Innovation in Food and Beverage is Expensive

Here's some "leaked" documents in ReCode about a food delivery startup called "Maple". The basic gist of the company is that instead of going to a restaurant, the restaurant comes to you (ahem: delivery). Uber has tried a delivery service that doesn't seem to be going anywhere fast. EatStreet is testing delivery because, well, a menu aggregation site only gets you so far. I could do this all day; the point is, the list of failed or failing restaurant/delivery services goes on and on.

Why?

Delivery is expensive. Duh. Add that to a meal that already has a relatively low margins, and a $10 meal becomes a $15 meal really fast. OK; still, $15 isn't bad, but for $5 I'm willing to bet most of us will either forego the $10 meal or, more likely, just run for some takeout ourselves and pocket the $5.

And, here's the thing that a lot of people forget: restaurant food is pretty expensive. It's made (and served) by people who are expensive, uses ingredients that are either modestly expensive or grotesquely bad for you and/or the environment, and goes "bad" quickly (not, as in "goes bad it will kill you" like with spoiled or contaminated food, but as in "goes bad and you will complain it's too cold and/or soggy" or whatever).

[ed note: I'd normally provide evidence for each of things I've claimed above. I feel that doing so would detract from a relatively concise point I'm trying to make, so I will leave it to you to go find evidence (dis)proving the things I've claimed if you care to]

People underestimate the impact of labor costs in the food that they order out. In particular, they forget that the price of the food at a restaurant only includes $2+/hr for wages for the server (and then you tip). There is lots of evidence to show that tipping is a terrible way to pay people, but the business effect is that it makes it seem like food is a lot cheaper than it actually is.

Here's a thought experiment: pretend there is a restaurant with tipped staff where a burger is $10 and you pay $2 in tips; and right next door is a restaurant of exactly equivalent quality where the burger is $12 but there is no tip. Which would you go to.

Here's a really interesting report from the USDA. Its conclusion is: "... that the demands for disaggregated FAFH [ed note: Foods Away From Home] products differ in price responsiveness and tend to be more sensitive to changes in food spending patterns than FAH [ed note: Foods at Home] products."

In normal-people speak? You're going to buy the $10 burger.

These delivery services are trying to take what the USDA calls a "premium" FAFH and "turn it into" a FAH. But, here's the rub: we seem to treat the pricing as if it's still a FAFH product. The price of delivery creates a price discrepancy between competing FAFH experiences and the USDA report says that instead of paying the premium for delivery, we're more likely to either substitute with FAH products or prefer the less-expensive (i.e., carry-out) FAFH option.

For businesses that want to "innovate" in this space this means that you (your business) needs to cut into ingrained consumer practices and attitudes. Normally this is done through costly consumer education (read: "marketing") campaigns to convince the user that your product is worth the premium. Good luck!

Reading List: Entrepreneurial Ecosystems

Guidelines for Local and State Governments to Promote Entrepreneurship
What an Entrepreneurship Ecosystem Actually Is
How to Cook Up a Vibrant Entrepreneurial Ecosystem

Six Strategies to Create Strong Entrepreneurial Ecosystems

For Social Entrepreneurs It's All About the Ecosystem

Entrepreneurial Ecosystem Diagnostic Toolkit (pdf)

Entrepreneurial Ecosystems and Growth Oriented Entrepreneurship (pdf)

Creating University-Based Entrepreneurial Ecosystems (pdf)

The Change I'd Like to See in the Entrepreneurial Community

This is a question I've been thinking about a lot lately. What is "entrepreneurship"? It has a lot of meanings.

We could get old-skool and talk about Schumpeter. A Schumpeter-ian entrepreneur is someone who is an "innovator" who "exploit[s] market opportunity through technical and/or organizational innovation." [cite] This is certainly the prevailing modern definition as well. When we hear about entrepreneurial hubs, entrepreneurial ecosystems, and supporting entrepreneurship in the university setting, this is almost inevitably the image that is being evoked.

We also have the Knight-ian entrepreneur. Frank Knight, also a Chicago Economist (technically Schumpeter was not a Chicago economist - but there is a lot of cross-over between the Chicago school and the Austrian economics of Schumpeter, Mises, and Kirzner), argued that an entrepreneur is a "risk-taker." In particular, the entrepreneur is the individual that takes risk, as opposed to an employee who doesn't accept the risk of failure or success but receives instead a salary irregardless [ed note: I've been made aware the "irregardless" is not a proper form of speech, however, I fall in the line of thinking that words have meaning in context and since "irregardless" clearly has a meaning - everyone knows what it means even if artfully spoken - I will keep it here in honor of Finnegan's Wake] of the success of their work. This, too, is a popular model of entrepreneurship; we don't normally think of Knight's risk-taker as being mutually exclusive of Schumpeter's innovator.

And, just for the sake of (neo)Classical Economics completion, we have a third economic model of entrepreneurship from Israel Kirzner (also an Austrian economist). Kirzner views entrepreneurship as arbitrage filling a market gap for profit opportunity until competition can negate the market premium captured by the entrepreneur.

Keynes, for his part, took a more basic approach to entrepreneurship. Keynes called the "owner of the production factor" the "entrepreneur." This is a bit similar to Knight's entrepreneur except Keynes doesn't bother to ask why this particular person happens to command the means of production.

All of this is background for the trigger that got me re-thinking about what we mean by entrepreneurship at all. I was interviewed by Fine Point Consulting for their Leaders and Influencers blog. At the end of the interview I was asked what change I would like to see in the entrepreneurial ecosystem.

This got me thinking about two things: first, a conversation I had with Madison College about their entrepreneurship support; and second, our work at the Law & Entrepreneurship Clinic. I thought about the kinds of people that go to Madison College, a local community technical college; and I thought about the kinds of people that we work with here at the L&E Clinic.

We fold under our umbrella of "entrepreneurship" all sorts of endeavors that have little to do with innovation, risk-taking (although here I mean "risk" in the more colloquial sense, not the strictly economics or legal sense that Knight would use), or taking advantage of market opportunities. For Madison College, and for many of our clients, entrepreneurship is more closely related to Keynes' matter-of-fact definition - the owner of the factors of production - and little more. A person has a skill and another person wishes to hire that person to perform that skill. Even this single person (who we often call a "consultant" or "independent contractor"), who in days of old would have been Knight's "employee" are now finding themselves, whether they want to be or not, as entrepreneurs.

Here, I'll point to Tim Syth's interview with Janice Simmons of Accenture. The "gig economy" is making entrepreneurs of employees. Knight's mutually exclusive distinction between the entrepreneurs and the employees is rapidly eroding in a post-bubble universe. Although interestingly, these post-recession changes are in fact all about the shifting of risk.

So, when I was asked about the change I'd like to see in the entrepreneurial community, I said: "I think we need to have a broader discussion about what is and isn’t entrepreneurship." And by that, I meant this: a lot of our policy and incentives and ecosystem is built around the Schumpeterian view of entrepreneurship. Yet, increasingly, more and more of our clients follow in the mold of the Knightian or simply the Keynesian entrepreneur. I'm not convinced that the same incentives and support systems work for both. So, as we think about how to improve our ecosystem, maybe we should start thinking about to support and incentivize different kinds of entrepreneurship other than simply innovation-based.