Knock at Door

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Knock at Door
Heady Investment: Leo Petrossian with a diagnostic device at Neural Analytics’ headquarters in West Los Angeles.

When Ken Fischer joined food delivery service LAbite in 2001, he delivered steaming-hot food to customers around town in his 1970 Lincoln Continental Mark III. And he walked door to door introducing himself to receptionists and restaurant owners while pitching his company.

“They’d say, ‘Is this a company – or is this you?’” Fischer recalled recently in his Culver City office.

He had the market almost to himself. But suddenly, a mix of formidable tech giants and startups has moved in on his food-delivery turf, hoping to capture part of what has become a $70 billion sector. That means the days when Fischer could name his competitors on one hand have come to an end.

San Francisco’s Uber Technologies Inc. now promises your next meal in 10 minutes or less. Last month, Amazon.com Inc. launched a one-hour restaurant delivery service in Los Angeles. About a week later, Google Inc. began delivering from grocers and retailers throughout Southern California including Whole Foods, Ralphs and American Apparel Inc. And that list doesn’t include the many startups vying for a piece of the delivery sector in a city that has proved to be a launching ground for companies hoping to go national.

“I can’t tell you how many third parties are out there now,” said Ric Gordon, director of operations at LyfeKitchen, a fast-casual restaurant with five locations in Los Angeles. “It’s just crazy, each one seems to be filling a niche market.”

Despite the latest aspirants from Silicon Valley and beyond, however, companies such as LAbite are betting that their knowledge of the L.A. restaurant scene will keep them in business.

Hungry competition

LAbite, co-founded by Wann Lee and two friends from Mission Viejo High School, was one of the key players in the area’s sleepy doorstep delivery space for much of the 2000s. During that time, the company grew across Los Angeles and the San Fernando Valley, and expanded to Orange County and then inland to the Coachella Valley. It had one main local competitor: Restaurants on the Run of Aliso Viejo.

But change came in 2009 when Chicago’s GrubHub Inc., now the largest food-ordering company in the country, launched in Los Angeles with more than 1,000 restaurant partners throughout the area.

Since then, food and grocery delivery has become one of the fastest-growing sectors in the venture capital market.

San Francisco’s DoorDash is reported to be in talks to raise financing at a valuation of more than $1 billion. New York’s Blue Apron, which delivers ingredients to home cooks, is valued at $2 billion. Instacart of San Francisco is worth a similar amount and expanded in the L.A. area this month.

According to CB Insights, more than $1 billion was invested in the food tech sector in 2014 – an almost fourfold increase compared with 2013 – with an additional half-billion dollars invested in the first quarter of this year.

And others have seen exits. GrubHub, which raised $192 million in its 2014 initial public offering, acquired LAbite competitor Restaurants on the Run and DiningIn of Brighton, Mass., in February for a reported $80 million.

“There’s a lot of investment groups looking at the industry and saying, ‘It has tremendous annual revenues, very consistent growth and it’s not going away,’” said David Bloom, executive vice president of business development and strategy at Synergy Restaurant Consultants in Denver.

When it comes to utilizing and leveraging technology, restaurants have also lagged behind, experts say. That means the industry is fertile ground for tech companies to improve production and delivery processes.

“I think the investment thesis here for the venture capitalist is this doesn’t take a lot of startup capital,” said Benjamin Matz, an analyst at Conway MacKenzie Inc. in downtown Los Angeles. “You’re talking about technology that is app based, GPS based. These are things that very well established and the VC guys are very comfortable working in.”

After all, everybody eats three times a day, Bloom added.

However, the formidable competition posed by giants such as Amazon, Uber and San Francisco’s Postmates is likely forcing even large established companies to think about their next move closely.

“If I was GrubHub, I’d be worried,” said Robert Ancill, chief executive of Next Idea, a restaurant consulting group in West Hills. Whereas a service such as Uber can market a completely new service to its enormous group of customers, smaller companies don’t have such a luxury.

“Uber’s ability to communicate with their customer base is quite broader, which is why I think it’s quite smart what they’re doing,” Ancill said. “At the end of the day, size is a going matter in the market.”

Eric Kim, founder of RushOrder, a 10-person food delivery startup in Koreatown, has seen the impact of tech giants and startups firsthand.

“We’ve been around since early 2014 and this competitive arena has changed a lot during that time. It was competitive, but it’s not what it is now,” he said. “Would I try and enter the market now? Probably not.”

The company, which is backed by investors including Koreatown’s Strong Ventures and Douglas Guen, a South Korean tech entrepreneur, has placed a bet on niche markets, focusing on partnering with hidden-treasure restaurants that serve ethnic cuisine. Kim’s wager is that Uber and other large competitors won’t be able to skillfully deliver a five-person order of Vietnamese pho noodles despite their logistical superiority.

“We have to be scrappy and resourceful because we don’t have the deep pockets of Uber and Postmates,” Kim said, referring to the San Francisco courier service estimated to be worth $400 million.

Room for more

Kim might not have to worry, though.

Through November, RushOrder, which hopes to be profitable by the first quarter of next year, reported month-over-month order-volume growth of approximately 20 percent.

Its experience mirrors a wider trend.

According to Citigroup Inc.’s research division, only 4 percent of food delivery and takeout orders last year were carried out online, meaning there is significant from growth.

Despite all the competition, the market is not yet saturated, according to analysts.

“There isn’t a clear cut dominant winner yet. What we don’t know is how the economics work and how much is just a pure land grab, with no sustainable profit business,” said CB Insights analyst Michael Dempsey, referring to the flurry of recent VC activity.

And many restaurants, he added, are only now beginning to take orders online.

For example, LAbite, which boasts more than 200 employees and approximately 700 drivers, estimates it will process more than $80 million in sales in 2015.

Earlier this year, the company took out its first small-business loan, for $3.5 million, to acquire Eat Out In of Austin, Texas, and Waiters on Wheels in San Francisco.

Through November, revenue has increased by 25 percent compared with the same time last year, said Fischer, who expects LAbite to serve five more major markets in the next two years.

He also wouldn’t be surprised to see consolidation in the industry on a national scale.

“We feel like as long as we can keep improving our process, we’re going to be OK,” he said. “We’re the local guys; we know the restaurants. We have a great team and that’s what will help us continue to grow.”

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