If the story of the twenty years of e-commerce’s growth was set in developed markets, the story of the next twenty years will be set in emerging ones. – Porter Erisman
In Venture Capital jargon, the Brazilian food service industry has what it takes to experience a process of profound technological disruption in the next few years.
For starters, it is one of the largest sectors of the country: the food service industry alone corresponds to approximately $50B in total processed volume per year and each percentage point of market share can represent a significant opportunity for value creation.
Secondly, the market is vastly fragmented. On the supply side, only one-third of the wholesale supply chain is captured by the big cash & carry companies and large distributors, while the remaining volume is spread across thousands of suppliers. On the demand side, the more than 2.5M small shops in Brazil (including bars, restaurants, dark stores, bakeries, dark kitchens, etc.) account for ~70% of the food service consumption. The 10 biggest restaurant chains in Brazil account for ~$4B in sales (or ~10-12% of market share) vs. ~$158B in sales (or 30% share) in the United States.
Third, the complete absence of a tech-driven and sophisticated procurement platform results in several pain points on the procurement journey faced by the owners of food service shops – it is worth remembering here that Brazil’s food service market is comprised mostly of independent entrepreneurs, and COGS can represent up to 70% of sales – such as:
- Poor time allocation across the entire food service supply chain: Small food service shops owners can spend up to 20 hours per week procuring goods for their operations, by either going physically to cash & carries, or relentlessly negotiating with suppliers who can deliver at their door. Imagine being able to save up to 4 hours per day in manual operations and reallocating this time towards serving customers, improving the menu, etc.;
- Low levels of delivery reliability: The inefficient procurement process of today can result in a up to 20-25% issue rate in delivered orders (wrong items, expired products, etc.), meaning that a substantial portion of time and effort goes towards fixing incorrect orders instead of focusing on increasing sales and productivity;
- Inadequate access to financing solutions: given the lack of data and liquidity pools in the fragmented food service segment, most of the procured goods must be paid for upfront, which significantly impacts the working capital position of both sides of the marketplace. Not only does this reduce the shop owners’ ability to try and experiment with new products, but it also creates the need to obtain high yield working capital loans. Additionally, upfront payments prevent suppliers from selling higher volumes and rapidly expanding their client base;
- High levels of inventory stock-outs: Given the lack of tailored operational systems focused on serving small and mid-sized restaurant owners, they usually have minimal visibility of their inventory levels, and no automation of their procurement cycles. Combined, these two factors contribute to 7%+ stock-out levels, which ultimately impact sales, customer satisfaction, margins, etc.
Fourth (and curiously enough), these food service entrepreneurs are already mainly transacting online. Unlike the B2C market, in which clients receive roughly 10% of the purchased items at their door, we can see a striking contrast of almost 60% of direct delivery in the B2B segment. In Brazil, small shop owners are already using multiple online channels and are used to digital transactions. However, the use of subpar means, such as handling dozens or even hundreds of WhatsApp groups or direct channels with suppliers, make their end-to-end procurement journey impossible to manage properly.
Lastly, traditional industries are also eager to properly access this fragmented portion of the market. The big CPG and FMCG players have almost no visibility of consumer preferences and their market share on a very granular level. Capturing consumption data at a neighborhood or street level is almost impossible in Brazil – apart from the piece of the value chain that goes directly into the small shops (think of Ambev) – and having access to a solution that aggregates this data on a micro level could represent the holy grail of retail. Here, we also see the potential to disrupt how large-scale sales promotions and trade marketing are done in the country.
In summary, the Brazilian food service industry is a massive, fragmented, and a full-of-pain market, where its stakeholders are already used to engaging online. The time for a tech-driven solution that tackles these problems and opportunities is long overdue, and we believe one of the biggest tech companies may emerge from taking on this opportunity.
Floki is building a comprehensive purchasing as a service solution that is looking to disrupt the food service industry in Brazil
Amid this background we stumbled upon Floki, a 2-year-old Brazilian startup building one of the most interesting “purchasing-as-a-service” solutions for fragmented retailers in Latin America – as the major candidate to take advantage of these problems and build one of the most valuable companies of the region. Several factors make us confident of this statement:
Comprehensive AI-first solution to address major pain points: Floki’s integrated solution touches on all major factors that restaurant owners care about:
Smart, cost-saving software: Floki has spent the last two years building a beautiful AI-powered SaaS platform that can generate unparalleled insights and actions out of unstructured data (i.e, receipts), and as the company scales, its algorithms learn faster and get smarter. With this level of intelligence, Floki can optimize the restaurants’ procurement processes, empowering the owners and procurement teams to source better, access lower-cost options, reach new suppliers and optimize SKUs mix and category selection, which combined can generate up to 30% of savings. As already mentioned, COGS can represent up to 70% of sales and is the #1 priority for restaurant owners;
- Efficient procurement: with all the insights that come out of its SaaS, Floki helps the demand side procure almost automatically, and efficiently given their needs. On the other hand, it also provides new liquidity options to suppliers. Thus, owners of small and mid-sized food service shops can access more and better suppliers, whereas suppliers will be able to tap into a massive pool of restaurants and sell at a much faster and more efficient way;
- Reliable delivery: Floki also ensures the orders are correct and that logistics are well taken care of, providing peace of mind to the food service entrepreneurs, who can now receive the right goods at their door;
- Financing options: lastly, Floki has already introduced Buy-Now-Pay-Later solutions which significantly improve working capital to both sides of the marketplaces, provide more liquidity to the transactions, and unlock a massive opportunity. The Company will soon come up with a broader menu of much needed financial solutions.
Ability to execute in a capital-efficient manner: when we first talked to Luigi and Marcelo as part of their Seed process, we were positively impressed by their background, energy, thesis and long-term vision. However, when we put our hands on the data room and saw what they could build with so little capital from their pre-seed round, we were completely blown away. We cannot disclose much about what we saw, for obvious reasons. Still, it is worth noting that when one thinks of all metrics for a B2B marketplace (SoW, growth rate, efficiency ratios, customer satisfaction, churn, GMV retention, etc.), Floki scored extremely high on every single metric. Valor Capital has invested in six B2B marketplaces so far (more on that later) and we know when we come across a diamond. Even during our diligence process, when we interviewed several customers, their feedback was nothing short of flawless.
Complementary and top-notch team: Luigi and Marcelo have very complementary backgrounds in their knowledge and experience in Consumer Goods, Advanced Analytics and Financial Services, and very rapidly brought on board a best-in-class team in Engineering, Data Science, Retail, Operations and Logistics (alert: we’re hiring – if you want to be part of the disruption in food service, drop them a note). Worth mentioning that my relationship with Luigi goes back to 2013, when we worked together at McKinsey, and I learned to admire his intellect, analytical skills, resilient mindset, and entrepreneurial spirit. Great surprise to meet him almost ten years later and partner up to build Floki together.
Big and bold vision: every time we see a Founder, we always ask what motivates them to build what they are building, and what their 10-year vision looks like. Luigi and Marcelo work relentlessly to empower the millions of small Latin American entrepreneurs who face multiple challenges when running their food service businesses and aim at taking Floki to every corner of LatAm. That is also something that has attracted us since day one.
The B2B marketplace disruption is a global phenomenon, and Latin America is the next stop
In the past five to seven years, we saw the emergence of several B2B marketplaces tackling all sub-sectors of retail (construction materials, groceries, electronics, restaurants, etc.), each with its own business and operating model and adapted to the challenges of its own geographies. From India to China, Southeast Asia, Europe, and the United States, we have seen impressive growth rates and disruption driven by companies such as Faire, Udaan, Ula, Tajir, Choco, etc., and we now believe the time for LatAm has arrived. All major structural factors are here, and it is time to build.
For the past few years at Valor Capital, we have carefully selected our B2B marketplace thesis and exposure across the major sub-segments of retail (i.e., Clubbi in groceries, Oico in construction, Meru in the cross-border space, DoLado in electronics and accessories, etc.). Now, we welcomed Floki – one of the last big pieces of the puzzle tackling the food service segment challenges, and a contender with great potential to become a massively valuable company in the region.
Luigi and Marcelo, we are humbled and excited about the opportunity to build Floki together with you and the team and looking forward to the journey!