(UN)wasted opportunity?

Over 820 million people go hungry each year.

“So then let’s focus our efforts on producing more food”, most people might think.

Wrong

.

The issue is not entirely based on how much we produce, but more so on how we allocate existing food supplies. Shockingly, 1.3 billion tonnes – approximately 1/3  – of food produced for human consumption goes to waste every year. This gross mismatch of food produced and hungry consumers, presents significant logistics issues, centering around the inefficient distribution of food. Moreover, it’s also a matter of monetary impact: food loss and waste cause about $940 billion per year in economic losses.

The problem of food waste is directly or indirectly to five sustainable development goals: zero hunger, good health, and well-being, responsible consumption and production, life below water and life on land. SDG 12 seeks to “ensure sustainable consumption and production patterns” and in particular 12.3 aims to “By 2030, halve per capita global food waste at the retail and consumer levels and reduce food losses along production and supply chains, including post-harvest losses”.

Therefore, cutting down food loss and waste has a triple benefit and saves money to farmers, companies, and households. Wasting less means feeding more.

Different stakeholders, including restaurants, retailers, consumers or governments, are working worldwide towards solving this issue in multiple ways and forms. Furthermore, dozens of startups are trying to disrupt the space by offering different alternatives. However, this challenge is still far from being solved.

More needs to be done.

 

 

A business model that outperforms existing ones

Our business model connects surplus food from supermarkets and restaurants with consumers via an App. Employing business model innovations to 1) solve for information risk and 2) align incentives, consumers can select among leftover food items at reduced prices. This –in turn– saves consumers money and increases the seller’s revenue. In effect, a secondary market is facilitated where 1) information on goods available with sellers is shared with interested buyers at the time that they want it most and 2) incentives between the buyer and seller are aligned. Additionally, because the product is an App, the technology is scalable and easily adopted by consumers and can leverage existing platforms. This could contribute to a more circular economy as instead of a proportion of food being thrown out, it will be consumed.

A key innovation that we would like to add to facilitate ‘market clearing’ and thus minimize food waste is ‘surge pricing’. Similar to the surge pricing we experience with taxi apps like Uber, surge pricing would mean that the price of food that is left over at the end of the day, while always discounted compared to regular pricing, would vary according to both supply and demand. When there is a lot of food left over, prices would be discounted even further and people with the app would receive notifications to incentivize purchase. The ultimate aim is to be able to vary pricing in a way that ensures almost complete matching of supply and demand. This is different from existing apps which do not have dynamic pricing and so would not be able to address the peaks and troughs in demand and supply. Therefore, this business model should outperform others in terms of environmental goals.

We expect that both restaurants and supermarkets would accept the dynamic pricing as in contrast to throwing away food and earning no revenue, the business model provides them with a way to monetize as much of it as possible. If we are able to bring food wastage down dramatically, it is also something they could report publicly and use in their PR. Customers should be willing to be work with dynamic pricing as, in any case, the price would be discounted in comparison to the regular price. In fact, we believe that some customers, like NGOs, would be able to leverage this feature very well as they have a need but may have a constrained budget and so could purchase more during low price periods. While our business model may perform better financially in the short run if we do not vary prices and maintain a certain margin, we believe that this innovation should help us outperform other models by reaching scale as it is the one that serves both restaurant/supermarket and consumer needs the best.

Next to implementing surge pricing, we want to propose to integrate digital food stamps into the existing apps. This will allow existing “food re-distributors” to reach people in need while outperforming existing business models.

Today, existing solutions are mainly used by the so-called yuppies (fashionable young middle-class person with a well-paid job). This group of customers likes to enjoy novel apps and due to environmental and cost consciousness become users of the app. But, in fact, existing business models are reaching the wrong customer segment. They should reach those that cannot afford to purchase food at the full price. Integrating food stamps into the existing apps would be one way of doing so. It can ensure that left-over food can be purchased at a discount by people who are truly in need. In this way, our business model outperforms the existing models on a social dimension: easier access to cooked food and lower associated costs for low-income (and potentially food insecure) customers.

Not only socially but also financially a revised business model will outperform current market players. With the government as the largest customer, the model can provide a steady stream of income. In the U.S. alone, the federal aid program called Supplemental Nutrition Assistance Program (SNAP) benefited 40 million Americans in 2018 – a HUGE market potential. Today, there is even a specialized debit card system known as Electronic Benefit Transfer (EBT) onto which the food stamps deposited monthly. Beneficiaries can use their credit on these cards to purchase food at supermarkets, convenience stores, and other food retailers, including certain farmers’ market. Being listed as one of the eligible food retailers can provide a significant business opportunity.

Therefore, a business model with integrated food stamps provides benefits for people in need while generating significant returns.

The innovation could be game-changing as it addresses both supply and demand needs by using existing technology and infrastructure. There is a value add for both supermarkets/restaurants and customers, and it addresses key SDGs. Restaurants/supermarkets could earn some extra revenue without any extra marketing effort and only minimal operational effort from existing resources and customers get cheap(er), good quality food when they want it.

The innovation can be a game-changer for all three major players in this model:

1.       Customers: For people who require financial aid, this model provides a convenient way to purchase food at a discount. With food stamps fully integrated in the existing apps, purchasing food becomes easier. It will not require a separate card but only the tool that most people own anyways – the smartphone. Even more so, it will allow people in need to treat themselves with a restaurant meal. To date, food stamps are limited to certain retailers. Integrating food stamps in the app will allow users to enjoy restaurants (while notably still consumed at home).
2.       Solution providers: With the government as the largest customer, solution providers can significantly decrease their risks. First, firms can more easily acquire new customers because the government will act as a distribution channel. Moreover, firms will be able to better forecast the demand (and set prices accordingly). A smaller proportion of the revenue stream will be attributed to independent retail customers.
3.    Government: Lastly, with a full integration of food stamps and potentially a feedback loop to the government, the government as an oversight body could go as far as to monitor and control what their beneficiaries consume. A feedback loop might allow the government to gather data on nutrition and – going a step further – even intervene when it comes to unhealthy diets.

 

Potential costs and risks of this innovation. Barriers to scaling

Surge Pricing

Despite all the potential game-changing advantages of the “surge-pricing” business model innovation, there are some potentials costs and risks associated with the innovation as well.

• There is no perfect price! When supply is less than demand, surge pricing will kick in, resulting in HIGHER prices. This may discourage customers from purchasing the food as they may perceive it as “unreasonably expensive” relative to other alternatives that they may be able to purchase. On the other hand, when supply is more than demand, the price will be LOW. This low price could also discourage customers from purchasing the food as they may now perceive it as “lower quality” product, and a risk not worth taking. The low prices will raise doubts amongst customers, making it less desirable for them to purchase the food.
• Restaurants may not be threatened by the low prices. Before the existence of such innovations, the restaurants used to incur the entire cost of overage, which had a salvage value of zero, and therefore view it as a sunk cost. With such innovation, restaurants are given the opportunity to sell the food, even if at a minimal price. As such, restaurants may not be encouraged to manage their food better, since their mindset has always been that leftover food is thrown away, and they will be happy with any salvage value they may get.
• Surge pricing will likely occur at peak hours. The risk here is that most customers will portal at certain popular mealtimes when demand for food is high. At these times, the surge price will likely kick in, and this may discourage them from buying the food, resulting in them finding alternative options.
• Scalability! This business model may also experience barriers in terms of scaling. Restaurants may resist this technology, fearing that it will expose them too much: if a restaurant always has low prices, it may indicate low demand for their products, or an inability to manage their supplies. In both cases, this may make them a less desirable option to the end user. Another potential barrier to scaling this business model is the availability of fast food delivery options that may be even cheaper than the food products available on the site. Another major barrier to scaling is around the mindset of buying and eating “leftover” food, especially when prices are surging.

 

Food Stamps

Working with the government (for example, the U.S. SNAP program) presents several costs and risks on the product side in terms of both partnership and integration. Similarly, on the customer side, adoption and utilization of the apps also offer their own sets of costs and risks.

• Business Development: Governments are not typically an “early adopter” of new technologies – i.e. they are risk-averse and slow moving in their decision-making processes. This can prove extremely costly for a technology startup, as the sales cycle (to secure the government as a “customer”) can be too long if the startup is cash-poor and concerned about the runway. Governments can also be highly demanding in terms of their technology security and privacy requirements. Especially for a startup technology company, meeting these privacy and security demands can prove very costly from a resource perspective on the product and business development side. Often times the government will require their technology providers to have an entirely different set of processes and employees who adhere to the government’s unique needs and procedures. Needless to say, the process of partnering and subsequently working with the government presents a big challenge for a technology startup; however, the benefits in terms of scale (for example, 40 million new users in the U.S.) and customer profile (low-income, food insecure users) are well worth the investment.

• Technology Integration: Any time two parties have to integrate their respective technologies/databases (in this case, the apps and the government), there are always challenges. In this specific case, the apps would have to integrate with, for example, a) EBT as a form of payment and/or b) potentially the SNAP database (registering new users and food stamps allocated to them). This type of integration would involve many stakeholders on both sides and could result in integration errors – “bugs” – in the App that could cause issues both with the backend reporting systems and for any user in the App ecosystem (the customer/restaurant/grocery store). Such bugs could cause any user to discontinue his/her/its use of the app – and, at scale, this could pose a major cost to the business (on the supplier or customer side).
• Customer Adoption and Utilization: As with any App and new technology, a major risk is whether or not users will actually download the App and repeatedly use the service (in this case on the driver/restaurant/ customer). Marketing efforts on increasing customer adoption can prove to be costly – especially in the absence of viral growth or knowledgable and strategic channel partner.

Failure to secure either the government as a partner, as well as engaging users of App, are the two biggest barriers to scaling the business.

 

Next steps to mitigate the risks associated with this business model and to allow it to scale

Surge Pricing

In order to mitigate the risks associated with this business model, a few possible next steps exist.

First, we should make sure that prices, even when surging, never exceed the restaurants’ menu prices. In other words, the food ordered through the application should always be relatively inexpensive to the customer, and the customer should ALWAYS benefit from using this application. Otherwise, there is very little incentive to pay more for “less fresh” food.

Second, we should make sure that food options are available on the platform throughout the whole day, and not just during peak hours. This will enable customers to benefit from the lowest prices without having to incur higher prices during peak times.

Third, we should be very transparent about the surge pricing multiplier that is being imposed on the customer. The customer should be able to easily understand why he/she is paying a certain price. This will help to clear any doubts about pricing or about the quality of the food that is being sold.

Finally, it is crucial to educate the restaurants and the end users on the food waste phenomena in order to encourage them join the movement. By giving them a sense of purpose, and by bringing them in and making them feel responsible and appreciated, they will be more excited to support this mission.

Food Stamps

In terms of mitigating these key risks and reducing costs on the partnership and customer side, the following strategies can be pursued:

• Business Development: Raising sufficient funding from investors (who are aligned with the vision of the App and see the potential of working with the government) can be an effective way to mitigate the risks and costs associated with a) the long sales cycle and b) investment in business development resources, as well as security and privacy enhancements.

Additionally, developing an advisory board of professionals who understand and have connections with the government can help expedite the sales cycle and navigate the government’s specific requirements, and reduce risks associated with a complicated partnership process.

• Technology Integration: Working alongside the government, the apps could launch a pilot in a specific region with a subset of food stamp users. This pilot with a smaller group of users will allow the App to work out any “bugs” – as well as operational/logistics issues – before rolling out the integration at scale (to all 40 million SNAP users, for example)

 

• App Adoption and Utilization: Understanding the behavior and preferences of the app user community is key to facilitating app adoption. To this end, it makes sense to leverage the government’s expertise in understanding this new customer demographic(s) based on past programs and initiatives with these communities.  

Another strategy for increasing adoption can be to build out an ambassador network across communities where government food stamp usage is high. Targeting trusted, “connectors” within these communities to promote the benefits of apps could be an effective way to increase awareness and trust of the apps. To incentivize these “Ambassadors”, the apps and government could offer some kind of commission-based compensation for X # of new signups and/ or orders within these respective communities.

Potential negative social/environmental impacts of this business model

While there could be negative environmental impacts of this business model, the effects can be mitigated through operational adjustments:

Packaging: The food from the restaurants and grocery stores will most likely be presented to customers in traditional takeaway containers (plastic containers with a plastic or paper takeaway bag). Mass use and production of this type of packaging have caused significant pollution, presenting negative environmental externalities; however, the App could encourage and/or restaurants and grocery stores to use biodegradable or reusable containers.

Transportation Pollution: Depending on how close the users are to the restaurant or grocery store, there could additional pollution associated with commuting costs to pickup or drop off the food order. To reduce these effects, the App could encourage users (through design, or price schemes) to visit restaurants close to their location.

 

Ashini Kothari, Renée Ros, Irene Salas, Hana Shashaa, Julia Streuli, 

 

External links:

https://www.ft.com/content/a66913c8-d888-11e8-aa22-36538487e3d0

https://champions123.org/target-12-3/

https://www.ft.com/content/57cd9dae-c53f-11e7-b30e-a7c1c7c13aab

https://www.theguardian.com/sustainable-business/2017/feb/06/food-waste-apps-global-technology-leftovers-landfill

https://www.nrcm.org/wp-content/uploads/2015/12/ReFED_Report_2016.pdf