Facing off with behemoths, Farmstead pursues online grocery market

Pradeep Elankumaran’s 2-year-old daughter craved Straus organic milk. He found himself in the grocery store several times a week getting milk and other staples. His family tried online grocers — Instacart, AmazonFresh, Good Eggs — but found them frustrating to use.

He posted on his Mountain View NextDoor site asking if people would like a weekly delivery service for milk, eggs and bread. In two days, he got 300 answers in the affirmative, many saying they’d also like fruits and vegetables to be delivered.

So Elankumaran quit his job as a Yahoo product manager and started an online grocery store called Farmstead, along with fellow Yahoo alumnus Kevin Li, with the goal to deliver fresh, locally sourced food.

It sounds crazy. Amazon, Walmart and Google, all with more money than they seem to know what to do with, want to dominate online groceries. Amazon bought Whole Foods in June for $13.7 billion, giving it hundreds of brick-and-mortar grocery stores in addition to a network of warehouses and commissaries. San Francisco’s Good Eggs provides a recent cautionary tale of an online grocery startup that expanded too rapidly and had to retrench, although it’s now staging a comeback. Webvan, one of the dot-com era’s biggest busts, turned investors off of grocery delivery for years after it burned through $1.2 billion.

But Elankumaran and his backers insist that online groceries remain ripe for change and that there’s plenty of room for competition.

“We love that this is an incredibly big challenge and lots of people have broken their pick trying in the past,” said Mike Hirshland, founder of Resolute Ventures, which invested an undisclosed amount in Farmstead in two financing rounds.

The company’s total backing is a modest $2.8 million. It has six full-time employees plus many part-time employees and independent contractors.

Like many startups and big tech companies these days, Farmstead is pitching its use of artificial intelligence. Elankumaran and Hirshland said its software can predict what quantities to order and reduce the food waste that plagues traditional grocers.

“They are reimagining the grocery business as technologists,” Hirshland said.

There’s ample reason to be skeptical of that boosterish claim: For one, Amazon, Google and even Walmart have long been investing in artificial intelligence, and those companies have far more data to use to teach their algorithms.

Groceries are indisputably a massive market, and one that can only continue to grow. Online sales are projected to surge to $100 billion, or a fifth of grocery sales, by 2025, according to the Food Marketing Institute and Nielsen Co.

Farmstead’s concept is to have “micro-warehouses,” small distribution centers to keep the food close to customers so it can offer same-day delivery in one-hour or three-hour windows.

It charges $4.99 for one-hour deliveries and $3.99 for three-hour windows. Delivery is free for customers with recurring weekly orders. Prices for the food, which is heavily organic, are on par with regular grocers.

The food comes in bags that customers return for future use, with reusable ice packs to keep perishables cold, and dry ice for frozen items.

Farmstead carries just 1,000 items, “but they’re the best” in their category, Elankumaran said. It has added items such as meal kits and some conventional or nonorganic produce in response to customer feedback. Still, it offers only a fraction of the 40,000 to 50,000 items at traditional grocery stores.

Deliveries are done by independent contractors driving their own cars. Farmstead pays them $16 to $18 an hour. Before Yahoo, Elankumaran was briefly head of driver product/growth at ride-hailing service Lyft.

“I spent a lot of time thinking about drivers and how to make sure they are successful,” he said. “That led to Farmstead.”

Farmstead started delivering in Mountain View about a year ago and now serves San Francisco, the Peninsula and parts of the East Bay from two warehouses in San Francisco and San Mateo. The plan is to continue expanding throughout the Bay Area, then California, then the country.

The company now does about 1,000 deliveries a week. Yelp reviews are stellar, almost uniformly five stars — even though customers noted glitches such as Farmstead being out of bread one day last month, something that rarely happens with established grocers.

Palo Alto resident Maya Venkatraman, a product designer, has been using Farmstead for about a year to handle the bulk of food shopping for her family of four, which includes two teenage boys. Her weekly order, heavy on produce, comes to about $150.

“It’s super convenient and has made my life easier,” she said. “The food always shows up on time, and it’s good quality.” She likes that Farmstead buys much of its produce from local farmers.

While she still needs to shop at a grocery store at least once a week, “those trips are lighter and funner; I don’t have a full cart anymore,” she said.

She appreciates Farmstead’s streamlined interface and pared-down selection because it makes it easier and less intimidating to place an order. She had tried Webvan years ago, and found it too tedious to slog through its massive selection of items.

“I just wonder how they can make money and be competitive with Amazon at the same time,” said David Livingston, a grocery consultant with DJL Research. “Yelp reviews are great but not relevant if you are not profitable. I would imagine Walmart’s reviews are horrible and they could care less because they are profitable.” (Walmart’s San Leandro store, the closest to San Francisco, gets two stars on the review site.)

Elankumaran said Farmstead makes money on the margin between buying food at wholesale and selling it at retail — just like any other grocer. But it keeps its costs low by minimizing food waste and tightly optimizing drivers’ routes.

“We are on track to be cash-flow positive in both hubs in the next five to six months,” he said, referring to its Bay Area warehouses. “This is a very scalable model. Wherever we go, we can spin up a hub very efficiently.”