Dive Brief:
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Slow and steady growth is the key to achieving long-term profitability in the highly competitive meal kit space, according to Home Chef's chief revenue officer Rich DeNardis. He told FoodNavigator-USA that the company believes success will come through reliable sales and returning customers instead of aggressively going for market share with pricey advertising.
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Home Chef is playing a long game, according to DeNardis. “To us, it doesn’t feel like a winner-takes-all market, so there is no need to race to be as big as humanly possible,” he said.
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In two years, the Chicago-based meal kit company has gone from delivering just 70,000 meals per month to nearly 2.5 million meals per month, which DeNardis said stems in part from Home Chef's mix of both online and offline marketing efforts.
Dive Insight:
Meal kits have proven very popular with consumers, but turning a profit in the business is very difficult due to high marketing costs and low consumer loyalty. Exhibit A is Blue Apron, whose stock plummeted nearly 50% since its IPO debuted this summer. The company has struggled with high marketing costs and declining consumer spending, although it claims 17% of the U.S. market and reported a 3% boost in sales during the third quarter of 2017.
Despite a few bumps along the way, future meal kit subscription revenue is projected to reach $10 billion by 2020, according to research firm Technomic.
There are several different avenues emerging in the market. They include meal kits launched by grocery stores (like Kroger's line of Prep + Pared kits) and those bought by grocery stores (like Albertsons' acquisition of Plated), plus direct-to-consumer ready meals backed by food manufacturers (like Nestle's investment in Freshly).
Demand for these products isn't surprising, considering consumer appetites for convenience and premium dining experiences. For a relatively reasonable cost, shoppers can get a high-quality meal designed for their dietary preferences, and all they have to do is assemble and cook it. However, while the industry rakes in an estimated $1.5 billion annually and has grown sales 25% over the past few years, the cost of customer acquisition can run as high as $80 per person, according to research firm Morningstar.
The key to surviving and thriving may partially lie in differentiation. In addition to its diversified marketing approach and slow but steady growth strategy, Home Chef recently added a line of "5 Minute Lunches" featuring salads and sandwiches that require no cooking, can be easily assembled and sell for less than $8. This allows the company to hit other day parts besides its dinner options and offer a less-expensive alternative that might attract new customers.
The fact that no one company dominates the overall fresh food meal kits market also works in Home Chef's favor. HelloFresh recently debuted its IPO in Germany, selling 31 million new shares priced at $11.91 each, while Amazon is currently testing its own meal kits, and Albertsons — which recently bought meal kit company Plated for an estimated $200 million — is ramping up its supply. Major retailers like Kroger and Publix have also gotten into the meal kit game.
There seems to be no shortage of investor cash for startup meal kit companies. Deal options abound, including manufacturer partnerships and acquisitions. In August, Chef’d raised $25 million from meat producer Smithfield and $10 million from Campbell Soup. Sun Basket received a $9 million investment from Unilever in May. Around the same time Amazon announced its intent to buy Whole Foods, Nestlé purchased a minority interest in Freshly, a provider of direct-to-consumer ready meals, for $77 million.
So many players crowd today's meal kit field that a shakeout is inevitable. Home Chef's DeNardis signaled as much when he indirectly compared his company to the tortoise in the children's fable, who ends up winning the race against the faster hare because he keeps going at his own pace and doesn't allow himself to be distracted. Only time will tell whether that strategy will work for Home Chef in the meal kit race.