Oh the Places Food Trucks Will Go!

I’ve always been curious about the food truck business.  Every day, a variety of food trucks line up along Park Avenue outside my office during lunch.  Long lines form around the trucks with people eagerly waiting to buy a lobster roll, dessert pizza, chicken with rice or donut ice cream.

In 2012, there were approximately 3,000 food trucks and carts in New York alone, and food truck revenue was estimated to be approximately $650 million.  The average customer spends approximately $10 on lunch and $15 on dinner at a food truck.  A previous study showed that the largest consumers for mobile vendors are individuals between the ages 25 to 34, spending an average of $44 a month.  In the past 5 years, the food truck industry has experienced tremendous growth with revenue jumping 6.1 percent in 2008 to $1.1 billion and 9.5 percent in 2009 to $1.2 billion.

Breaking In

Although the food truck business is a simple concept and has a lower overhead than restaurants, there exists many challenges in entering the business and becoming a sustainable market leader.  The initial costs to start a food truck include the truck, a permit to operate, parking, supplies and insurance.  The average cost of a food truck ranges anywhere from $30,000 for a used food truck (e.g. Vending Trucks offers food trucks with a very basic mobile kitchen in an older step van for $40,000) to $300,000 or more (newly customized gourmet food truck).  A retrofitted truck would cost around $60,000+.

Even more important than the truck is the permit required to operate a food truck in a state.  In New York, food truck owners are required to have a Mobile Food Vendor Personal License and a Mobile Food Vending Unit Permit.  The permit in New York expires in 2 years and the fee is $200 for a processing food unit and $75 for a non-processing food unit–the sale or distribution of only pre-packaged foods or foods that do not require cooking or any other treatment that exposes the food to contamination.  In comparison, a permit costs $500 in Boston, $1000 in Chicago for a processing food unit and $700 for a non-processing food unit, $340 in Philadelphia, and about $730 in San Francisco.  The limited number of permits available in each city (e.g. approximately only 3,000 in New York) has resulted in illegal rental permits and a black market where permits can be sold up to $20,000.

Usage of a commissary is another large upfront cost and is also a monthly cost.  The New York City Department of Health mandates that all mobile food vendors must visit a state licensed commissary each day, where food is store and prepared and cleaning services are performed.  These commissaries also sell and rent carts and sell vendors supplies such as food and propane.  When a food truck is not operating or selling to its customers, it is required to park at the commissaries; food trucks are not allowed in metered spots or on private property.  The average cost for commissaries ranges from $500 to $1200 per month.  In addition to the food truck, permit and commissary costs, business liability insurance and vehicle insurance are also necessary startup costs.  Insurance costs include auto liability ($2,000-$3,000 per year or $2,500 estimate per year), general liability ($3,500 per year), and workers’ compensation insurance ($7,000  per year for 3 employees).

Other variable costs that need to be incurred to operate a food truck include gas, vehicle modifications, food, marketing materials, and staff.

Beyond costs, also think about: Location, Location, Location…

The demographics of the customers and location of competing businesses are both significant sales-affecting factors.  Lunchtime in a business district is an ideal location for a food truck, but permits may be difficult to obtain in those areas.  The idea is to position your truck in a walking distance location or where foot traffic is heavy.  Knowing who your competitors are in the area and what they’re selling is necessary to avoid selling similar menu items and differentiating your truck.  Avoid selling pizza next to another pizza food truck…I find the trucks around my building have been very strategic with their location as there is a Bank of America building with numerous ATM machines across the street and we are located in the midtown financial district.

View of food trucks along Park Avenue near my building:

The number of food trucks already in New York makes it difficult for new entrants to succeed, as many of the most popular corners have already been occupied.  Additionally, with increased city regulations, it becomes more difficult to sell in various locations.  For example, New York City Council recently proposed a bill that would create up to 450 specially designated “food truck zones”, and require food to be legally served only in the parking spots.  This would restrict food trucks to specific locations, stripping them of their mobility and advantage over restaurants as well as limit the number of food trucks allowed in the city.

The Challenges…

Contrary to popular belief, there are high barriers to entry into the business these days when considering startup costs, permit availability, and limited commissaries and unoccupied desirable locations.  The increasing startup costs require expensive business loans that are not easily attainable as default risk is high in the food truck business and there is a lack of visibility into the financial condition of the food trucks.  In general, small businesses are more vulnerable to business cycles and therefore viewed riskier.  As a result, it is more expensive to lend to these smaller businesses.

I believe the food truck market has also become very dense and this has made it difficult for new entrants to achieve the margins promised by the business.  For example, in Boston, the number of food trucks has increased from 15 in 2011 to 59 today.  Restaurants have also begun introducing their own food trucks to get their own slice of the cake (e.g. Taco Bell).  And as previously mentioned, increased regulation in response to the rapid growth in the number of food trucks in each city further hinders food truck entrepreneurship.

We can expect to see more food truck lots or areas designated for a few trucks during select hours to sell food and drinks (e.g. DispatchNY) as well as increased food truck presence at food markets such as Williamsburg’s Smorgasbord and farmer’s markets (I love the coffee cart that comes to my farmer’s market every weekend).  Corporate campuses like Facebook’s and LinkedIn’s have also welcomed food trucks and have become popular locations for food trucks.

Can’t Stop, Won’t Stop Wheeling Forward

This is not to say that current food truck players will also be negatively impacted by these factors, rather food truck market leaders can benefit from their first mover advantage and security in the market.  Existing food trucks will have less competition with their menus, location and brand as well as have a higher customer retention as a result of fewer new entrants.  They will also have easier access to business loans to increase the number of their trucks or expand into another state as they grow their sales and market share in the market and support their potential with historical financial performance.

My favorite food truck and where you can find me on a Friday @ 47th and Park Ave!

 

Also check out Shark Tank episode on Food Trucks…Pretty hilarious!

 

Share with me your thoughts on Food Trucks/Mobile Vending @tiffanydstone or comment below!

 

Sources: http://www.sbdcnet.org/small-business-research-reports/sbdcnet-connections-issue-55-mobile-food-vendors, http://www.entrepreneur.com/article/220060, http://www.nytimes.com/2013/05/12/magazine/the-food-truck-business-stinks.html?pagewanted=all&_r=0, http://www.forbes.com/sites/investopedia/2012/09/27/the-cost-of-starting-a-food-truck/, http://www.grubstreet.com/2009/08/users_guide_how_to_start_your.html, http://www.grubstreet.com/2012/07/food-trucks-turn-to-stores-for-convenience-reliability.html, http://www.csmonitor.com/Business/2013/0824/Restaurants-reinvent-the-food-truck, http://mobile-cuisine.com/trends/food-truck-owners-need-to-keep-an-eye-on-dining-trends/?wt=10, http://mobile-cuisine.com/business/preventing-employee-theft-in-your-food-truck/?wt=10, http://hereandnow.wbur.org/2013/08/29/food-trucks-slowing, http://800buycart.com/Index.html, http://www.cloverfoodlab.com/wp-content/uploads/2011/06/Food-Truck-101.pdf, http://www.amazon.com/Start-Your-Food-Truck-Business/dp/1599184141?SubscriptionId=AKIAJZ6KOIE3KFD4MRWA&tag=rotues-20&linkCode=xm2&camp=2025&creative=165953&creativeASIN=1599184141, http://upended.net/post/25574021175/foodtruckstartupcosts, http://mobile-cuisine.com/business/breaking-into-the-food-truck-industry-%E2%80%93-part-1/, http://network.intuit.com/2012/12/05/food-trucks-motor-into-the-mainstream/#sthash.PVSSwoTW.dpuf, NY Health Department