At the raucous scene at Sarit in Nairobi, Kenya, you'd find a diverse array of commercial activity. A stroll through some of the nicely paved walkways would bring a massive whiff of tasty goodness, pointing to a busy food segment of the market. The news that Kune, a food technology startup that raised one million dollars in 2021, has shut down operations is likely to come as a shock to many people.
On Wednesday, June 22, 2022, Robin Reecht, the CEO of the company, announced that it would be closing down because it had no more money, had used up all of its other options, and had no other choice. What has followed is a string of responses, both well-reasoned and perplexing, that have been posted on the internet.
Nevertheless, it sparked our interest in the issue that Kune was attempting to resolve. Does its exit create an opportunity for better performance in the food sector of Kenya's economy? In order for us to get a better grasp on this topic, we will need to investigate the specifics of Kune's business model and the current state of the food delivery market in Kenya.
In June of 2021, Reecht included a narrative with his TechCrunch pitch in which he claimed that Kenya did not have a robust food culture. A quick search on Google, on the other hand, would have turned up results for Food and Kitchen Kenya, which is a food exhibition show in Nairobi. Putting the story aside, Kune's model was a very intriguing concept.
When it announced a $1 million pre-seed in June 2021, it stated that it would be disrupting Kenya's food market by launching a hybrid or cloud kitchen model. This claim got the likes of Launch Africa on board as one of its early backers, and the company went on to raise $1 million in total funding.
This meant that Kune would own the entire food supply chain, from the cooking to the packaging to the delivery with its riders and motorbikes. This gave Kune full control over the quality of the food it provided to its customers. Additionally, it intended to acquire a fleet of one hundred electric bicycles and to employ one hundred female riders.
Understanding Kune's proposed model should be made easier by taking into account the rapidly growing food delivery industry. There are three distinct business models that are utilized by the various startups that have emerged in this industry: aggregator marketplaces, restaurant delivery services, and cloud or dark kitchens.
In the first version of this business model, the company creates a website that features a directory of all the restaurants located in the customer's immediate vicinity. When a customer places an order, the restaurant has the option of either completing the delivery themselves or passing the responsibility off to a representative of the platform.
After that, the platform deducts a commission, which is typically between 20 and 30 percent of the total value of the order. This business model has been implemented with great success in the United States by companies such as DoorDash, while UberEats has brought their food delivery service to a number of additional countries, including Kenya.
In certain instances, these platforms take a more active role in the process of delivering the customer's food and serve as go-betweens between the customer and the restaurant in the event that the customer has any questions or concerns. The food delivery services Grubhub in the United States and Jumia Foods in Nigeria immediately come to mind.
According to Statista, the platform-to-consumer business model brought in a total of $189 billion worldwide in 2021 and is expected to bring in an additional $100 billion by the year 2025.
On the other hand, traditional restaurant chains have started providing delivery services for nearby restaurants through their respective mobile apps and websites. They will either personally fulfill the orders or utilize the services of third-party delivery providers. Burger King and Domino's Pizza are two examples of restaurant chains that offer this service. If you're having a lazy day, you can always place an order from one of these restaurants, but if you're looking to have a good time, going out to eat might be the way to go.
There was a total revenue of $107 billion generated worldwide by restaurant-to-customer deliveries in 2021, with projections indicating that figure will rise to $165 billion by 2025.
The question then is, where does the hybrid model fit in?
The hybrid model combines elements of the two previous models, in which the company is responsible for the preparation, packaging, and delivery of the customers' meals. It does not have to deal with the hassle of outfitting a dine-in space for customers, like restaurant chains or platform services do, nor does it have to worry about the food's quality. The cities of Ghent in Belgium and Dahmakan in Malaysia are excellent illustrations of this model.
Nevertheless, the model of the cloud kitchen is undergoing rapid development. CloudKitchens is a startup that is currently valued at $15 billion and has raised $850 million so far. It is backed by Travis Kalanick, the co-founder of Uber. It runs on a business model that centers on encouraging independent chefs to make use of their own kitchen space and cooking utensils.
While you concentrate on cooking, the company promises to get your kitchen operational, manage your deliveries, and cut your costs. Lendsqr and Evolve Credit, two Nigerian fintech companies, operate in a manner that is analogous to that described above: they are in charge of setting up the technology, while the lenders concentrate on providing loans to customers.
The global market for cloud kitchens was estimated to be worth $56 billion in 2021, and analysts at IMARC Group, a company that specializes in market research, anticipate that the sector will flourish to the staggering amount of $112 billion by 2027. There is every reason to believe that players in the space of platform and restaurant chain businesses will be looking to get a piece of the cloud kitchen pie.
Why did Kune fail in Kenya when the cloud kitchen industry all over the world is experiencing explosive growth?
Kenya's online food delivery industry is heating up, just like its counterparts in other parts of the world. The market was estimated to be worth $79 million in 2021, thanks to an increasing population that is proficient in digital technology. Serious players in the market included Jumia Food, Bolt Food, Take Eat Easy, and Uber Eats, amongst others.
Despite the fact that platform-to-consumer deliveries dominate globally, restaurant deliveries take the lion's share of the market. Restaurant deliveries have a market value of $53 million, whereas platform delivery companies only have a market value of $26 million.
When Kune raised one million dollars to build a dark kitchen set-up, the company was competing in a highly competitive market, and it needed to find additional ways to set itself apart from its rivals. Because of this, it picked price, which is a problem area for each and every customer on the planet. However, the price has a variety of different effects on different people, but more on that later.
Kune had other options available to him for breaking into the market. As we saw earlier with CloudKitchens, which is backed by Kalanick, it could have built dark kitchens and delivery infrastructure for hundreds of restaurants in Nairobi that, contrary to Reecht's opinion, actually offer high-quality food at affordable prices.
According to the data provided by Statista, restaurant-to-consumer deliveries are anticipated to experience the most expansion in Kenya, reaching a value of $313 million by the year 2025. According to the most recent estimates, platforms will only account for almost half of this total. It is anticipated that platform-to-consumer food delivery will grow at a faster rate in the United States than delivery from restaurants.
After that, Kune took on the enormous challenge of constructing a technology-enabled infrastructure for cooking, packaging, as well as mobile and web applications; in addition, it needed to keep a network of local suppliers in order to make operations simpler. All of these factors, along with the extremely competitive price point of $3, contributed to the creation of a company that most likely did not have any plans to become profitable.
In the post that he made to announce his decision to pull the plug on LinkedIn, Reecht mentioned that one of the reasons he made the decision was because of the current economic crunch and the tightening investment market. This occurred only one year after the pre-seed round for the company and seven months after the company officially launched in December 2021.
By the end of February 2022, Kune had reached a turnover of $37,000, and by the beginning of March, it was rumored to be delivering 600 meals per day, which would have equated to a turnover of $55,000. According to what Reecht said, Kune was able to sell over 55,000 meals to a total of over 6,000 individual customers in addition to 100 corporate clients. If each meal cost $3, then Kune would have generated a total of approximately $165,000 in revenue throughout its entire operation.
If it hadn't gone out of business, Kune would have needed to keep operating until at least November 2022 before it could have reached a revenue of one million dollars, according to our best estimates. This is based on the assumption that its price point of $3 will result in a month-over-month customer growth rate of at least 50 percent.
Even if it did, the gross margins on each meal posed an additional challenge for the business. Although meals cost $3 each, the costs of production and delivery for each dish amounted to an average of 50 percent of the total cost of meals and drinks combined.
This cost only accounted for the price of the ingredients, the packaging, and the delivery, but it did not take into account significant expenses such as salaries, lease or rent, or the cost of maintaining a "tech-enabled" facility. Its plans to operate 100 electric bikes would have also resulted in an increase in costs, as decent electric bikes can cost anywhere from $1,500 to $4,000 each. For example, the price of an Ampersand bike is over $2,500, and the purchase of one hundred of those bikes would have consumed one quarter of Kune's total fundraising goal.
When companies use price as a market entry strategy, they typically anticipate a mass adoption that either justifies the product's overall cost per unit or hooks customers into purchasing a product that is ultimately more profitable and lucrative.
For instance, in Nigeria, the level of competition between different telecommunications companies has consistently lowered the prices of SIM cards, phone calls, and data in order to encourage widespread adoption. Using data that is publicly available from MTN and Airtel, you would be able to see that this required a significant investment of capital and resulted in millions of new subscribers. Another example can be found in this section, and it comes from MultiChoice with the launch of GOtv.
OPay, a financial technology company, took the Nigerian market by storm in 2019 with its ride-hailing and food delivery services. This is an easy example for us to look at when discussing the world of startups. We know for a fact that the meals were of the regular quality and quantity as a result of the numerous orders that we placed with OPay. The fee for the standard meals that were offered from notable restaurants was a meager ten British pounds.
At one point, it appeared as though it wanted to become Nigeria's super app; however, we determined that everything was bait for its payments service, which, in the end, proved to be a huge success following the beginning of the global pandemic.
However, OPay raised $150 million in just six months between July 2019 and November 2019, almost exactly one year after the company's launch in 2018. Having such a war chest at your disposal opens up a lot of doors for you.
The unit economics of Kune's model were unstable on multiple levels, and the company would have needed to raise additional significant amounts of funding in order to right the ship. A similarly misleading narrative about the Kenyan food market and a deteriorating investment landscape didn't help matters, either. Both of these factors worked against Kenya.
However, nearly all restaurants are contending with the challenges of escalating food costs and a competitive economic environment. In most cases, restaurants will either increase their prices or decrease the amount of food they offer.
It is interesting to note that Kune's entry into the market as well as the initial investor excitement have prompted us to consider the potential for cloud kitchen services in Africa.
If the number of deliveries made by restaurants directly to customers in Kenya is expected to increase by 490 percent between 2021 and 2025, this bodes well for the successful implementation of a cloud kitchen model. Why? It is likely that the costs associated with maintaining traditional brick-and-mortar restaurants will continue to rise, barring an act of God.
The concept of a "ghost kitchen," in which a software platform is developed to manage deliveries, inventory, customer complaints, and/or other kitchen facilities, and in which existing and prospective restaurant owners are given the opportunity to concentrate solely on cooking, appears to be quite compelling.
Again, Travis Kalanick's CloudKitchen and the United Arab Emirates' Kitopi are great examples of the success that is possible with this model. Both companies have successfully raised a total of $1.3 billion and 804 million respectively, and are making significant headway in the field of cloud kitchens around the world.
In addition, an asset-heavy model similar to Kune's might work, but the price point at which it is offered must be justifiable. It may be possible to use a model with a lot of assets that has a low price point as bait to gain market share and hook users into using a service that is better and more profitable for the business.
Eden Life, based in Nigeria, runs a similar model that places an emphasis on quality control. In May 2022, the company expanded its operations to Kenya. However, in contrast to Kune, it utilizes a subscription model, which requires a minimum payment of $38 per month in order to receive one meal delivery every week.
However, this is not the end of the story because each meal at Eden Life would then cost almost $10. When a customer selects a plan that includes six meals per week, the company makes fewer deliveries and spends less money overall on logistics. In addition to that, it runs a laundry and house cleaning service concurrently, which results in the creation of additional revenue streams.
Despite the fact that Eden's model may not be without its challenges (after all, which model is foolproof? ), the fact that its founders have relevant local experience means that the experience in Kenya may be different.
In addition, the anticipated growth in restaurant-to-customer deliveries in Kenya provides additional evidence that a more grounded and hands-on approach may prove fruitful.
In spite of all the research we did, they say hindsight is always 20/20. Even if you do everything right, there is still a chance that your startup will be among the 90 percent that are unsuccessful. You could also follow in the footsteps of Kune and become one of the 10% of startups that fail in their first year.
It would be fascinating to watch an indigenous Kenyan founder who is familiar with the pertinent aspects of the local context attempt to implement this model. Send an email to the address listed below if you are already working on one, and our reporter, Emmanuel Paul, will be available to assist you with it.