Shef - connecting real-life chefs to customers
Do their numbers work?
These below are my views only and not my employer's.
I have been seeing Shef pop up all over my webspace and it made me curious. Kudos to the company’s marketing and copywriting team for creating compelling ads and photo essays on their service. Their value prop is that they get real-life, average joe chefs to bring the magic of their home kitchens to your doorstep. I was tempted to try.
Turns out, the food and packaging were both great. And as I relished the complimentary dessert post my dinner yesterday, I couldn’t help but look at the numbers and wonder if Shef’s business is sustainable.
What is in a bill?
For my order of $20.29 in gross proceeds to the company, Shef received $17.08 in net proceeds (gross proceeds minus taxes and tips).
Of the $11.98 spent on the actual food items, I suspect Shef takes a 30% cut and gives the balance to the chef for his/her labor and the cost of ingredients. (At these levels, chefs who make this a full-time job stand to make ~$50K a year pre-tax — not too bad, but not too great either. So Shef can’t really increase its cut beyond this level. My model is linked here for reference.)
Besides the chef’s labor and the cost of ingredients, the two other direct cost items are delivery fees and the cost of packaging. I received my order in this fancy insulated bag that when I looked up on Amazon had my jaw drop — $10+ a bag! Surely this business model breaks right here, I thought!
But better sense prevailed and I looked for quotes on Alibaba and found that when you bulk order a bag like this in quantities greater than 100,000 units, the cost drops down in logarithmic proportions to 60 cents a bag or thereabouts. Let’s call it 50 cents for Shef.
As for delivery fees, minus tips, delivery people make a little more than minimum wage, around $20 an hour. Assuming the higher-end of 5 deliveries per hour — it’s probably closer to 3-4 — the delivery person’s share of the order is about $4.
Finally, not every order is going to be perfect. There are bound to be quality and delivery issues. I wasn’t able to find a metric in the public domain on this but for the time being assumed that 1% of all orders are refunded back to customers.
Do all the additions and subtractions, and that leaves Shef with a gross profit of $4 per $20 order. That’s a gross profit margin in the range of 20-25%.
What about overheads?
The answer to this question depends on what one thinks about Shef. Is it a tech company? Or is it a “tech lite” marketplace?
Shef is similar, at least operationally in my mind, to Uber. Uber manages a set of free-wheeling driver-contractors who drive on their schedule and can’t be bossed around by Uber execs, at least in principle. An Uber support/ops exec’s job is, therefore, to recruit drivers and ensure that quality issues are addressed as they arise.
Shef’s ops teams have a slightly more complicated task to manage in that its service is a little bit more sophisticated and delicate — it’s home-cooked food after all — than managing cab rides. But the core of the job is similar in nature. So Shef needs execs to handle issues that chefs might face, delivery people might face, and customers might face.
I’d wager that Shef’s back-end tech stack is not as complicated as DoorDash’s or Uber’s, which do real-time supply and demand matching. Shef, in comparison, has an order process that is seemingly tech-lite in the sense that a customer places her order 2 days ahead of time giving Shef — and the chef — enough time to plan, prepare, and deliver.
Let’s dive into it:
According to LinkedIn, the company has some 90 odd employees, most of them in ops roles
Assuming each makes $60,000 a year in salary, the total annual salary costs amount to ~$5.4mm
In other words, assuming the company sells a million meals a year, salary expenses account for $5.4 per order
On marketing, we need to pull off some gymnastics to arrive at reasonable estimates, but humor me:
Assume the company pays the standard $1 per ad click
Has a 5% conversion rate on its ads
Each acquired customer then goes on to purchase 20 meals through the platform through the rest of the year
Said another way, for every $100 spent in marketing the company acquires 5 customers who each place 20 orders, or 100 orders cumulatively, implying a per order marketing cost of $1
On a million orders, that’s a million dollars in marketing expenses
General and admin might include things like office rent, intercity travel, local travel, etc. Relatively marginal.
Add all of these costs up, and you'd see they amount to ~42% of net revenues.
For comparison, DoorDash and Uber spend approx. 50% of their revenues respectively on sales, general, and administrative (SG&A) costs. And an additional 10% of revenue a piece on research and development (R&D), presumably for software that is in development and not revenue generating yet. I am assuming Shef spends 1/10th of what its larger rivals spend on R&D, or 1% of sales, on R&D.
Waterfall all these numbers down and this is what you get.
Shef’s unit economics
The company seems to be losing ~3 dollars on every order processed through its system at a run rate of 1mm orders a year.
Profitability?
The profit lever for Shef looks to be hidden in its salary expenses — the only fixed cost in this entire equation — and ability to execute with razor-sharp discipline.
All else equal, the company can turn a profit at around the 2-3mm order mark. For context, New York City alone sells some 1.8bn meals a year. If Shef can capture 0.1-0.2% of the addressable market in each of the cities it operates, it can crawl out of the red into the green.
Path forward
Shef’s trying to bring an Uber-style revolution in the food industry, by by-passing restaurants and fast foods and connecting consumers directly to real-life chefs. It’s a noble experiment at the very least. Customers get healthy food and people can turn their kitchens into assets (albeit with a fair amount of labor) to earn extra income. Will be interesting to see if the company can scale its orders without ballooning its costs.