Fast Dining: Marc Lore’s Wonder in the Shift from Food Trucks to Food Halls

The last time I wrote about Wonder, I mentioned their somewhat innovative model of using food trucks to deliver meals while also prepping the food at the customer’s doorstep. I wasn’t very optimistic about the overall endeavor as I thought it was expensive and polluting, and didn’t see exactly how it could work. 

But if there’s one Wharton person I wouldn’t bet against, that’s Marc Lore (No… it’s not Donald Trump).

About a year ago, Lore decided to dump the food truck idea and pivot to a new one: Food Halls, which only allow delivery and pickup (with limited seating). The first Food Hall opened in the Upper West Side of Manhattan, and now the firm has 10, primarily located around New York. Recently, the firm opened “its 11th location, which is both its first in Pennsylvania and first inside a Walmart store…”

Many things to like and dislike here, and as you know, I tend to dislike things more than like them...

So, let’s begin.

Using the S.C.A.L.E framework (introduced in a previous newsletter) for our analysis, we will assess the firm’s readiness to scale by taking a different perspective on its business model and operational attributes. 

Aligned

Let’s start with the notion of Alignment between the different components of the business model. 

The model is an excellent example of the statement, “Tell me what you’re not good at, and how you use it to be great in something else.”

The main idea behind Wonder is giving up the dining experience and betting on people wanting better and cheaper food, along with more variety, that is also conveniently delivered or picked up.

Let’s delve deeper: The firm is betting on people wanting something better than what they can make at home, but not having to eat it outside their home. Wonder’s hypothesis is that people don’t cook (or don’t know how to cook) but still prefer the comfort of their own dining room, either because it’s less time-consuming than dining out, either because it allows them to relax at the end of the day, or simply because they’re less social (that would be me) and prefer to dine in. 

Once the hypothesis is solidified, the firm can then optimize the operating model around it: a centralized kitchen (the commissaries) where most of the food prep is done, and several “edge kitchens” (the physical storefronts) whose role is to offer the necessary precision for good food to be made at the right time, while reducing delivery costs (since the food will be either picked up or delivered a short distance). 

So, if you think about what needs to be done centrally and what needs to be done locally, I believe the firm is striking the correct balance in offering good quality at low cost with relatively good variety. The firm also standardizes the process. 

Wonder creates meals in a New Jersey commissary and completes the cooking in TurboChef ovens operated by staff in its storefront locations. According to Lore, Wonder claims to deliver ‘hot food’ within 20 to 35 minutes (depending on the time of day) by utilizing a hub-and-spoke system. The service area is confined to a six-block radius to guarantee a hot meal delivery within 10 minutes of its preparation, and a $1.99 fee is applied for delivery.

In fact, all dishes are prepared with just three types of equipment: TurboChef ovens, water baths, and self-venting automated fryers. For the restaurant staff, the process largely involves simply pressing a button —a simplicity that enables the concept to be easily duplicated across various environments.

Wonder also offers convenience in terms of ordering different cuisines —something impossible with DoorDash. If a group can’t decide on Pizza or BBQ, Wonder can make it all in the same single order. 

Sounds great right? Let’s continue and we’ll see…

So it’s clear that people want inexpensive, fast food with convenient delivery. And it’s also clear that people want some level of variety along with a certain level of quality that should match the notion of “fast fine” that Lore is promoting. 

Currently, the firm offers 23 different brand names but claims to be able (or at least strives) to operate around 100. 

The key questions on variety are: How much variety is enough variety? Are 100 brands enough? And, is it possible to maintain the level of quality expected from customers? 

One of the model’s most important aspects is that everything is made in the same oven, using the same process. If quality and variety of flavors are their main concern, this is probably not the way to do it.

While the firm claims that this pizza tastes like a woodfire pizza, it is not a woodfire pizza, and it will always look and taste like an industrialized pizza:

​​It doesn’t look bad, but it looks like food court pizza. Based on customer feedback, it’s not good pizza, and neither are the chicken wings and sushi the company serves. 

Now, if you live on campus and these are your only options, that’s fine. But if you live in Manhattan, once in a while, you can go try what good pizza tastes like.

So, Wonder will continue to compete (and lose) to DoorDash and UberEats in terms of the variety of reasonable quality options. It’s not that DoorDash doesn’t have any bad options, but there are enough very good ones. 

On a related issue, Wonder will also lose the authenticity of the food it aims to deliver. You may argue that people don’t care about authenticity, and you may be correct. If you’ve never had good pizza, you don’t know what it tastes like. If you’ve been surviving on Cheetos, you’d consider a home-cooked meal dull. As we cook less, we also lose our ability to distinguish “just ok” from “very good.” 

The reality is that the early photos don’t look very appetizing.

And from what history has shown, although Lore knows how to squeeze out a dollar and how to achieve operational excellence better than almost any other tech entrepreneur, attention to high quality is not something I’ve seen much of in his past. 

As I mentioned, Lore calls the model “Fast Fine.” And while it’s definitely going to be fast, I’m not so sure about “fine”…

When I think of fine, I picture something like this:

Not this:

But maybe that’s just me. 

This also brings me to question the decision to open a location at Walmart. 

As president and CEO of Walmart.com from 2016 to 2021, it’s evident that Lore already has deep ties with the retailer. It’s also a place with high traffic, so there’s no need to spend on marketing, and most likely, ordering food will require downloading their app (this is just an assumption) thus fully monitoring customer interaction.

So the operating system seems to be great at delivering fast, “OK-quality” warm food, which isn’t too expensive, and also has the ability to blend a fairly limited variety of cuisines. 

Whether there are enough customers looking for this value proposition, and to what extent they’re willing to compromise on variety or authenticity is hard to say. At the time of this article, Yelp’s score for a Wonder location is around 3.9 (with a bi-modal distribution of reviews and the majority of “Elites” giving relatively low reviews). 

Scalable

The model is scalable, but...

Marc Lore claims he wants to build a trillion-dollar firm.

To do so, he will need to open more locations, which means investing more capital as the firm grows. He will need to add centralized cloud kitchens, i.e., commissaries, which means even more capital.

He will benefit from pooling resources and achieving economies of density. So as he opens more restaurants, his supply chain will become more efficient. This will increase his bargaining power for purchases, reduce food waste, and decrease the overall excess capacity needed in the system.

Based on Lore’s claims, each restaurant can reach $10M in sales (very high). But reaching a trillion dollars from $10M increments is no easy feat. Domino’s has around $1B of annual revenue and a market cap of $15B, so to reach 1 trillion dollars, Wonder will need to open roughly 7,000 locations. 

Not impossible…

But… (you knew there was a “but” coming) ... the more locations, the harder it is to control quality and maintain employees.

Food is not like diapers. Food poses challenges in maintaining quality and ensuring food safety.

Also, “fine” food is primarily about raw ingredients. When considering Domino’s or McDonald’s, which mostly taste like cardboard, scaling is possible. But high-quality food doesn’t scale well. Buying the same beef and lettuce for 10,000 locations is one thing, buying ingredients centrally for 100 different brand names of food across 10,000 locations is another. Maintaining the same quality and standard on all of them is nearly impossible. 

There’s a reason why all food-court food tastes the same. 

Efficient

Is there a predictable path to profitability? I think the model can be profitable. Lore claims it will break even at $5M of revenues per location, and I believe it will.

One key idea contributing to this is Wonder’s vertical integration, which brings two clear benefits. When controlling the entire process (or at least most of the process): 

1. It’s easier to manage costs: no need to pay intermediaries and you can optimize for cost efficiency, something Marc Lore has been known to be an expert in. 

2. It’s much easier to maintain margins: this is made more clear from the following graph. 

To understand the second point, I wil linvoke my favorite framework: The Stan Shih Smile Curve.

Wonder doesn’t control the brand (or the R&D in this case), but they do control the customer relationship, as well as everything from the point of “branding” and to the right. This means that they can extract more value than a regular ghost kitchen or a platform dealing only with a portion of this value chain. 

Lore claims that they dropped the trucks because it was difficult (and expensive) to find parking for so many trucks. Maybe. But it’s clear that that model had a much slower path to profitability. 

Constraints

Given the above “tailwinds,” the question is, “What will the main constraint for growth be?” 

Of course, capital will play a role, but I don’t think that’s the ultimate constraint.

The main issue is that even if everything is automated, a kitchen still highly depends on people.

As of November 2023, the restaurant industry witnessed a turnover rate of 6.1%, higher than the overall rate of 4.9% across all sectors. This rate stands out as one of the most elevated sectors during the same period. Beginning 2023, the restaurant workforce was 3.6% short of its pre-pandemic figures, as reported by the National Restaurant Association.

Moreover, 62% of restaurant operators indicate difficulties in staffing to match consumer demand and 80% face challenges in recruiting for vacant positions. The industry’s high turnover is often attributed to its demanding nature, including fast-paced work, irregular hours, and intensive customer service, which can lead to employee burnout. The variability in earnings, mainly due to fluctuating customer visits and limited opportunities for career progression within the sector, exacerbates the situation. The instability and physical demands of restaurant jobs often result in higher turnover rates than other sectors that offer more stable earnings.

The financial repercussions of turnover vary by restaurant, with the cost of losing an employee ranging from half to twice their annual salary. This fast turnover in employees can be extremely costly for restaurants (estimated overall at approximately $9-10K), not to mention that the constant change in hands can negatively impact food handling and issues relating to food safety. 

Recent research shows that an outbreak of listeria in fast-food and casual dining establishments could lead to costs exceeding $2.5 million, including lost revenue, legal settlements, fines, and increased insurance premiums, for an incident affecting 250 people. Fine dining venues faced slightly higher expenses at $2.6 million under similar conditions.

Such financial repercussions from outbreaks pose significant challenges to the restaurant industry, sometimes leading to irreversible damage. For instance, Chi-Chi’s chain declared bankruptcy and shut down operations in the U.S. and Canada after a Hepatitis A outbreak in 2003. Over the last ten years, numerous national restaurant brands have experienced substantial losses due to incidents related to foodborne illnesses. Chipotle’s e-coli outbreak is still talked about even though it happened more than ten years ago. 

As Wonder grows, finding enough good workers and managers to maintain quality and ensure food safety will be a challenge. It’s not impossible, but it will be a constraint, primarily if the firm is skewed toward the “fine” side of the spectrum. 

Why Ghost Kitchens Didn’t Deliver

While Wonder isn’t a cloud kitchen, it borrows certain concepts. 

Ghost kitchens, once hailed as the future of fast food, promised restaurant owners and investors a more cost-effective route to expanding their businesses than the traditional sit-down eateries. These virtual kitchens offered the ability to test and expand new menu concepts with fewer overheads such as rent and labor. However, the reality of ghost kitchens has fallen short of expectations, leading to a significant downturn in their popularity and viability.

One of the primary issues with ghost kitchens is the confusion and disillusionment they cause among customers. The lack of a physical location meant that customers couldn’t visit, see where their food was coming from, or efficiently address issues with their orders. This made customers feel “duped” when they discovered they were ordering from a large chain masquerading as a small, independent kitchen. 

A survey by the National Restaurant Association revealed that 70% of diners prefer their food to come from a location they can physically access. This highlights the importance of identity and physical presence in the dining experience, the absence of which resulted in insufficient sales for ghost kitchens, making the business model unsustainable.

The operational challenges are also significant. Relying on third-party delivery services, which can charge fees as high as 30%, made it difficult for ghost kitchens to maintain profitability. Regulatory challenges have arisen too, with local health departments struggling to inspect and regulate these virtual food prep spaces.

Consequently, numerous restaurants have closed their ghost kitchens, and investment in the concept has waned. High-profile retreats from the ghost kitchen market include Wendy’s, Applebee’s with its Cosmic Wings, and Travis Kalanick’s CloudKitchens. 

What Differentiates Wonder?

Wonder stands out in the evolving food space for several reasons, making it a more compelling model for the future of ghost kitchens. 

The four key elements are:

Their Own App: Wonder’s app is a significant advantage, offering customers a seamless, direct interface for browsing menus, placing orders, and tracking deliveries in real-time. This direct-to-consumer model enhances user experience by streamlining the ordering process and offering personalized recommendations, which can lead to increased customer loyalty and repeat business, as well as higher margins (the Smile curve).

Delivery System: By managing its delivery system, Wonder ensures control over the customer experience from order placement to delivery. This control can lead to higher quality standards, faster delivery times, and a more consistent experience. Moreover, by not relying on third-party delivery apps, Wonder can avoid high commission fees, improving its profitability and allowing for competitive pricing.

Pickup Service: The availability of a pickup service caters to customers who prefer to grab their orders on the go, offering flexibility and convenience. This service can also reduce delivery costs for Wonder and its customers, making it an attractive option for those looking to save time and money.

Physical Location: Unlike traditional ghost kitchens that operate out of hidden commissaries, Wonder’s investment in physical locations adds a new dimension to its business model. These locations serve as operational bases for cooking and delivery and offer the potential for brand visibility and customer engagement in the community. Physical locations can act as touchpoints for customers who prefer in-person interactions or wish to have a dine-in experience, thereby broadening Wonder’s customer base.

Bottom Line

Wrapping up, Marc Lore’s pivot from food trucks to Food Halls, while ditching the cumbersome and polluting trucks for a more streamlined delivery and pickup service, is a testament to his adaptability and keen business acumen. Lore’s ability to shake up the food industry, from acquiring Blue Apron to launching food courts in Walmart, showcases a blend of innovation and practicality. Despite my initial skepticism, it’s difficult to ignore this model’s potential for scalability and profitability. 

However, concerns regarding food quality and the ability to truly compete on variety and authenticity with giants like DoorDash and UberEats remain. The journey toward a trillion-dollar valuation is steep, requiring significant expansion and maintenance of quality across potentially thousands of locations. The labor constraints in the restaurant industry add another layer of complexity to this ambitious goal. Yet, if there’s one thing clear from Lore’s track record, it’s his knack for navigating through operational challenges and market dynamics. As the food industry continues to evolve, it’ll be interesting to see how Wonder adapts and whether it can truly redefine fast, quality dining on a massive scale.