The R&D Tax Credit Aspects of Grocery Delivery



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Grocery-Delivery
        Trends such as increased urbanization and more health conscious consumers are driving a trend that is changing the way food is delivered to kitchen tables across the U.S. Due to these trends, just-in-time food delivery has quickly become a large, fast growing industry in many major metropolitan markets.

        On a global scale, 54% of the world’s population resided in urban areas in 2014. That is significantly more than the 30% that lived in urban cities in 1950.  This trend towards urbanization is expected to continue, increasing to 66% by 2050.   These urban dwellers prefer fresh, delivered foods because of the time saving benefits when living a fast paced lifestyle. 

        Realizing this, investors have doubled down on the tech-oriented, grocery delivery industry.  Food tech start-ups received unprecedented investments in 2014.  These innovators provide apps and software to help business owners control inventory and place orders for fresh food, just in time to be served. Consumers use the technology to shop for groceries from home and better understand their dietary behaviors. 

        Tech start-ups in the industry have recently enjoyed a lot of success.  Instacart, Inc. a personal grocery shopping service with operations across the U.S. grew 15-20% each week during 2014. Postmates, Inc., a similar buzz-generating delivery startup, has grown 10 times each year since its launch in 2012. 

        One industry leader, based in New York, Fresh Direct, which controls about 7% of the total market, makes over 45,000 deliveries per week. The company’s new, $100 million headquarters at the Harlem River Yards in Port Morris is a 500,000 square-foot facility scheduled to open in 2016.

        Fresh Direct’s new mobile application caters to the individual customer by tailoring recommendations. The more the customer uses the service, the better the app becomes at sensing likes and dislikes.  With this type of technology integration, it allows grocery delivery services to cut out a crucial step in the supply chain.

        Traditionally, supermarket products go from a warehouse to the grocery store before hitting a customer’s fridge.  Using grocery delivery services such as Fresh Direct, the grocery store is no longer part of the supply chain.  Instead, food orders go directly from the warehouse to the consumer.

        Recent innovations have made this service possible including software/mobile apps to place orders instantaneously, RFID tags and data analytics to make supply chains smarter, leaner and faster,  sensors to detect food spoilage, and advances in agricultural science to grow crops that stay fresh longer.

        Innovators developing these types of technologies are often eligible for federal and state R&D Tax Credits which are available to support innovation in the United States.


The R&D Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.


Grocery Delivery Industry

        The food and grocery delivery industry is one of the fastest growing industries.  In 2014, start-ups in this sector received more than $1 billion in venture capital, almost a fourfold increase from the previous year.  In the first quarter of 2015, another half a billion dollars was invested.

        The opportunity for further expansion looks bright as online penetration of food and grocery services represents only about 1% of the total current market.  A $700 billion industry, food is the largest retail category and a greater transition online in the coming years could create a wealth of opportunities for innovative entrepreneurs. 

        In addition, the technology platforms needed to expand the online grocery market are already in place.  The ubiquitous use of smartphones over the past decade has made it possible for nearly anyone with a car, bike, or scooter to become a food courier.  Now, start-ups can build Uber-like fleets for a small fraction of the price that it would have otherwise cost them a few years ago.


Internet of Food

        The  “Internet of Food” refers to a food tech ecosystem that involves software, mobile apps, databases, sensors, big data analytics, RFID tracking, supply chain management technology, incubators, start-ups and other technologies that are increasingly being used to order and deliver food.  Like the Internet of Things, these technologies are increasingly becoming more connected.

        Internet of Food innovations are quite creative including smart refrigerators with automated reordering buttons and web connnected cameras, intelligent dishwashers that allow users to check the status of their dishes from their app, and ovens that can turn off automatically if something  is burning.


Software & Mobile Apps

        Aside from the active health conscious consumer movement, the largest catalyst in the fresh grocery delivery industry is the use of intelligent software and mobile apps to streamline logistics operations.   These platforms allow customers to visit websites day and night and immediately notify manufacturers, farmers, or restaurants.  The software can automatically arrange for a pick up with a local carrier while keeping the customer informed throughout.  These capabilities allow customers to save time ordering and allow businesses to save on operating expenses.  Logistics, payment processing, driver routing. and inventory management can all be optimized software as well.

        Mobile apps actually become the middle man in instances where there was previously a market failure to produce a service.  In NYC, several logistics/technology companies have developed apps for customers to order delivery from restaurants even if they don’t deliver.   Caviar by Square, Inc. delivers meals from dozens of restaurants in 18 cities across the U.S. that otherwise don’t deliver.   


Logistics

        Food companies are increasingly looking to logistics service providers in order to deliver orders quicker and cheaper.  Supply-chain management companies are working to develop an ecosystem where restaurants and other food suppliers order produce and vegetables as close to final consumption as possible.

        Some logistics companies focus on streamlining the delivery process to save on transportation costs.  The demand for low-cost shipping methods has gradually increased, thus creating a greater need for improved software solutions within the logistics industry. As companies focus on improving their supply chains, intelligent software systems have emerged. 

        Airclic in Trevose, PA is a cloud based solution that saves restaurant, healthcare, and hospitalities companies an average of $400 per truck, per month.  by eliminating paper and processing costs, reducing overages, shortages and damages (OS&Ds), and reducing customer service costs.  The software has numerous functionalities including automatic dispatch for scheduled routes, product tracking en route to delivery, produce productivity and performance reports, visibility on operations, successful delivery notifications, and even accurate price quotes.  Pricing may be the most integral as inaccurate pricing can result in huge losses from underpricing and loss of customers from overpricing.   


Trucking

        At the center of the grocery delivery movement is trucking and transportation.  Virtually every food product consumed everywhere in the country has been transported by truck somewhere along the supply chain.  These trucks are equipped with refrigerated trailers to control spoilage and many times hold food for days at a time, travelling across broad distances.  These conditions inevitably result in significant amounts of spoilage.  An estimated 23%-25% of fruits and vegetables are lost post-harvest due to spoilage.   Much of this spoilage occurs because of control issues and much of the food goes bad due to temperature management problems. 

        Some hopeful solutions to the spoilage issues include RFID and temperature monitoring to allow transport companies to gain more granular, pallet-level visibility into product condition. Temperature and traceability data (including location) are stored on the RFID tag as it travels with the produce through the supply chain. This provides a much more precise view of the temperatures that each pallet or case has been exposed to. Using this data, the system can calculate how much shelf life is left in each pallet or enable the use of FEFO (First Expired First Out) inventory control to reduce spoilage.

        In order to deliver fresh, on demand groceries, trucking companies like Baldor Specialty Foods, based in Bronx, New York must have state-of-the-art logistics and software programs in place in order to receive orders from customers, maintain optimal inventory and track orders that are en route to their destination.


Supply Chain Food Waste

        Agricultural and food scientists analyze data about crops and food production methods and utilize their findings to create new and innovative ways to increase agricultural output or improve the quality of our food supply.   With an expanding global population, many people believe developments in this field are essential to maintaining our current standard of living.

        Agricultural science can provide a partial solution to the estimated $35 billion worth of food spoilage in the supply chain.  Genetic engineering is one solution to create produce that last longer after the harvest.  Delayed ripening of fruits and vegetables, for example, is a major ongoing research effort in genetic engineering that can slow down the spoilage process.  Calgene Inc., an agricultural biotech company, uses genetic engineering to grow tomatoes that stay fresh for weeks -- more than enough time for transport companies to deliver anywhere in the world.

        When wholesalers and retailers have produce that's beginning to spoil, they often throw it away since they can't sell discolored, blemished, or bruised fruit and vegetables.  The U.S. wastes a large portion of what it produces because people simply can’t consume it quickly enough.   One reason for this is that many people in the supply chain don't have the knowledge of where the food is, the infrastructure to gather it or the logistics to manage it intelligently.

        There are, however, some practical solutions.  Food Cowboy, in Maryland, uses mobile app technology to mimic complex logistics software programs.   Co-founder Roger Gordon had this to say about his company’s technique: "We figured out that, from your cell phone, you can mimic a lot of logistics that big companies use." He calls it an "air-traffic control or a routing system" for unwanted foodstuffs.   The company developed an app to select a charity that they wish to donate food to and then Food Cowboy will coordinate a pickup and delivery so the food doesn’t go to waste.  They have a database of 700 charities, including 350 food banks, and work with about 500 truckers around the country. The company looks to innovation in everything they do and relies on crowd sourcing for much of their funding and encourage other technologies like Cropmobster to warn food companies about products that are about to spoil. 


Food Safety

        Food safety is a priority and concern for every reputable distributor. Each of the products they deliver must be loaded correctly to prevent cross-contamination with raw product and damage by heavier items at the bottom of a stack.  Food products have to retain their chill throughout the multi-stop delivery process, especially in the heat of summer when truck refrigeration units have to work extra hard to maintain temperature.  If distributors do not take proper protocol to maintain food safety they can face strict sanctions from the FDA, USDA, and state regulatory agencies who are constantly increasing their standards for quality.

        Food contamination could however, be significantly curbed with innovative technologies.  IBM Research and Mars, Inc. recently embarked on a partnership to develop sequence metagenomics on different parts of the supply chain and build reference databases that record what is a healthy/unhealthy microbiome, what bacteria lives there on a regular basis, and how they interact. This information would be used to identify potential hazards, according to Jeff Welser, Vice President and Lab Director at IBM Research–Almaden.


Waste to Energy

    Other than rapid-speed delivery, the fresh grocery delivery movement has other benefits as well.  Organic or green waste can be recycled into high energy gas and liquid and many organic disposal sites accept the following waste items:

  • Fruits and vegetables
  • Meat, poultry, and seafood
  • Eggshells, rice, beans, cheese
  • Bones (yes, bones)
  • Waxed cardboard (ex. Chinese takeout boxes)
  • Frozen/refrigerated food boxes
  • Napkins, paper towels, paper plates
  • Milk cartons, tea bags, coffee grounds and filters
  • Parchment and waxed papers
  • Plants and flowers
  • All yard waste

        Several of these environmentally friendly facilities have been emerging around the country, including one in California which processes organic waste feedstocks and generates renewable energy.  Under a long-term agreement, Zero Waste Energy (ZWE) partnered with Monterey Regional Waste Management District (MRWMD) to design and build the first, U.S. based anaerobic digestion (AD) plant in Monterey, California.  ZWE operates the facility, which includes four AD digesters used to convert up to 5,000 tons per year of organic waste into biogas that will provide power and heat for MRWMD’s use and be sold to the neighboring Monterey Regional Water Pollution Control Agency.  The SMARTFERM will also provide high quality compost to local farms.


Conclusion

        Technology is revolutionizing the way food is produced, sold, and consumed in the U.S. and around the world.  Companies developing and integrating these technologies in the food supply chain may be eligible for federal and state R&D Tax Credits.  Companies should consult with a tax professional on how to utilize the R&D Tax Credit to support and stimulate innovation efforts.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.


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