Q&A: Farmstead co-founder and CEO Pradeep Elankumaran

Pradeep Elankumaran is CEO and co-founder of Farmstead, an artificial intelligence-powered digital micro-grocer hoping to reinvent the supermarket model through technology. Operating from a small warehouse near its customer base, Farmstead’s priority is local food delivered from farm to fridge in under an hour (it also sources from farms throughout the United States). The service matches or beats local supermarket prices, dispenses with minimum orders and delivers at no charge when customers sign up for weekly grocery delivery. Otherwise, same-day and one-hour delivery costs are generally less than traditional grocers.

Thank necessity for the advent of Farmstead. When Elankumaran’s two-year-old daughter hit a growth spurt, she was drinking so much milk that running out was a daily occurrence. Elankumaran and his wife tried every available grocery delivery service, but remained underserved: Service was hit or miss, almost none offered locally sourced food (a priority for the young family) and all came with high surcharges and delivery fees.

Frustrated, Elankumaran turned to social media to survey his friends and neighbors and see who was interested in having milk, eggs, yogurt and bread delivered for the same price as the supermarket. When virtually 200 said yes — and 50 handed over payment information — what was intended as a side project turned into Farmstead. Operational since October 2016, Farmstead has completed more than 100,000 deliveries within a 50-mile radius in the San Francisco Bay area.

Prior to Farmstead, Elankumaran led mobile video monetization and Livetext at Yahoo, managed the driver growth product team at Lyft and co-founded a mobile photo sharing product.

Why do you believe the future of grocery is on-demand delivery?

The reality is that Americans spend $800 billion in groceries a year, but only 5 to 8 percent of that is online. It’s also true that as a country, we are way behind in online grocery adoption compared with the rest of the planet. While not every customer has the desire to stop shopping at stores, generally millennials are spending less time at stores and buying more online. Unfortunately, nobody has figured out how to make fresh food part of this online buying pattern and make it so customers pay the same price without additional fees to get delivery to their doorstep.

But Farmstead has?

It’s not that the traditional players are missing anything. It’s just very challenging given the margins. We know traditional grocers will need to retool. We’ve spent the last three years building a unique model that makes this happen. We believe that every home in the country deserves fresh, on-demand groceries delivered to their doorstep at a price they can actually afford. As an example of managing costs, we’re able to use technology to reduce food waste from 30 to 40 percent, which is the average range for a traditional grocer, to less than 10 percent.

You’ve said Farmstead is a tech business. Can you share why the heart of the operation is technology rather than product?

Traditional grocers have struggled with ecommerce because their stores and labor models aren’t optimized for order picking, packing and delivery. Companies like Instacart and Shipt solved that problem for them, but at a high cost, so most grocers view them as a temporary solution. And as far as we know, even with all the fees they charge, most of those companies still haven’t figured out how to make money at this while keeping prices the same as or less than local stores and retaining customers over the long term.

We have. We firmly believe that grocers cannot solve these problems for customers, given their cost structures. When you’re making 2 to 3 percent net margin per order, adding new functions like picking and delivery means you pass the costs down to customers, which suppresses adoption from customers who are on fixed grocery budgets — the majority of the country.

What should traditional grocers and supermarkets fear most about Farmstead?

Digitally native companies like Farmstead — technology businesses that are customer-centric and are not afraid of operations — are the ones that will solve these problems. The key here is to buy wholesale and sell retail but keep most of the profit by not having too much food waste. The proceeds are used to finance our rapid pick and optimized delivery, after which there is some profit to be made per order.

We’re three stores in one — customers can purchase comparable products from Safeway, Trader Joe’s and Whole Foods Market at the same prices they pay at all stores because we are rewiring the supply chain a little bit more than a traditional store.

All of this is only possible with technology improving those margins and reducing pick and delivery costs. We use artificial intelligence to predict just how much to keep in stock so there’s always enough of any product to add to your delivery basket, but not so much perishable products in stock that inevitably those items go to waste because nobody bought them. This allows us to cut food waste to under 8 percent.

Our hub associates then pick using software that we wrote from scratch, in a software-controlled hub. Then our delivery drivers drop off bags to you and your neighbors at the same time on long delivery routes, which saves money. All of this is controlled by Farmstead with custom code we wrote from scratch to solve this problem.

What sets Farmstead apart in such a crowded marketplace?

We’re three stores in one — customers can purchase comparable products from Safeway, Trader Joe’s and Whole Foods Market at the same prices they pay at all stores because we are rewiring the supply chain a little bit more than a traditional store. That means they’re saving a couple of hours a week minimum. We’re also fresh-focused and locally focused. This means more than 50 percent of our inventory are refrigerated products, which is what most consumers tend to buy more nowadays. We also source produce locally whenever and wherever possible depending on season and geography.

We don’t carry 30,000 products, and instead carry a tight selection of 1,000 to 2,000 products, with each category containing multiple price points. For example, we will carry three brands of sea salt potato chips — one inexpensive, one mid-tier and one fancy organic. It’s why we don’t believe selection is king; we believe curation is king.

What’s next for Farmstead?

I can say we’re not actively looking to add a physical store — we’d much rather invest our time in getting better.  We are hoping to move our average [purchase amount]from $50 to 60 a week to over $100 a week. After three years of working on operations products to improve efficiencies, we’re focusing now at Farmstead on making our customer shopping experience phenomenal. We’re currently working on the most personalized grocery shopping experience [customers]will ever use. We want to remain in the background of their lives — we don’t want to be dominating their day-to-day. We are also mapping out our expansion across the country with both our packaged goods partners and potentially a few grocery partners as well.