Thanks for writing such a thoughtful comment about our business. We’ve spent a significant amount of time thinking through this model, so I thought I’d share our perspective on some of your concerns.

I noticed three general concerns throughout your message.

1) You see small producers as unreliable and disloyal and thus we’ll have a hard time keeping them within our marketplace. Specifically you think these producers will go out of business or if they become successful enough, we will lose them to Amazon.

-In regard to producers going out of business:
We’ve designed our platform to allow lots of food producers to sell through Foodzie. More specifically, a significant number of producers in each category so that when one producer stops selling for a season, or goes out of business all together, there is another chocolate or olive oil option for customers that come to our site. Also, we know that it’s tough for small producers to market themselves. That’s one of the primary reasons we started this business… to help these small producers market to new customers and increase their sales so they can stay in business.

-In regard to losing producers to Amazon:
We’re in the business of helping these small producers succeed. If a producer becomes large enough and sees Amazon as the right opportunity for their business, that’s absolutely fine with us. We know there are enough independent producers across the country that need a platform like Foodzie to sell their product. At the end of the day they have to make choices about where they sell their products and what it says about their own brand. The experience shopping on Foodzie is much like shopping at your local specialty food market, while Amazon more closely resembles shopping at Walmart. It makes sense for electronics, books and shoes to mingle within one marketplace, but there’s something different about food. There’s something about going to a place just to shop for food that’s simply more appetizing and we believe our producers and customers get that.

2) You see shipping as a big issue with our model, both the cost of shipping and the reliability of our producers to ship a package that will arrive in good condition.

-In regard to shipping costs:
We agree aggregation is a great strategy. That’s why with Foodzie we’re aggregating lots of small producers within one marketplace. One of the benefits to our model is that producers within our marketplace can ship under one account, thus aggregating all of their shipping volumes and getting better shipping rates for the whole group.

-In regard to condition of shipments:
The producers we work with welcome the direct to consumer business because it allows them to control their growth and thus control their quality. So, many of our producers make a business around shipping direct to the consumer and have perfected the shipping of their product. Any producer that’s figured out how to ship 50 cases, had to figure out how to ship just one box first. I worked for a specialty food retailer where we had specialty food producers large and small shipping samples to us every single day. It was a rare occasion that boxes would ever arrive with damaged product. If you know this business (and by the thoughtfulness of your response it seems that you do), you would know that any small food producer starting out has to master shipping samples to potential buyers to start getting business. These sample packages are roughly the same size packages our producers will be sending out to their customers on Foodzie, and I think they are more than well equipped in experience and the resources to do it well.

3) You think it will be difficult to sell products that don’t have any brand recognition.

You are absolutely right. It is tough to sell products without any brand awareness. This is a big reason why so many of the specialty food sites haven’t been all that successful. We believe that if you aren’t familiar with a brand you need feedback from other customers to help with your purchasing decision. We are working on features for Foodzie that allow the community to give feedback on products. We believe building a community around these products and producers that allows users to share their experiences, helps each customer to feel more confident purchasing a product they’ve never tried before.

they got food, books, win, champagne. a rare and efficient service.

K

The real problem for startups in this economy is that once you’ve scored a funding round you can get addicted to the money, and it most likely was the last funding you’ll see.

Not only are small artisan food producers not very good at ecommerce, they’re not very good at product fulfillment in small quantities. Their model is to deliver 50 cases to a distribution warehouse. They know how to make bread or sauce. They run a kitchen. They just aren’t set up to ship out small quantities to lots of people and aren’t very good at it. I can’t tell you how many times I’ve seen a small vendor put an entire case of glass bottles in a box without packing material and just ship what becomes half a case of broken bottles from UPS. Throw in the fact that many of their products have a limited shelf life and require refrigeration and this is going to be a nightmare.

Foodzie is basically just a drop shipper, which means they’re in the middle between the customer and the supplier when fulfillment doesn’t go right. Their worry won’t be, as others have suggested, that the vendors will steal their repeat customers. Their problem will be making their customers happy in the first place. Getting a reliable supply from most of these vendors when you’re purchasing in 50 case quantities is tough enough. Being in the middle of 1 and 2 unit transactions is really going to be hard. 20% is not nearly enough to cover the transaction costs.

Another aspect of the specialty foods market is that the vendors enter and exit very quickly. There’s not much cost to entry — you just need a product and a facility to produce it. Every small market and restaurant thinks they can get into the business. They do it for a couple of years then fold up. Given the economy, there will be a lot of exits if only because the vendors can’t get a credit line to finance operations. Foodzie runs the risk of spending the money to market products that disappear out from under them.

A 20% margin is a good deal to the vendor because they usually have to give up about 80% to push the product through the distribution chain. (10% to the broker, 30% to the distributor, 40% to the store). It’s rare to sell directly to a store — the quantities at a single store aren’t enough to justify the delivery cost for the vendor. They generally sell to distributors, who then sell to grocery chains. But the amount of total sales that the vendor will get from online sales will always be a small part of their business. For every person that purchases a specialty food item online, about 10,000 do it at Whole Foods or their local grocery store. So when supply problems hit, guess which channel is going to get their attention?

Another problem is that their shipping is distributed. Each vendor does a small amount of shipping, so they’ve got high shipping costs. Specialty foods aggregation type businesses work because they drive the cost of shipping down with volume discounts.

Of course, there’s already a pretty well known company that has been in this specific business for the last year — Amazon has a specialty food section. They’re masters of that model, so it’s going to be tough to compete with them. If Foodzie manages to evangelize the market, Amazon can just overwhelm them. If one of their producers starts to make it big time, does anyone really think they’ll turn down Amazon when they come calling?

Plus, there are only about 1,000 specialty foods sites doing the same thing already without the funky drop ship arrangement. As a site with just under 7K visitors/month according to Compete (most of which have been driven from the buzz around techstars and not from their target market), Foodzie has a very tough road ahead of them.

But the real problem is that they’re selling unknown specialty food products, which is very tough to do over the internet. Since, according to their site, they want to concentrate on items that customers can’t just find in their local stores, they have the problem that people don’t know anything about the brand they’re being asked to purchase. For instance, “Rocky Mountain Red Jerky” sounds good (at $11 for a 3.5oz bag it better be!), but not many people are likely to purchase it without having tried it before. As people in the specialty foods business will tell you, brand awareness is king. You’ve got to get out into the public and get them to sample your product. That’s why you can sell something like Dave’s Insanity Sauce over the internet — it already has a built in cult following. But put the same product in a different bottle and call it Joe’s Hot Sauce and you won’t sell very much of it. So Foodzie’s market is people that have been previously exposed to their set of relatively unknown products and would rather purchase over the internet than in person. Ouch.

This business is all about repeat customers. You don’t make much on their first order because the marketing makes it a break even proposition, but as the list builds your margins increase. Foodzie is doing the inverse: they’ll have a tough time getting repeat customers and they’ll spend a lot more money evangelizing unknown products. When the marketing money runs out the sales will stop because they won’t have the snowball effect of repeat business.

If I was going to invest $1M in the online specialty foods business, I’d do a rollup of several boutique vendors and leverage the customer lists. In this economy, it’d be cheaper to buy than build.

Does anyone else get the impression that all these flowery sugary comments these days on Techcrunch are not authentic?? Is there some company you can hire in India to (not so) cleverly spam Techcrunch to give the TC new story that positive afterglow from saccharin loaded comments?

Check out http://www.TEAandSPICE.com and maybe we should strike up a little something…

Chris

Maybe Foodzie could also act as a “farm team” of sorts for the large chains helping Foodzie’s most successful producers garner distribution deals as an extra value add (with finder’s fee, of course). Wholefoods, for one, does have local buyers and Foodzie could forge the correct relationships to broker these deals and expedite the process of getting compliant and on the store shelves

Anyway, good luck and congrats to them :p