Steve and his housemate were always complaining food was expensive in Toronto. So, they came with a solution: hire a chef for themselves and 20 friends. This simple idea quickly escalated into a business, that, within a few months, was making +$110,000 per month. But, as it went up fast, it also came down rapidly. The business was involved in some legal problems, which forced the founders to shut it down. Read Steve’s failure story and learn from his mistakes!CanadaFoodLegal Problems
Founder of a failed startup.
November 7, 2018
You will learn about the importance of being up to date on the legal stuff of your business, and why not to enter the food industry.
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Hi! My name is Steve and I’m a 28-year-old entrepreneur from Toronto, Canada. Though at the moment I’m “digital nomad”-ing in Chiang Mai, Thailand. Before I jumped headfirst into the world of entrepreneurship at 24, I was a management consultant at Oliver Wyman.
I co-founded Chowdy with a childhood friend and ex-housemate in order to solve the problem we both personally had, which was that we were spending way too much money eating out. To solve that, Chowdy offered subscription-based prepared meals plans to Toronto’s young professionals at a flat $7.99 per meal, with plans ranging from 6 meals per week to 14 meals per week.
In terms of how we divided up responsibilities, I was in charge of operations, technology, and finance while my partner was responsible for customer service, marketing, and outreach. In reality, we both did whatever was needed.
We had some success with this setup for a while. We grew Chowdy to $1.3M in annual revenue in 2 years, a team of 8 staff, and successfully pitched on CBC’s Dragon’s Den (though we turned down the funding offer).
A big reason for the success was an innovation we created that no other prepared meal companies were doing: we didn’t deliver. Rather, we had our customers pick up their meals from one of our partner cafes in downtown Toronto. These “hubs”, as we called it, were independent local cafes at prime downtown locations; the cafes would provide both the space for the fridge and the staff to track customer pickups. In return, we paid them a relatively small fee of $500-$800 per month, plus all the foot traffic from our customer base.
The reason this model worked so well was that it solved one of the biggest problems meal delivery companies face: the extremely high cost of last-mile delivery. It allowed us to cut distribution cost per meal to less than $1, compared to $5-$8 for a typical meal delivery company (which, by the way, is why none of them are profitable). The hub system allowed us to scale up very quickly.
Looking back at the 2.5 years we ran Chowdy, its eventual failure was the confluence of many factors from unsustainable business model to cobbled-together operations, but the straw the broke camel’s back was regulatory (and ironically, related to our hub system).
This experience was ultimately very educational for me from both the successes we had and the causes of its end, and I’m applying a lot of what I learned to the project I’m currently working on - The Travel Brief - which is a crowdsourced travel guide to off-the-beaten-path destinations around the world. While these two businesses are so different, I think a lot of tactics are the same, like how to acquire customers, how to improve visibility, how to find a sustainable model, and how to deal with the emotional rollercoaster as a founder.
While we’re still on the very early stages of The Travel Brief, having just launched it 3 months ago, we’re already seeing some promising growth and at the moment we have ~200 users (~100 monthly active), 2000 monthly views, and 20-30 new pieces of content generated by our users every week, and most metrics are trending positively.
I’ve always known that I want to be my own boss at some point. By 2014, I started to seriously think about starting something, anything. I was getting antsy because I knew that it’d take me multiple years and attempts to build something successful, so I needed to get started ASAP. It seems silly in hindsight, but I wanted to “make it” by the age of 30.
So, I quit my job as soon as I got my bonus that year. I didn’t have any business ideas when I quit, but I figured quitting the job would give me the motivation and time figure it out.
The idea for Chowdy came about in a random conversation I had with my housemate and soon-to-be business partner complaining about how food was so expensive in Toronto. Since neither of us knew how to cook we should just hire a chef to make our food for us. I applied my consulting modeling skills and quickly realized that it’d be too expensive to cook for just the two of us. Then we wondered what if we could have a chef make food for 10-20 of our friends, and for multiple days at a time.
With that, we decided to just try it out. My partner knew a cook personally. We pitched the idea to him and he loved it. We messaged 30 friends we thought might be interested and got 20 of them to agree to try it for a month. 2 weeks later we made our first batch of meals. After the trial period of 1 month, we were pleasantly surprised to find that most of our friends wanted us to keep going. We did and opened it up to the public, and that’s how Chowdy came into being.
By the way, we weren’t called Chowdy in the beginning. We thought our target demographic was the fitness/gym crowd, so we called ourselves “FuelBite”. As I’ll explain below, we were forced to change our name a few months in and we came up with “Chowdy”. Full credit goes to my partner for this name, which he came up at 3am in the morning after we thought off and tossed out what felt like 1000 ideas. We both loved it instantly because it sounded food-related, friendly, and gender-neutral (it was important for us to not sound either too masculine or feminine).
Piece by piece, and continuously.
Within 2 weeks of discussing the initial idea, we agreed on the basic business model, the key marketing message, and the price. My partner and I both believed in the agile approaches to startup, so we never spent too much time trying to figure out the “right” answer. We agreed to just try everything we could and see what sticks.
We initially wanted to do a revenue-sharing model with cooks who would get compensated by how many meals they made. But when we pitched it to our first cook (who was a friend of my business partner’s), we basically learned that there was zero appetite for something like. People in the food industry have a very traditional mindset and they wanted guaranteed hourly rate. Once the cook was onboard, we got 20 of our friends to partake in a 1-month trial at $5.99 a meal. 2 weeks later, the cook was making the first ever batch of Chowdy meals at his home kitchen.
Over the course of following one year period, we one by one put together most of the key foundations of Chowdy:
First was the kitchen, we learned that we couldn’t use a home kitchen for commercially sold food. So, we went out and found an hourly-rental commercial kitchen.
Next, we couldn’t use our apartment for distribution anymore because the volume was growing and strangers started to use the service, so we conjured up this “hub” idea, cold-called a bunch of cafes to pitch them, and was able to get one of them to give it a try.
As the volume kept growing, we couldn’t keep using email and Google Spreadsheet for order management anymore because my partner was spending an ungodly amount of time on these admin tasks. So I built a web app that automated all order-taking and order management tasks with Ruby on Rails.
Shortly after that, we could not personally do all the ingredient shopping anymore because the volume was too large for the two of us to handle. So we learned how restaurants get their ingredients from national distributors like Sysco and GFS, so we went out and signed up with one of these distributors.
So on and so on.
I’m describing all these milestones in a linear way, but there was a LOT of running in circles and setbacks along the way. I remember how on the Christmas of the year we started, we got a Cease and Desist letter from a lawyer representing this company called Fuel Foods because they thought our name was too similar to them (we were called FuelBite at the time). We panicked because neither of us knew how to deal with it and we were scared of getting sued. So we “lawyered up” but was actually advised to change our name. My partner at 3am in the morning came up with “Chowdy”, and that’s what we were called ever since.
I think the main thing I’m trying to say here is that we never stopped building Chowdy over the course of 2.5 years. There were always new initiatives we were trying out. Most of them fizzled out but the ones that did work allowed us to achieve what we did.
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Marketing was one of those areas in which we tried a lot of different tactics. Eventually, it solidified to four main marketing strategies, which generated almost all of our customers.
First and foremost was Facebook advertising. I never used Facebook advertising before Chowdy and I was skeptical of how effective it would be. But within days of setting it up, it was generating a steady flow of sign-ups. The acquisition cost was also very low, averaging no more than a few dollars per conversion, making this channel extremely critical to our growth. I would say Facebook ads gave us around 50% of our customers over the lifetime of Chowdy. We tried advertising on other platforms, notably Google Adwords and LinkedIn, but they were not very effective for us and we gave up on them after a while.
The second most important strategy was customer referral. We copied what Uber did and gave each customer a referral code, and gave both the referrer and referral $10 off their purchase. This accounted for around 25% of the customers. Even though it was a very expensive marketing channel at $20 per acquisition, we felt we had to do it simply because it has become such a standard practice.
The third strategy was Search Engine Optimization. Through various efforts (many of which were frankly accidental, like getting featured on a national newspaper), we eventually ranked within the top 3 Google results for “Toronto meal delivery” and “Toronto food delivery”. This allowed us to get a steady source of sign ups from people who were looking specifically for services like ours. This accounted for around 20% of the customers.
The last strategy was seasonal discount. We would offer a discount code on our website, Facebook ads, as well as our social media accounts on average once every other month. Every time we put up a discount, we saw a noticeable increase in sign-ups. This accounted for around 5% of our customers.
We also tried a bunch of strategies that did not work. Notably:
If marketing was the rocket fuel for Chowdy that allowed us to grow 10-20% every week the first 2 years, we crashed because this rocket just wasn’t built to last. Looking back, there were a number of fundamental issues that we never quite figured out.
First, our margins were extremely slim. We had this idealistic vision that since we didn’t have the real estate and seating area overhead that restaurants have, we can charge a low price and still get good margins. I modeled everything out and things looked great in Excel. But costs always turned out higher than planned and were always increasing (inflation). But because we fixed our price as part of our core brand message, we were always struggling to make enough money. If there were any hiccups in the process, we would lose a lot of money.
The second problem was high customer churn. The average lifetime of a subscriber was 9 weeks, with almost half quitting after the first week. Once they quit, it was also extremely unlikely for them to come back (we tried to entice them back with discounts but less than 1% of them came back). This wasn’t a burning issue for us because we were still small and the untapped market was large, but it cast doubt on the long-term sustainability of the business.
The third issue was that our business model wasn’t scalable. Our model relied on having 3rd party hubs, and the hubs all had to possess certain characteristics: independently-owned and beverage-only. There was only a limited number of them, getting them on board was not a repeatable process, and most critically, they were not very stable. For example, we had one hub go out of business because their landlord sold the entire complex to a condo developer. This event was extremely disruptive for our operations, as we had to find another hub in the same neighborhood to replace it in a very short timeframe, and having any downtime meant losing tons of hard-earned customers.
While these three issues were something that we had to overcome sooner or later, they didn’t stop us from growing. The thing that led us to shut down Chowdy turned out to be regulation.
Basically, the Toronto health department did not approve of our distribution model. They looked at how we were storing our meals at 3rd party hubs - who did not own these meals - for anywhere between 8 hours to 36 hours, they deemed the process too risky and lacking sufficient oversight. In August 2016, with a single report, they ordered us to shut down our pickup business. They were fine with our suburban delivery business, but that made up less than 20% of our volume and there was simply no growth potential in that because we had no cost advantage compared to the myriad of other food delivery businesses in Toronto, some of which were very well funded (like UberEATS).
After they ordered us to shut down the pickup business, we tried to switch our customers over to delivery, but almost no one converted since we charged an $8 delivery fee (the breakeven delivery cost). Additionally, most of the pickup customers actually prefer the pickup system, because it gave them the flexibility to get the meals whenever they want, instead of having to wait for the delivery driver to show up.
We went back and forth with the city for about 1 month, during which time we lost pretty much all the money we made in 2015 and 2016 because we kept most of our staff on payroll and still had to pay rent on the production facility. We also had to write off about $10,000 worth of ingredients that we purchased but could not use when the city ordered us to shut down the pickup business.
Eventually, we just couldn’t figure out a way to compete in delivery and get back the volume we lost. And because we had essentially no retained earnings to keep the business going, and no outside investors, we simply did not have the resources to keep it going any longer.
The shutdown process wasn’t very orderly. Because the city had ordered us to stop the pickup business abruptly, we couldn’t even give 80% of our customers proper notice. It was literally an email a day before the scheduled pickup date telling them they couldn’t pick up their meals anymore. Predictably this led to a lot of angry emails and cancellations. Over the following month, while we were negotiating with the city, we kept our staff but cut back on their hours to try to save money and attempted to salvage any pickup customers to delivery instead. When it became obvious that this won’t work, we gave the head chef 2 weeks notice, everyone else was let go immediately. We informed the landlord, with whom we had a 2-year lease but she ended up not pursuing us for it (because I personally helped her find another tenant). Every piece of equipment we owned was written off.
The entire month felt like an out-of-body experience, like I was watching someone else perform these tasks. Chowdy became such a normal part of my life by that and it was hard imagining what life would be like without it. But I was also relieved, to be honest. I was pretty much constantly stressed the two and half years we ran Chowdy and all of sudden I wasn’t, it was a big weight off my shoulder. It helped that we didn’t take on any debt building the business.
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I think the single biggest mistake we made from which we did not recover was the “Uber mentality”, which was growth at all cost and ignore any regulations.
In building up our food production and distribution process, we should have consulted with the health department early on. We should have paid a private consultant to come in and do an audit for us. Early warning on this would have provided us with ample time to try different distribution models and adjust accordingly. Instead, we were hit with an abrupt shutdown order and as the result could not muster any resources in the short term to make operational changes.
But we didn’t consult anyone. Because we were inspired by Uber and Airbnb to just ignore the regulators. On top of this, there were a bunch of other mistakes in hindsight; which, although did not directly cause Chowdy’s demise, all contributed to it:
Our pricing was way too low. So low that we basically made no profit over the 2 and half years we ran Chowdy. So low that we didn’t have any resources in reserve to help us deal with unexpected emergencies.
Not getting funding. This again relates to the question of resource. When the health department issue came up, we literally had no money to deal with it. If we had outside funding this may have turned out differently.
Not having contingency plans for a lot of situations. It wasn’t just the health department issue - we were constantly going from one emergency to another. I barely devoted any time on growing the business after the 2nd year because there were so figurative fires I had to put out, from water getting cut off in our facility, to hub shutting down, to employees walking out.
No risk management. I never sat down and analyzed what were the major risk areas our business faced, partly because I spent all my time in the weeds of running the operations and handling the emergencies. In retrospect, there were so many parts of our business that were very fragile and would break at the slightest disruption. The health department issue that led us to shut down was really just a manifestation of this.
In terms of the challenges we faced along the way but eventually overcome, there were so many. I’ll give 3 examples:
The first challenge was ingredient sourcing. We started with buying ingredients ourselves from local supermarkets. We would rent a car on production days, drive to cheap Chinese supermarkets, and buy 1-2 shopping carts worth of ingredients.
After about 3 months our volume became way too big for us to shop for ourselves. Additionally, I realized we were not taking advantage of our volume to get discounts on the ingredients. That’s when someone explained to me how restaurants get their ingredients from national distributors like Sysco and GFS. With that, I reached out to a bunch of these suppliers through their websites. Initially, I didn’t get any response back. I then called them directly and was able to meet with some of their reps to figure out how we can buy ingredients from them.
The next problem was the facility. We were using our cook’s home kitchen in the beginning. But very quickly that became unfeasible as we learned that it’s illegal to use home kitchen for commercially sold food. Also, home kitchens are simply not equipped with all the specialized and expensive equipment that commercial restaurants use for volume production (like a convection oven and tilt skillet). So we looked around for any commercial kitchens we can rent for cheap. At one point we had the idea to partner up with nightclubs, which are all legally required to have commercial kitchens but they rarely use them. We were able to get a couple of nightclubs to agree to let us use their kitchens for cheap, but this turned out to be a big mistake as we found out that these kitchens were woefully under-equipped and not very clean (we had 2 hires walk out on us because of it). Eventually, we found a newly-started hourly rental kitchen that was clean and had everything we needed. We stayed there for 2 years until we eventually took over a restaurants space and converted it to a dedicated kitchen space.
The biggest problem, though, was staff. I learned pretty quickly that the type of people I was hiring was so different from the corporate type I used to work with at the consulting firm. In the food industry, every one job hops every few months and it was extremely tough to retain good and reliable people. We offered above-market hourly wages, yet we were not able to keep anyone for longer than a few weeks. And because our production team was so small, losing even a single person caused significant disruptions for us. There were so many days when my partner and I had to personally jump in to help with dishwashing and deliveries because we were so short staffed. This problem never fully went away, but we eventually grew to a scale that we were able to have a full-time head chef, who basically managed all the hiring for us.
When we started with our 20 friends, we had a weekly revenue of around $300. By the time we shut down, we were doing weekly revenues of around $25,000, or $100,000-$125,000 per month (our ordering cycle was in week so it’s easier for me to think in weeks). In terms of expenses, almost all were operational related to food production.
Ingredients accounted for the single largest piece, around 40% of revenue. Industry recommendation is that no more than 33% of revenue should be ingredients, but our prices were just so low.
Then it was staff. We had a team of 8 people, consisting of 6 cooks, 1 driver and 1 customer service rep. Aside from 1 head chef, there was no other management personnel. Collectively accounted for around 35% of revenue.
Then it was advertising, where we spent probably around 10% of revenue. Another 10-15% on things like rent and admin expenses and emergency expenses (like all the losses from the health department episode). Remaining 0-5% was basically the money my and my partner’s salary.
So, all in all, we basically made no profit.
Honestly, I probably would avoid food business! There have been so many food startups over the years, including some that raised tens of millions of dollars, but most of them went out of business (SpoonRocket, Sprig, Maple) or drastically shrunk in size (Munchery). There are very little barriers to entry in this space so price is ultimately what everyone competes on. At the same time, consumers have no loyalty to food brands; they will happily try a bunch and switch to another service if they can get a better deal.
But if I have to do Chowdy again, I would try to raise money as soon as we hit $1M in annual revenue. At this point, it becomes relatively easy to raise money, and with the money I would hire a team to manage all the day-to-day operations so I can focus on the big picture; specifically, growth, risk assessment, and contingency planning.
Related to this but a much more significant strategic change I would make is to find a strategic partner and/or acquirer as early as we could. I was starting to toy with this idea in my head by the time we had to shut down but I never got around to implementing it. The idea is to partner up with a large company that can get a lot of synergy (I know I hate this word too) from our business model.
I was specifically thinking about grocery chains. I think grocery stores would’ve loved to partner with us because we could help them acquire a fast-growing segment of the market that they don’t already own: people who don’t cook. This arrangement would solve our distribution problem once and for all because grocery chains already have a large and stable real estate network. I’m not quite sure if this would solve our regulatory issue, but I have a hunch that if our distribution partners were large grocery chains instead of mom-and-pop cafes, the health department would’ve treated it very differently.
In fact, a year after we shut down, I read about a meal kit startup in Montreal being acquired by Metro, one of the largest grocery chains in Canada. It’s obviously too late at that point, but it made me regret that we didn’t reach out to one of them sooner.
I don’t specifically seek out business advice, but I really enjoy listening to the founding stories of other entrepreneurs, especially small entrepreneurs. There’s this podcast by this Australian entrepreneur Nathan Chan, who interviews a lot of mostly small founders on his show, which I both enjoy and find helpful.
Other than that, I use this app called Flipboard for most of my reading. I follow “Startup” and “Business” interests on it, and from time to time it suggests very insightful articles on various topics from growth to managing staff.
I realized that it’s almost impossible make any generalized true statement about how to successfully start and grow a business. Every entrepreneur faces a different set of circumstance and what worked for one entrepreneur might not work for another. What comes to mind right now is regarding hiring people. I’ve heard some successful business people (I think it was either Eric Schmidt or Paul Graham) insist that you need to hire the best and the brightest even if they are terrible people; and others argue that they focused on hiring people who played nice with others on the team even though they weren’t A players. I think both of these approaches are true, but in different circumstances and times.
My only advice is to take any business advice with a grain of salt. None of them are universal laws and they are all context-dependent.
I’m currently working on my next startup project, The Travel Brief, which is a platform that crowdsources useful travel information. You can follow our progress here!
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