Flash in the pan or long-lasting comfort: How viable is the meal kit market?

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Subscription meal kits have changed the definition of food shopping and home cooking over the past several years. About one-quarter of U.S. adults have purchased a meal kit either in a store or for delivery, according to the Nielsen research firm, and 70 percent continue to buy them after the initial purchase.

“In addition to saving time from shopping, preparation and cooking, many consumers continue buying meal kits because they offer new and healthy recipes,” Nielsen said in a recent study. “With 60 percent of Americans using diet to help prevent ailments, the inclusion of fresh foods and easy-to-follow recipes makes meal kits a simple option for those looking to manage their health and diets.”

The value of the meal kit market approached an estimated $4.5 billion in 2017, and some analysts expect meal kit sales to hit $6 billion by 2021. Players like HelloFresh, Blue Apron and Plated have proven to be an alternative to takeout and another avenue for growth among supermarkets.

The business is ripe for consolidation once Amazon makes a full-throated entry with its own meal kit delivery service on AmazonFresh and in its Whole Foods stores as well as with online partners.

Joining the culinary cage match is Walmart, which will begin selling proportioned “on-step” meal kits in over 2,000 stores this year. When combined with its delivery deal with Instacart, that puts Walmart in heated competition with Amazon as well as the pureplay subscription meal kit programs.

However, supermarket sales seem to be the wave of the future, according to Nielsen, which found that 36 percent of U.S. adults would like to be able to buy kits in their local grocery store. For the year ended March 4, 2017, meal kits in U.S. grocery stores generated $81 million in sales, up 7 percent over the previous year.

“With today’s consumers 12 percent more likely to make impulse purchases in-store and more than one-third looking to purchase meal kits in store, grocery stores have an opportunity to assemble the same meal components at an affordable price to open up this expanding market,” Nielsen said.

Meal kits have attained some popularity among millennials, higher income consumers, men and working parents who don’t have time to shop, as well as home cooks who want another option for dinner.

Survival questions

New entrants are also crowding the retail scene. Weight Watchers International, backed by Oprah Winfrey, is launching quick preparation kits to be sold in supermarkets along with kitchen utensils; the company is hoping the move will boost sales as its membership rebounds.

Low-carb champion Atkins is moving into meal kits with ingredients for two proportioned meals that will range from $27 for a meal for two to $65 for a four-person meal, and Lunds and Byerly’s in Minneapolis are offering chef-crafted meal kits that don’t require a subscription and come with step-by-step cooking instructions and a hotline to in-house food experts.

Business intelligence and analysis firm Second Measure has found that Blue Apron has 40 percent of the meal kit market, followed closely by HelloFresh at 28 percent and Home Chef at about 10 percent. The balance is made up of Sun Basket, Plated, Green Chef, Purple Carrot, Gobble and Marley Spoon.

Current competition as well as consumer fallout has already taken its toll on Blue Apron, one of the early entries, which laid off hundreds of workers last year and saw its share price drop nearly 75 percent.

Several factors have led observers to challenge the long-term viability of the meal kit market as it is today, bringing up questions that will determine its survival: What business model is operationally practical enough to produce sustainable profits? How can the customer base be maintained after the initial trial? What price points will consumers accept before they shy away? And has venture capital dried up, limiting opportunities for smaller firms?

“The economics of the business are very challenging,” says Daniel McCarthy, assistant professor of marketing at Emory University’s Goizueta School of Business. “You have to spend a lot of money to acquire users and the consumer churn is fairly frequent after they are acquired. It’s not like there’s a segment of the market that will come back and potentially stay for years.”

All the pureplay companies have customer acquisition costs north of $80 per customer, so most of them are not profitable, McCarthy says, pointing to statistics showing that Blue Apron is losing money on two-thirds of its customers.

Blue Apron is also suffering from higher wage and labor costs at a new plant in Linden, N.J. The company has slashed its marketing budget by $26.1 million to offset costs, a move which could lead to further declines in the company’s customer base, according to reports.

Price will certainly play a big part in repeat business. Meals for two at Walmart run from $8 to $15, while upscale menus from other companies in the field can run up to $60, a level that would be impossible to sustain among anyone but higher income customers.

Long-term convenience

Customer retention is only partially a matter of price, according to McCarthy. “The value proposition is predicated on discovery and people getting new meals they wouldn’t have made,” he says. “That makes it special. But for a large number of people, the value proposition gets a bit old after six months and they don’t care about getting their 100th chef-inspired meal.”

Replenishment has endured much longer for subscription companies like Dollar Shave Club and Harry’s that offer the same products over and over again, McCarthy says.

Convenience is also an issue: Meal kits have attained some popularity among millennials, higher income consumers, men and working parents who don’t have time to shop, as well as home cooks who want another option for dinner. Companies are expanding their horizons to reach young couples, families with children and empty nesters, according to findings from research firm Morning Consult.

That is where in-store meal kits from retailers like Walmart may have an edge over companies like Blue Apron. Walmart customers who place orders in the morning or by lunchtime have the option of having the kit delivered or picking it up themselves from a store’s curbside grocery service.

Additionally, Walmart’s offerings are more than the standard comfort food fare. Pre-portioned meal kits for two include ingredients and recipes for items like steak Dijon, basic garlic chicken, pork Florentine and Thai curry chicken, along with favorites like meatloaf and pot roast.

Plated, acquired by Albertsons last September, may also be in a better position for growth and cost reductions. “We are able to have efficiency because of our supply chain,” Kroger CEO Rodney McMullen told the Wall Street Journal. “That’s cost we can take out and pass along to the consumer.”

However, customers sign up for subscription kits in advance. This can add an element of stress to the meal process if people either don’t have the time to cook when it arrives, don’t really want what was sent or are not willing to take the time to cook from scratch on weekends — time off that has become increasingly valuable, observers says, and all this can create a significant waste factor.

Refrigerated mailed meal kits in durable packaging for shipping are not a favorite among environmentally conscious consumers, though it’s been reported that both Kroger and Amazon’s Whole Foods chain are test marketing meal kits in a bag that require less packaging.

Access to capital

Consumers aside, the major hindrance to the category’s growth is access to capital, especially for small companies. Investors and venture capitalists who have pumped a considerable amount of funds into these companies are losing their appetite for a category that may not be a viable long-term play.

An estimated 70 percent of Blue Apron customers stop buying the products regularly six months after signing up, according to in the Wall Street Journal, and the number of inactives jumps to 80 percent for HelloFresh.
Greycroft Partners, a venture capital firm and once a lead investor in Plated, reportedly tripled its profits in Plated’s $5 million round of financing in 2014 following Albertsons’ acquisition.

But venture capital money has dried up. “We are not funding meal kits, and I don’t know a single VC that is actively looking at the space,” Ian Sigalow, co-founder of Greycroft Partners, told the Wall Street Journal. VC research firm Pitchbook found that at its peak in 2015, VCs funded 25 deals involving meal kit companies valued at $308 million. Last year, the number was $274 million involving 18 companies.

Blue Apron went public last June and was quickly dubbed by Renaissance Capital as the worst performing initial public offering of the year. The company said recently it could break even on a key measure of profitability earlier than expected by Wall Street by cutting capital spending and administrative costs and improving margins.

“From an investor standpoint the model doesn’t look very good. The finances of some companies aren’t great and there will be consolidation or further mergers with grocery stores. If a meal kit company were to go to the capital markets now, the terms wouldn’t be very good,” McCarthy says.

“Second Measure has looked at the meal kit space. One of the things they put together is that while everyone’s focusing on issues at Blue Apron, the whole industry has pretty poor retention. They looked at the top six meal kit companies and Blue Apron’s retention rate was about the industry average of 12 months.”

There are exceptions. Gobble, which specializes in 15-minute, one-pan meals, has raised $15 million in financing with the industry’s strongest retention rate of 19 percent over a 12-month period. The runner up was Sun Basket with an 18 percent rate, according to Second Measure.

Some companies in the meal kit industry are expanding their reach by offering different types of niche meal services for vegetarian products, vegan, gluten-free, organic, weight loss, paleo, diabetic and kids meals.
McCarthy believes the industry will increasingly focus on personalization. “It might be the equivalent of Spotify for meal kits. But I don’t believe the hyper-niche meal kits will work,” he says.

What might work? “A la carte sales on a website and partnering with other companies, supermarkets or big brands,” McCarthy says, “as long as meal kit companies have a good way to manage logistics, quality control and cut customer costs.”

Len Lewis is a veteran journalist and author covering the retail industry in the United States, Canada, Europe and South America.

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