margins / or margin expansion opportunities
  • Accretive to earnings
  • Post earnout EBITDA multiple of 6-8x

This strategy allowed us to grow from one brand (The Ball Jar company in 2002) to over 50 brands and ~$8b in sales by 2015 when the company merged with Newell Rubbermaid. 

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Food Delivery and Marketplaces Converge

I continue to see the surplus of food delivery companies and F&B marketplaces on an impending crash course. Is DoorDash a retailer, a logistics company, a brand, a restaurant or even a media/data company? Their vision is likely to be a bit of each and this will be accomplished under a build, partner, buy framework.  Like numerous other industries, the idea of a horizontal play has turned vertical and we’re starting to see each encroach the other’s territory. The challenge in the future will be how to become the super app that customers interact with daily. This fight for share is not without challenges. The average smartphone user has 80 apps on their phone, but they only use ~9 apps per day and 30 apps per month. This means that 62% of those apps don’t get used much, if at all. 

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DTC Startups – The Bear/Bull Case

Brands aren’t built overnight. Some of the most successful brands (Nike, LVMH, etc) have taken years to achieve the awareness (and more importantly relevance) they have now. In the case of LVMH, there is a key element to owning a piece of European heritage that has driven the company to be the largest luxury goods company in the world. Louis Vuitton owns much of their own supply chain. As an example, over the past couple of years they opened a manufacturing center in Texas to create leather goods here in the US that further allows them to create local stories around their products.

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Twitter – Did they Have a Choice?

When Twitter ($TWTR) announced last week that they were permanently suspending the President’s personal account I was surprised  – but I really don’t think they had an option. It’s very clear that Twitter’s growth has been heavily influenced by Trump and I expect the company will see user attrition as a result. Already, over the last few days, their stock has been falling. That said, there was no way out here. The simple fact is that Twitter makes money from advertisers and this cohort is about as risk averse as can be. Brands don’t want to be next to controversial rhetoric so they often will blacklist platforms or services that could be considered threatening. During my time at Jarden when I was overseeing our global advertising, we were constantly tweaking our buys to avoid anything that could be considered controversial.  If Twitter had done nothing, while their user base would likely have remained robust, their earnings would have fallen precipitously as advertisers abandoned the platform. This, also likely would have been a jolt to the stock – and ultimately their business model. 

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A New Airline

Happy New Year! When I see a chart like the above, it’s unfathomable to believe that it’s a good time to be in the airline business, let alone be a startup trying to enter the capital intensive sector. But that’s what David Neeleman (the founder of JetBlue) plans to do. History is littered with failures of upstart airlines due to a myriad of factors that make it an extremely difficult sector to compete in. Today’s 3 large legacy carriers (Delta, United and American) are the result of years of consolidation and currently control ~50% of the US market. 

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Giving Tuesday

This is the first year that sales on Cyber Monday are expected to exceed Black Friday, but then of course, this year is anything but normal. I’ve never been a fan of the whole holiday shopping frenzy. As food lines extend miles and millions of people remain unemployed, it’s more important than ever to give back this year. 

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Venture Debt & Revenue Based Investing

If you have a small but growing business selling on Amazon or even direct-to-consumer (D2C) you’re bound to hit a point where you require money to scale. For as much as the media talks about venture capital, the reality is that less than 1% of startups here in the US are able to raise money from VC’s. The challenge, however, is that consumer brands often have working capital needs associated with carrying inventory or affording increasingly expensive paid media.  So where do these types of businesses get the cash to grow? Traditional lenders, such as banks, often have strict covenants in their terms and have not historically catered their products to this cohort, but a growing number of new, innovative solutions are disrupting the model. I should note that pre-revenue/pre-product startups are likely not going to be a candidate for institutional debt – but a convertible note, SAFE or crowdfunding remain a viable alternative at this early stage. As a side note on crowdfunding, the SEC recently increased the cap for fundraising via this channel to $5m (from $1m) which I suspect will open up more activity in this space. 

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Vote

I’ve been reading recently how an increasing number of companies (and startups) are giving their employees off today in order to vote. I applaud this move. It should be a national holiday so everyone has a chance to go out and make a difference. We are very fortunate that we even have a say in our democracy, while around the world this is not always the case. 

Nearly 100 million people have already voted either through in person early voting or by mail – this is nearly three-quarters of the number of votes cast in the entire 2016 election. I expect, in the end, we’ll see significantly more voter turnout for this election then we did in 2016 and that’s a good thing. 

I voted by mail, but for those who haven’t, I urge you to go out today and exercise your right to vote.    

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