The Business Times' Column | Due Diligence: What’s a VC-backable F&B business model?

This column was first published on The Business Times

By Khushbu Topandasani and Elise Tan

SOUTH-EAST Asia offers some of the world’s best gastronomic destinations – food is a central part of our life in this part of the world. The food market is valued at US$696 billion in 2023 and projected to grow at a compound annual growth rate (CAGR) of 6.96 per cent between 2023 and 2027.

However, keeping customers happy and sustaining a food and beverage (F&B) business is challenging. How do investors assess F&B startups? As an active investor of startups in the F&B sector across South-east Asia and India (Janice Wong in Singapore, DailyBox in Indonesia, and Kapiva and Licious in India), we have been observing the F&B scene closely.

F&B is traditionally a brick-and-mortar business. However, during the pandemic, online food delivery experienced supercharged growth across South-east Asia. F&B companies that were only operating offline were forced to go online to survive. In 2022, even as the pandemic eased and dining-in made a comeback, ordering food online continues to persist.

Hence, serving consumers through an omnichannel approach, providing consumers with great, consistent experience on both online and offline channels, has emerged as a key strategy.

F&B businesses also need to constantly track and market to the ever-changing consumer preferences. Marketing to consumers has evolved dramatically, and harnessing the power of social media such as Instagram and TikTok is critical for brand discovery and sales.

Lastly, but perhaps most importantly, since competition within F&B is intense, it’s essential that the startup is able to create and build a strong brand, as well as cater to the taste-buds of Gen Zs and millennials.

Firstly, does the business scale?

The ability to scale and capture billion-dollar market opportunities is one of the key venture capital (VC) assessment metrics for any business. When we assess F&B businesses, we ask, can it scale across cities via both offline and online channels?

During the pandemic, food delivery platforms enabled F&B brands to expand beyond the reach of their brick-and-mortar stores. However, that has come at a high cost of at least 30 per cent. Cloud kitchens also caught on as a concept that can help F&B entrepreneurs scale rapidly at low cost, and allows them to test the waters before expanding to Tier-2 or Tier-3 cities. However, costs were also a concern and even Grab, one of the pioneers of cloud kitchens in Indonesia, shut down its entire cloud kitchen ecosystem (known as GrabKitchen) after four years of operations due to the unsustainable business model. With the pandemic over, entrepreneurs now face the challenge of meeting consumers’ ever-changing preferences.

In the quest to reach consumers wherever they are, brands must think strategically about managing their online and offline locations to deliver consistent food quality and experience, while at the same time maintaining a viable business model and profitability on both channels. This is a challenge, and 2023 marks a pivotal year for F&B entrepreneurs to succeed in executing an omnichannel strategy that is complementary in nature.

One of our portfolio companies, Dailybox, a multi-brand F&B group, managed to expand to Tier-2 and Tier-3 cities in Indonesia by optimising both central kitchen and cloud kitchen concepts. As of January 2023, Dailybox Group has more than 200 outlets across Indonesia and is currently one of the largest omnichannel multi-brand F&B platforms in the country. The company has five brands under its umbrella, namely Dailybox, Breadlife, Shirato, Lumiere and Antarasa.

Is it an aspirational brand?

Building a successful F&B startup requires not just scalability, but the ability to build a strong brand. To succeed in this highly competitive market, it’s crucial to create an aspirational brand that differentiates the company and attracts loyal customers. In Indonesia, there is a significant opportunity to tap into the spending habits of younger consumers, with 53.7 per cent of the country’s population being millennials and Gen Zs. This demographic tends to splurge on dining out and unique culinary experiences, making them a key target market segment for VC-backed F&B businesses.

With a shift towards value-driven spending, especially by younger consumers, brand neutrality is no longer the safe way out. Across every industry, millennials and Gen Zs can be seen supporting brands they believe in. These generations demand sustainability, innovation and transparency from the brands they are spending on – and they are willing to pay more. According to a DealStreetAsia report, although 66 per cent of global consumers are willing to spend more on sustainable goods, millennials are 73 per cent more likely to do so, and Gen Z will spend 10 per cent more.

Janice Wong Singapore is a multifaceted confectionery company in our portfolio. While its core artisanal brand exudes luxury and pushes boundaries through art and design, Janice Wong has continued to innovate in other dimensions and has rolled out new product lines and concepts that are relevant to the evolving consumer preferences.

For example, beyond product quality and experience, the company’s bean-to-bar line “Pure” and ice-cream concept “Softhaus” also focus on promoting sustainability, environmental consciousness and inclusiveness, whereby the cocoa beans are sourced directly from farms in cocoa-rich regions of the Philippines, Ecuador, Thailand, Colombia and Peru. Janice Wong’s innovative dessert concepts have enabled the brand to cultivate a loyal following of customers globally, across different generations.

Metrics that we look at

There are several key metrics that venture capitalists would look at when assessing food businesses. These businesses typically comprise online and offline components.

To assess the performance of offline stores, there are a few key performance indicators (KPIs) to consider. First, we look at the payback periods of stores – both newer and older concepts, since they are essentially the return on equity of the business. The payback period targets differ depending on the business model.

Secondly, we also assess the same store sales growth of the company, since it is the growth driver of the business that determines whether sales are increasing or declining over time for a particular store.

Thirdly, monitoring four-wall earnings before interest, taxes, depreciation and amortisation (revenue/expenses that pertain only to the store are referred to as four-wall expenses) would also help F&B brands, especially multi-brand and multi-location players, to assess which stores are performing well versus those that are not.

It is good for us to see that our founders are paying more attention to the numbers and closing down underperforming stores quickly enough to minimise losses and focusing on optimising the performance of successful stores.

For the online F&B business aspect, we focus on metrics that give us insight into the health and potential of the business, such as consistent and healthy monthly growth rates, healthy customer retention, and profit contribution margin. We also look at how founders are minimising variable costs to ensure a sustainable business model in the long run.

Not every F&B business would be VC-backable. It all depends on the business model, the ability to scale, the unit economics and whether it can build a strong brand that resonates with a large market segment and a business that constantly evolves to meet changing preferences. Last but not least, the founder factor is key to our investment decision. We invest in founders who are street-smart and resilient, who are able to ride the wave even as the business cycles go up and down.

Khushbu Topandasani is an Associate Director at Vertex Ventures Southeast Asia and India.

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