Why Misfits Market Thinks Selling Imperfect Produce Is A Perfect Business

To hear Abhi Ramesh tell it, he’s in two businesses. First, he’s trying to fight against the excesses of the U.S. food system, which is one that wastes more than 40 percent of all produce either due to excess production or cosmetic imperfections. Second, he’s “rescuing” that excess produce to bring a unique subscription box business model to the masses at an affordable price. But regardless of how the business works, don’t call the products of Misfits Market ugly.

“There’s the excess and then there’s the rest of the produce that doesn’t make the cut,” Ramesh, Misfits Market’s founder and CEO, tells PYMNTS CEO Karen Webster. “Ugly is sort of this broad term that has been almost used as a marketing factor in this industry, but it’s not even ugly. It’s anything that is nonstandard. Maybe it’s apples that have not even bruises, but as little scarring and a grocery store wants all their apples to be perfectly red. So we see things that are too small or too large. It’s just sort of like nonstandard versions of food that traditional retailers either are not able to buy or refuse to buy.”

Those “misfts” have helped this Philadelphia-based, 2-year-old startup turn “rescued” produce into a fast-growing online grocery platform. Its growth has been so successful before and during the pandemic that it has attracted new funding that will allow it to expand its unique subscription box business model. The $85 million round was led by actor Ashton Kutcher’s Sound Ventures and Valor Equity Partners.

The company will use the funding to expand its geographic distribution footprint beyond the Eastern Seaboard and into new product categories. It’s the nature of that product that makes Misfits a unique company in the food delivery space. It started as rescuing nonstandard or imperfect produce that would have gone to waste.

Ramesh sees Misfits Market as mission-driven, and a large part of that mission is to take affordable, healthy food and make it accessible to a broader audience than the current subscription box market populated by companies like Purple Carrot.

The new funding will continue that mission and expand it. The company has seen a 400 percent spike in consumer demand during the pandemic and has hired 400 new employees, which helps the economy in the greater Philadelphia area. The company will also be opening a new state-of-the-art warehouse in nearby Delanco, N.J. that will enable the company to double its order capacity across the East Coast, South and into the Midwest.

It is also expanding beyond its core produce subscription box and will grow its platform to allow customers to order other categories of imperfect discounted items within their weekly order. Among the brands that will be added to what will now be a customizable order sheet are Bob’s Red Mill, Taza Chocolate, Teatulia and Ceremony Coffee at an average of 25 to 50 percent off retail. Customization, says Ramesh, is a key to growth.

“When we started off, no one could customize anything,” he says. “We basically sent you a box every week and said ‘we’ve rescued this here it is. Enjoy it.’ Since then, we’ve iterated on the product quite a bit. And now, you can actually customize your box. You can customize the produce side and the protein side of your box. And you get to pick and build your box based on that.”

Ramesh’s background is in private equity finance and in that role, he had a chance to see food storage and logistics businesses, which is where he saw the aforementioned waste firsthand, even beyond the produce that gets scrapped for imperfections. He saw, for example, that coffee or chocolate could be scrapped for minor packaging mistakes. He found that the food supply chain is so fragmented that no one tracks or even considers the “misfits” including the supermarkets themselves. If Grocer X didn’t want the mislabeled coffee or misshapen peppers, no one took the same product to see if Grocer Y wanted it. It went to the trash. And there he saw a business opportunity.

“Sometimes it happens that far downstream, but a lot of times we’re working directly with the farms,” he says, “because what happens is this cycle has been going on for a long time. And the result is that those products are sorted out a lot of times before they’re shipped. So we actually work directly with farms to essentially buy the stuff that they sort out, because they believe someone’s not going to buy them, or because someone’s told them ‘we’re not going to buy this type of stuff.’”

As other subscription-based companies can attest, getting, keeping and growing customers is the key to surviving and thriving in the food delivery business. A big part of Misfits’ customer acquisition is digital, but it also has leveraged word of mouth and referral campaigns. Ramesh has identified power customers that not only get deliveries of the product but share it with their friends. He doesn’t like the word “viral,” but he believes word of mouth and organic growth will drive the majority of his new customer additions. Misfit has also executed direct mail campaigns and out-of- home marketing that he says are in the “first inning” of Misfits’ marketing effort.

At the very least, other food manufacturers have heard of Misfits. It was because of a small group of them reaching out that the expansion beyond produce has happened. For example, some of the new products have packaging errors but the quality is up to speed with the rest of the supplier’s items.

“There’s definitely a level of sort of, kind of some curiosity around what is it actually going to look like when I get it?” Ramesh says. “And I’d say nine times out of 10 our customers are positively surprised that the stuff that they are getting isn’t as weird or ugly or misfit as they would have anticipated. In reality, the imperfections are kind of minor. And, especially when you tap into the surplus and excess bucket, sometimes there aren’t any noticeable imperfections. It’s just the imperfection was the inefficiency of the food system.”

As has happened with many digital-first companies, the unfortunate circumstances of the pandemic has led to more business.

“We do weekly cohort analysis and I think there’s two things we’ve noticed,” Ramesh says. “One, the behavior of the customers that joined from late February till now actually looks very similar to the behavior of customers that joined pre-COVID. So the purchasing habits or frequency of purchasing — all that stuff looks very similar. What is different is that a much larger percentage of the customers we acquired from February until now are having their first online grocery experience. That’s interesting to me.”

And it is from that cohort that Misfits will build its business from the pandemic and beyond — imperfectly.