A Blog by Jonathan Low


Jul 30, 2018

The Messy But Potentially Huge Business of Selling Meal Kits

Entrepreneurs and investors biting off more than they can, um, chew? JL

Heather Haddon and Jennifer Smith report in the Wall Street Journal:

Meal-kit spending by consumers has grown three times as fast as spending in established food sectors such as restaurants and grocery stores since 2015. (But) getting a box of pre-portioned ingredients and instructions to a customer’s door is one of the most complicated logistics riddles in the food business. “It’s building a supply chain from scratch.”Meal-kit businesses are now looking to supermarket sales to supplement subscription-only revenue. Grocers also want a piece of the action. “Don’t send eggplant. When in doubt, add cheese.”
Meal kits may make cooking easier, but getting a box of pre-portioned ingredients and instructions to a customer’s door is one of the most complicated logistics riddles in the food business.
Companies have poured millions of dollars into solving such questions as how to stack fish and fennel in boxes. They’re also investing in systems to reroute shipments during snowstorms and algorithms to predict what customers want to eat during the summer months.
“It’s building a supply chain from scratch,” says Ray Gonzales, vice president of U.S. production at HelloFresh SE , HFG -0.95% a Berlin-based meal-kit company that is the world’s largest by revenue.
Dozens of meal-kit options are now on the market, but the pressure is growing for Blue Apron Holdings Inc., APRN -6.34% HelloFresh and others to show results and turn profits. Los Angeles startup Chef’d ceased operations earlier this month after it couldn’t secure fresh capital to keep its complex operations going. A California food consultancy bought Chef’d earlier this week to focus on its retail operations, rather than e-commerce.
Some meal kits are starting to stabilize financially. HelloFresh hopes to break even companywide by year’s end, and Blue Apron is looking to do the same next year. Chicago-based Home Chef said it had two profitable quarters last year, and expects to have a full-year of profitability by the end of 2018.
Meal-kit spending by consumers has grown three times as fast as spending in established food sectors such as restaurants and grocery stores since 2015, according to Nielsen. Still, meal kits constitute just a fraction of the overall $800 billion food and beverage retail market.
Plans typically cost between about $7.50 to $9.99 per serving, though most companies offer discounts for new subscribers.
Andrea Dennis, 34 years old, of Orlando, Fla., and her husband even took meal kits from HelloFresh with them on vacation. “They’re all in the individual packaging, so we just made them there,” Ms. Dennis said.
But companies that sprang up in garages or test kitchens are getting a close look at just how expensive and complicated it can be to deliver millions of boxes a month to customers’ homes or to supermarkets.
Startups have had to devise workarounds for everything from heavy weather to diverting trucks around highway accidents, and company founders have lots of war stories, especially from the early days of their operations.
At Home Chef, a sudden recipe change could set off a scramble to source ingredients at the last minute, with the chief operating officer in one instance filling up a truck with potatoes himself.
“We had to figure it out ourselves,” said Pat Vihtelic, founder of five-year-old Home Chef, whose profits took a hit after it had to overnight shishito peppers from a California supplier because of a subpar prior shipment.
When the “bomb cyclone” snowstorm shut down East Coast transportation networks in January, HelloFresh turned to one of its produce suppliers to help truck shipments from its Newark, N.J., warehouse to FedEx Corp.’s nearby regional air hub, flying out some of the boxes.
Many startups have brought in food-manufacturing veterans as pressure builds.
“Building a perishable-food business is not something you do quickly or lightly,” said Don Barnett, Sun Basket Inc.’s chief operating officer, who began his career at Dole Food Co. and has 25 years of experience with perishable food, including roles as a co-founder and CFO at organicgirl, a packaged salad company.
To help keep a lid on costs, Sun Basket, whose meal kits target health-conscious consumers, has gone so far as to set up a Midwestern distribution center in a converted limestone cave—a cheaper way to keep its products cold than spending millions to convert a conventional warehouse in the region for refrigeration. The temperature inside the underground facility remains stable regardless of whether it’s hot or cold outside, so the company spends less on electricity.
Adding to the complexity of the meal-kit business: Blue Apron, HelloFresh and others are now looking to supermarket sales to supplement subscription-only revenue. Grocers also want a piece of the action. Kroger Co. and Albertsons Cos. both acquired meal-kit startups in the last year.
Chef’d was one of the first companies to push into supermarkets, but ran into trouble as it did so while also running a complex e-commerce operation that offered more than a 1,000 recipe choices.
Homebound meal kits are made differently than those sold in supermarkets. Kit makers worry that fresh products may linger in back rooms or hit expiration dates on the shelf, so some use ingredients that can last longer. HelloFresh, for example, doesn’t use fish for its supermarket meal kits.
While products developed by big food companies tend to stay constant once they hit the shelves, meal-kit choices are in constant flux, with new recipes every week, said Tim Smith, senior vice president at Blue Apron, whose meal-kits are selling in Costco Wholesale Corp. stores.
Despite the challenges, the market is expected to grow. Meal-kit and food subscription companies saw $281 million in venture-capital investments last year, up from 2016 levels but down from 2015 records, according to a PitchBook analysis.
Companies have struggled to acquire and maintain subscription customers, though some startups have shown progress in moving beyond promotional deals to bring in paying subscribers. Home Chef, which raised around $52 million in investors, said its revenue more than doubled to $250 million last year. Kroger’s announced acquisition of the company in May for a total of $700 million gave a boost to the meal-kit sector overall.
After Blue Apron’s initially shaky public offering last year, with its shares losing two-thirds of their value after debuting at $10, the company has started to recover from operational problems.
But investors are getting choosier about where to put their money. Tech companies that venture capitalists have traditionally backed have much lower costs than meal-kit companies, financial filings show.
“Fresh food by its nature is perishable inventory,” said Rett Wallace of Triton Research, a provider of data on technology companies. “It’s easy to see how marketing and delivery costs would zero out any margin they make on the food itself.”
Growth phases can also bring trouble. After cookbook author Mark Bittman endorsed vegan meal-kit company Purple Carrot, demand swelled unsustainably for the startup, which was founded in 2014 by a former pharmaceutical executive in his Boston-area garage.
“We were literally building the plane in flight,” said Chief Executive Andy Levitt, who said operations have now improved and the company is growing.
To survive, startups are scrutinizing each step of their operations. While some rely largely on manual labor, Blue Apron and Sun Basket Inc. are investing millions in automation, such as machines that dole out sauces or seal single-serving ingredients in tiny bags.
At Blue Apron, the switch to automation initially caused some glitches, and some customers’ orders arrived late or incomplete. The company says timely, full arrival of boxes has improved and the investments are helping productivity.
At Blue Apron’s most automated plant in New Jersey, radishes tumble down chutes, go through a system of scales to sort them by weight and are apportioned at a rate of 70 bags a minute. Machines also make unique spice mixtures, executives said.
“Things that took us hours now take minutes,” said Ilia Papas, the company’s co-founder and chief technology officer.
HelloFresh, on the other hand, relies more on prepackaged ingredients from suppliers, such as company-branded pesto in travel-shampoo-size bottles, an approach it says allows for more supply-chain flexibility. But the company is looking to do more in-house food manufacturing, a factor that drove its acquisition in March of organic-kit maker Green Chef Inc.
Executives at several meal-kit companies have forged relationships with farmers and struck special deals to ensure supply and high standards. Blue Apron bought the BN Ranch grass-fed-beef company, while Purple Carrot took a $4 million investment from Del Monte Produce Inc. in May to improve its supply and reach.
Home Chef uses wireless sensors and heat chambers to determine the amount of cooling material needed for different times of the year and parts of the country. It has also built algorithms to pull in live weather feeds to predict the conditions for individual boxes.
Officials say they are also getting better at learning what ingredients and recipes not to ship or try. Mr. Vihtelic said Home Chef now avoids shipping eggs, fresh berries and bananas, as they proved too delicate.
Blue Apron’s culinary director, John Adler, says he has learned a few critical lessons: “Don’t send eggplant. People don’t like bitter foods. When in doubt, add cheese.”


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