As seen in Fortune on 25 May 2021
Meal-kit advertisements paint a pretty picture: unwrapped vegetables spill out of cardboard boxes like a Thanksgiving cornucopia and an attractive couple holds a single recipe booklet together in their high-end, high-spec kitchen.
While the real-life settings may look a little different, thousands of meal kits were ordered over the past year and thousands of the carefully planned meals consumed. Business is booming. Lockdowns kept whole populations stuck at home—multiplying the number of potential customers for meal-kit firms to tap.
But change may be coming. In much of the first world, pandemic-related restrictions are easing and people are gradually going out to eat. The subscription-based service model, offering perfectly portioned ingredients for a full meal at home, is going to face a stern test.
Is there still money to be made? Will there be a shake-out in the industry?
In some ways, the structure of the meal kit business is fairly straight forward: customers had to be found and retained while costs are managed carefully. But none of these factors is easy.
Ayisha Koyenikan, global food and drink analyst at market research firm Mintel told Fortune that subscriber retention was a problem from the start.
Running a meal-kit company is expensive. There are operational and supply-chain costs, marketing costs, and logistical costs. Combine that with low customer retention rates and the outlook might appear grim.
A meal-kit company can only make a profit by charging substantially more than what it would cost a home cook to gather the right ingredients. According to data from market research company Mintel, 63% of potential customers in the U.S. cited price as the reason for not using meal kits. That makes finding the right market for products crucial.
Linda Findley Kozlowski, chief executive of Blue Apron, told Fortune that most of the firm's meal kits target people on annual incomes of $50,000 and above: "It isn't necessarily the right solution for every audience.”
Even if the price point is right, there's another hurdle. The subscription-based model has the inbuilt assumption that customers want to stay at home and cook but that does not work for people who want to be spontaneous. Mintel's survey bears this out. Meal kits did not appeal to 68% of Americans because they did not want to be tied down.
So when the pandemic came, it was like a godsend to the meal-kit story—keeping potential customers indoors with cash to spend and nowhere to go.
Turning a profit
The earliest meal-kit firms started around 2011. The companies that have been around the longest benefit from economies of scale and are at a clear advantage to take advantage of lasting changes in consumer behaviour as lockdowns end.
Gousto, a private meal kit company in the UK, doubled its sales during the pandemic. The firm started in 2012 and booked its first profit in April 2021. Hoping to keep up with the demand, the firm said it plans to hire 1,000 workers.
Frankfurt-listed HelloFresh logged its first profit in its largest market, the U.S., in January 2020 after being in the country for more than 4 years. The company has had a massively successful pandemic, logging 7.3 million active users globally in the first three months of 2021, up 74.2% from a year earlier.
U.S.-listed Blue Apron reported its second profitable quarter in July 2020 despite struggling to keep customers because there weren't enough workers to meet surging demand.
And, these profits are likely to stay. Research from Rabobank noted that changes in consumer behaviour following the COVID-19 pandemic has been accelerating trends that were already happening. Among them is the greater emphasis on convenience and health alongside increased internet usage. These factors have allowed some meal-kit companies to carve out their market.
"There's a lot of both external research and internal research that we've done that says that people are intending to cook more at home post pandemic," Blue Apron's Kozlowski said, adding that people gained a lot of confidence in the kitchen.
Some of that confidence may have come from experimenting with meal kits. Between November and December last year, 45% of respondents in the U.S. said they had ordered a meal kit at some point over the previous 12 months, according to national online consumer survey by Packaged Facts.
Marjolein Hanssen, analyst of consumer foods at Raboresearch told Fortune that consumers may have acquired a taste for meal kits: "Once you start making use of this service, the barrier to keep using it is much, much lower."
Enthusiasm for meal kits and trouble elsewhere in the food and hospitality sector brought new players into the market. Competition grew quickly but as lockdowns end, stay-home cooks might not be so plentiful anymore. Demand for meal kits is expected to dip, and some reckon there is a looming bloodbath for smaller, newer players.
“On the demand side, the bigger you are, the easier it will be to attract consumers, the more meal-kit choices you can offer,” Rabobank's Hanssen said. "The whole situation has changed and these bigger players have attracted a lot more consumers and have invested in their local fulfilment centers becoming more efficient.”
Capital counts. Larger companies have had the capital to make investments in marketing, logistics and sustainability, further increasing efficiency and bringing down costs.
Seasonal changes too affect the meal-kit business, requiring forward planning and investment. The start of the year tends to boost demand as people try to fulfil resolutions to eat more healthily and in the summer months, costs rise as extra packaging is needed to keep ingredients safe. The meal-kit business does help cut food waste, but packaging can be a problem. Each of the firms Fortune interviewed said they have invested or were looking to invest in sustainable packaging.
Blue Apron has been using the boom time to work on product advancements. “We're getting a really good pace on those, we've created strong key customer metrics, we're layering additional marketing investment on top of that,” Kozlowski said.
The ultimate goal is “to make sure that we can get to that profitability milestone on a consistent basis," she said.
Many new players are celebrating their first year in the business with strong pandemic revenues, but they may find it hard going if they can't find fresh funding.
Daniel Hulme, chief executive of One Fine Dine, a relatively new entrant into the business believes the “big boys” such as Gousto, Mindful Chef and Hello Fresh, will dominate, and the others will have to find a niche to survive.
“Some of these people are going to drop off the edge, because the market has become quite saturated," he told Fortune.
Hulme's own One Fine Dine morphed through the pandemic to survive, moving from catering for private jets to luxury meal kits.
One Fine Dine, and Plateaway, another meal kit company born during the pandemic, told Fortune they experienced a surge in corporate clients, who placed massive orders as treats for distanced office workers to bond over cooking together.
Others are looking for niches they can thrive in. Crowd-funded All Plants uses an entirely vegan menu while TV chef Rick Stein is offering high-end, luxury box meals. Pasta Evangelists, a UK-based pasta-focused meal kit company that was bought by Barilla Group, has estimated its sales increased by more than 300% in 2020.
US-based Home Chef, bought out by supermarket chain Kroger in June 2018, appeals to customers who are not comfortable in the kitchen, with an "oven ready" kit range that includes pre-measured ingredients as well as the baking trays to cook them in.
According to Koyenikan at Mintel, there some ways brands could stay relevant post-pandemic —including simpler meal kit options, collaborating with food service brands or investing in digital solutions to connect customers virtually.
Food and drink brands do have a role in connecting people either online or in real life, Koyenikan said, citing a Mintel survey which found that 57% of U.S. adults look forward to eating with others virtually after the pandemic.
Kozlowski at Blue Apron remained upbeat about the prospects for the business. For her, the arrival of competition has been a positive development. "(It) is actually a good thing because, frankly, if competitors don't come in, you don't have a market.”