If you were ask someone like Fabian Siegel, meal kits are the future of consumer food buying.
According to the founder of Marley Spoon, “Supermarkets will be replaced. Amazon will take care of the pantry; meal kit delivery services will take care of the what we are cooking tonight.”
Ignore for a moment that Siegel is most certainly biased since he owns his own meal kit company and ask: well, is he right? Are the days of the local supermarket coming to an end, to be replaced by direct-to-consumer grocery delivery services? The massive growth in meal kit companies might suggests the answer could be… maybe.
Growth has certainly been strong. In the roughly 5 years since these services emerged, the market has grown from a small handful of players like HelloFresh and Blue Apron to now over 150 meal kit companies. It is estimated meal kit delivery services generated $1.5 billion in 2016, or 1% of overall food spend.
And it is expected to keep growing. NPD Group has reported that only 3% of U.S. consumers, or 8 million adults, have tried a meal kit service, but that 20% have expressed strong interest in trying a service in the future.
With growing interest from consumers, venture capital funds continue to invest despite their mixed returns. Meal kit start-ups have raised over $650 million in venture capital since the industry emerged several years ago. In the coming year, direct-to-consumer distribution continues to be a top focus for investors.
Despite the interest from investors, not all of these companies are sustainable long term. The grocery business is notorious for operating on razor thin margins, surviving principally on large volume sales. With hundreds of companies in the meal kit space currently, chances are these companies cannot all expect to achieve the scale of operations needed to be sustainable.
Customers are also very fickle. It costs a lot to acquire new customers and they are very easy to lose. A single late delivery or spoiled ingredient is enough for customers to jump ship. Market-tracking firm 1010data found that half of customers drop their kit subscription after only one week and 90% have dropped within six months of starting.
Consumers gaming the system account for a fair share of these subscription drops. With all of the incentives of free meals and no obligations, people are quick to subscribe to a service just for the deal, but equally quick to drop out in order to get the next deal that comes their way.
In the face of all these challenges, the industry can take encouragement from the strengthening financial picture of industry bellwhether Blue Apron. The company reportedly became profitable (in terms of recurring costs) in the third quarter last year as it achieved scale, growing to an estimated $960 million in annual revenues and shipping 8 million boxed meals every month. Their operations have evolved in the past 5 years since inception into a highly efficient, mass scale production with 4,000 employees and three fulfillment centers.
But Blue Apron is not trying to be all things to all people. While many players in the meal kit space are catering to niche markets (gluten-free, ethnic, eco-friendly), Blue Apron is after volume by offering meals that appeal to the widest possible audience. Blue Apron is also expanding into wine and cooking supplies to further diversify the business.
Blue Apron’s growth and signs of profitability have led to talks of an IPO. While initially expected in 2016, such plans were delayed due to the high cost of customer acquisition. It is reported though that the company will move ahead with IPO plans this year.
If Blue Apron continues on a path towards profitability and goes eventually public, it probably won’t take very long for others to follow in its footsteps. And who knows, maybe in 10 years, Marley Spoon’s Fabian Siegel will be right and, for many of us, meal kits will take care “of what we’re cooking tonight.”
So why would a person prefer going to the grocery store over the clear convenience of automated delivery?
