Meal-Kits: No Repeat Customers? Food Delivery Revolution Postponed!

Blue Apron

Fast Company reporting on a study on the burgeoning meal-kit industry:

The research firm 1010data analyzed consumer-spending data that represents millions of consumers, revealing a significant retention problem for the major meal-kit delivery services—which ship recipes with pre-portioned ingredients to customers on a weekly basis. After the second week, only about 50% of customers stick with Blue Apron, 1010data found. Six months into their subscriptions, only about 10% remain. The firm found a similar pattern for HelloFresh and Plated. […]

(Highlights by me.)

​Of course, those companies told Fast Company that the data was inaccurate and also declined to provide more accurate data.

Until Blue Apron goes public -and maybe HelloFresh soon after-, we won’t know for sure. But looking at the business models and current processes of the companies I am not surprised by those findings. In fact, I would have been surprised if this would have been different.

See, meal-kits are a very promising way of selling food online and building a food brand for doing even more in the future. But, this only works well at scale and every player is far away from meaningful scale at this point. Remember, relatively low amounts of fresh food are being packaged and delivered here. Most of those packages are unique to meal-kits, adding a lot of complexity to the whole model. This fact leads to, amongst other things (like unprofitability), a customer experience that can feel overwhelming very fast.

The smallest box at HelloFresh is three meals per week for two people for $69, putting the price per meal at $11.50.
The smallest box at Blue Apron is three meals per week for two people for $59.94, putting the price per meal at $9.99.

Everyone who has tried meal-kits at one point knows that the food delivered can take up quite a lot of space in the kitchen, and in the fridge specifically. The small (comparatively inefficient) packages and the smallest available size of the bundles create mental overhead. A different mental overhead to planning meals all by oneself, but still. It doesn’t (yet) reduce as much mental overhead overall as the model should in theory.

As I said, one reason for this is missing scale. Most people, apparently, according to 1010data, don’t want those boxes every week. Maybe it makes more sense to have those come only once per month, creating a special meal-kit week for the household, instead of every week. Maybe people would rather have one meal instead of a minimum of three every week.

The problem is, all those would probably serve the needs of most customers better but they would also decrease the average customer lifetime value massively. Ever smaller packages in this sector won’t bring the companies closer to breaking even.

I believe that meal-kits are an important brand-building part of the online food market. But they need to evolve and those companies need to get big faster to bring the overall costs down so they can introduce more products aimed at the mainstream. (If you are reading closely: yes, this hints at a market with few big players.)

Mother Jones hints at discounts driving new and existing customers to switch between services:

To entice new customers, these companies maintain perennial “limited time offers” like this one from Blue Apron: “Get 3 Meals Free With Your First Order!” If the 101data report is accurate, loads of consumers are taking these deals and then quickly bolting, perhaps moving on to the next meal kit dangling free food with no obligations. […]

Earlier this year, I dug into the meal-kit business model and found it extremely tricky: loads of packaging, delivery, and ingredients costs, balanced against a need to keep prices low enough to lure consumers away from the supermarket. The 1010data numbers suggest that customer retention is yet another daunting hurdle to profitability. No wonder food startup analyst Brita Rosenheim told me that “very few, if any,” of these are likely to be “cash-flow positive” at this point—another way of saying that they’re still burning through their venture capital to stay alive. Another market-tracking firm, Packaged Facts, delivered a similar assessment in a May 2016 report.

There is another interesting question in there: How do you create stickyness with meal-kits, besides by building classic brand affinity?

Pymnts.com on the impending Blue Apron IPO:

Still, the service is undeniably popular, as several sources familiar with the internal structure of the firm note that it is on track to surpass $1 billion in revenue over the next 12 months. That annualized run rate is not the firm’s revenue projection — which could, in fact, be much higher or lower depending on its specific internal tea leaves — it is a count of what revenue would net out at over the next 12 months if its performance were the same as the last 12 months.

And apart from strong sales and reasonable revenue, Blue Apron claims to have something that many other subscription delivery services do not — profitability. Blue Apron has raised nearly $200 million in venture capital from investors, including Fidelity, First Round Capital, Box Group and Bessemer Venture Partners, where CEO Matt Salzberg once worked. It was valued mostly recently at $2 billion when it raised $135 million last year.

​The meal-kit industry is growing fast, still being a very young niche. Fast Company:

Despite the retention problem, 1010data found that the meal-kit industry has grown over 500% since 2014. A food-consulting firm estimated that category will account for $3 billion to $5 billion of the online food shopping business in 10 years.

The relative market sizes that the data from 1010data is hinting at are also interesting:

Blue Apron, according to 1010data, generates three times the sales of HelloFresh and about 12 times the sales of Plated.

​The general direction here is certainly correct. Which means, no. 1 on the US market will go public soon, with no. 2 most likely not too far behind.

More on this topic:

5 comments

  1. […] the rather large, and fast growing, meal-kit segment is absent from that […]

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  2. […] Meal-Kits: No Repeat Customers? Food Delivery Revolution Postponed! […]

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  3. […] data from 1010data hinted at Blue Apron generating three times the sales of HelloFresh in the […]

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  4. […] that the model doesn’t really work sub-scale one could say: the more competitors, the […]

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  5. […] Meal-Kits: No Repeat Customers? Food Delivery Revolution Postponed! […]

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