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Can An On-Demand Startup Survive Without Contract Labor?

Munchery is one of many companies that want to change the way we eat by selling cheap, nutritious, pre-made meals — and it wants to do so paying its employee a living wage. It won’t be easy.

Via Munchery

These days, especially in San Francisco, it seems like you can get pretty much anything delivered at the push of a button: Whether it's a ride or a hairdresser or a house-cleaner or coffee or weed, the on-demand economy can have it on your door almost instantly.

The same goes for dinner. Don't want to cook, don't want to go out, don't want to order in? Munchery has a solution for that: fresh-cooked, refrigerated food, prepared by professional, pedigreed restaurant-quality chefs, delivered to your door for a reasonable price.

But there's something that sets Munchery apart from the rest: While companies such as Uber, Instacart, and Homejoy rely on contract labor to make the seeming magic of the on-demand economy happen, Munchery has committed to treating its employees like, well, you know, employees — that is, salaried workers with benefits. That's an expensive business model and a tough road to hoe, however — and it's not Munchery's only challenge.

Munchery faces plentiful competition, high labor costs, angry neighbors, and the challenges associated with making dinner for thousands of people a night. Now poised to enter its fifth year and its fourth city, it's a parable for the challenges a young, ambitious, well-meaning startup faces on the path to scale in the 1099 economy.

Tri Tran co-founded Munchery to solve a relatively specific problem: Weekday dinners are stressful — especially for families, especially for those trying to eat healthfully and on a budget. He set out to create a delivery option that was easier than cooking, more healthful than standard delivery fare, and cheaper than eating out.

And it's worked out pretty well. According to Tran, Munchery now serves “many thousands” of meals a day, operates in San Francisco, Seattle, New York City, and, soon, Los Angeles, and has raised nearly $ 40 million, including investments from high-profile venture capital firms such as SherpaVentures and Menlo Ventures.

But Tran isn't the only founder who predicted that busy urbanites would thrill at the prospect of hand-delivered, partially cooked, relatively nutritious meals, and Munchery is but one of many startups eyeing the busy American's dinner table. Sprig, SpoonRocket, and Zesty are all rolling up on your door with similar concepts: meals at various stages of preparedness. Meanwhile companies such as Blue Apron and Plated have both found success delivering ingredients to customers who want to cook for themselves, but don't know how, or don't have the time to shop. And of course, there's also more traditional takeout, now facilitated by websites like Grubhub and Seamless. All of these companies cut into Munchery's potential customer base: people too busy or too lazy to cook dinner for themselves from scratch.

For now, Munchery is the biggest, at least among its immediate competitors: Sprig, which claims to have served more than 300,000 meals since launch and has raised $ 11.7 million, has a kitchen staff of 50 in San Francisco. SpoonRocket, meanwhile, has raised $ 11 million. (SpoonRocket didn't respond to request for comment for this story.)

But to stay on top, Munchery needs to expand with the kind of market-owning aggression shown by fellow on-demand labor companies such as Uber. Every city has an untapped market of potential Munchery customers; if the company doesn't capture that revenue, someone else will, and Munchery investors will be disappointed. That pressure can be hard to live up to without having to sideline some of the core principles of a business along the way.

Tran said it's important to him that everyone who works for him to feel that Munchery is “something they can believe in.” To that end, Munchery matches the cost of every meal it sells in donations to local food banks (Marin Food Bank in the Bay Area, City Harvest in New York).

Donations aren't the only thing cutting into Munchery's bottom line: Unlike some other Bay Area startups, which are being taken to court over potentially misclassifying workers as contractors — thereby cutting them out of benefits, overtime, and other compensation — Munchery offers both drivers and kitchen workers employee status, including benefits.

This is an ethical decision for Tran, but it's also a savvy business move. The higher compensation that comes with employee status may help with retention for drivers, many of whom Tran said are students or ride-hail drivers by day. From a consumer relations standpoint, it behooves Munchery to have happy workers showing up at customers' doorsteps every night. And from a management perspective, classifying workers as full employees, rather than contractors, allows Munchery to exert a higher level of control over them in the name of efficiency. (For example, Munchery drivers use an internal app to plot the most efficient drop-off route and communicate with customers.)

Hunter Walk is a venture capitalist and co-founder of Homebrew venture fund, which funds a number of early stage startups including a few in the on-demand services space. He agrees that the long-term benefits of making an investment in labor can easily outweigh the short-term benefits of relying on contract labor. “Why would you give up customer-facing innovation opportunity by treating the folks that interact with your customers as low-quality, disposable resources?” he told BuzzFeed News. “That just doesn't make sense to me.”

Moreover, classifying employees as contractors may well be illegal — and many have wondered whether these on-demand labor companies can continue to grow, or survive at all, if the courts force them to reclassify the cheap labor their business models depend upon.

Other on-demand delivery companies say they can't afford the labor cost of hiring workers as employees, but Tran doesn't think that's a good enough reason.

“If you look at labor law, and all the 25 tests the IRS has about what makes an employee or contractor, these folks are clearly employees,” Tran said.

But Munchery's success — if it continues — might suggest that it's possible to offer workers full compensation, and even benefits, without going under. Still, financially, the difference has to be made up somehow; like so many startup founders, Tran is also hoping scaling rapidly will close the gap.

Munchery's sheer size brings perks, such as bulk discounts on ingredients. As the company continues to expand across the nation (Tran suggested Boston and D.C. as possible next locations), its potential market share seems almost limitless. Said Tran, “We don't have a ceiling in terms of revenue.”

But the business model nonetheless faces challenges, even beyond Munchery's unusually high labor costs. Efficiently delivering thousands of meals a day means operating a large commercial kitchen in a central location from which residential neighborhoods can be reached with relative ease. In San Francisco, that's the Mission District. Ingredients from storage facilities located elsewhere are delivered every morning; trucks and delivery cars are loaded and unloaded all day as ingredients come in and chilled meals in insulated bags go out.

This has, somewhat inevitably, resulted in complaints about parking, noise, and general disorder caused by Munchery's ever-quickening business. After local news outlets picked up on reporting by neighborhood blog Uptown Almanac regarding engines left running on refrigerated trucks outside the facility, Tran moved the kitchen, at no small cost to the company. But similar problems arose at the new location.

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