Meal Kit Companies Reconsider Direct/Subscription Model In Favor Of Retail

Among the new wave of direct-to-consumer and subscription-based eCommerce taking hold of the industry, none was considered more promising over the past year than the direct-to-consumer meal kit business.

By some estimates, the meal kit sector has exploded in terms of year-over-year growth, jumping from about a $1.5 billion market to a $5 billion market by the end of 2017, as independent startups entered the business only to find supermarket chains and big box stores entering the mix. Meal kits were initially shipped directly to consumers in simple, ready-to-cook assemblage, offering meals that were considered healthy, affordable and serving a direct customer need.

But some of the most successful meal kit companies began to run into problems they had failed to foresee, ranging from customers jumping from platform to platform, with little brand loyalty, to the inability to make long-term commitments on subscriptions, to conflicting work and lifestyle issues that resulted in meals, like many perishable goods, sitting for days on end without immediate use or immediate value.

Companies that were considered among the top-performing players in the market eventually had to rethink their entire distribution strategy – they were very good at attracting customers, but maintaining loyalty from those early adopters was a far bigger challenge.

Conversion Strategy

“While we have been successful in driving customers to our platform, we must improve the rates at which they convert to paid subscribers,” CEO Brad Dickerson told analysts during the Blue Apron second-quarter conference call with analysts late last week.

He said the company’s pilot program, which initially sold meal kits in 17 Costco stores and has expanded to 80 locations within three months, has “further validated to us the power of Costco’s retail platform.”

The company is planning to test “on-demand” meal kits through its eCommerce platform and third-party delivery partners, initially launching on the East and West Coasts to see how successful the strategy is.

Dickerson said the company recognizes that “many customers we surveyed who may have left our subscription platform in the past have cited subscription as a challenge for them based on their lifestyle and what they need to do week-by-week.”

Among the key customer metrics, Blue Apron saw customers fall to 717,000 in the quarter from 943,000 a year ago and 786,000 during the first quarter. The number of orders also fell to 3.1 million from 4 million in the year-ago quarter, and 3.47 million during the first quarter. The company was, however, able to improve cost of goods sold [COGS] by 400 basis points on a year-over-year basis to 64.7 percent during the quarter, citing greater efficiencies in labor and shipping costs. Also, the company has signed a new multi-year contract with Federal Express, which Blue Apron officials say will help save last-mile costs.

Another potential benefit of the retail strategy is that, while the company is working its way up to reach scale in terms of selling through stores rather than direct, is that Blue Apron will have lower acquisition costs, lower shipping costs and much lower marketing costs for goods sold through retail, Tim Smith, senior vice president and general manager of consumer products, said during the call.

Brian Kilcourse, a managing partner at RSR Research, told PYMNTS that when you have rolling stock, there are two issues to deal with. One is the higher costs associated with distribution, and secondly, you lose out on the opportunity to upsell your best customers. For example, retailers that get customers to pick up goods inside a store have the opportunity to get them to buy more products when they come to pick up orders.

“Retailers have realized that consumers still like to come into stores,” Kilcourse said.

The meal kit business has evolved a bit since Blue Apron and some of its initial rivals got started during the 2011-2012 period. HelloFresh, which launched in November 2011, acquired Green Chef in March of this year, making it the largest firm in the meal kit business, surpassing Blue Apron. The firm announced plans early this year to sell in Stop & Shop and Giant Food. Plated, which launched in 2012, was acquired by Albertson’s for $300 million in 2017. Many of these acquisitions were spurred on by the 2017 Amazon acquisition of Whole Foods, which itself had been struggling.

Under the subscription model, meal kits typically include many fresh ingredients that must be used quickly or refrigerated, are shipped to the customer’s home in a box and have to be cooked at home. Prepared meals are often sold in-store and are previously cooked by store employees or workers at a distribution center.

One of the most glaring problems with independent meal-kit companies was that they had enormous problems retaining customers, according to Daniel McCarthy, an assistant professor at Emory University. In November 2017, he noted that the six-month retention rate for Blue Apron was 28 percent, while he estimated the HelloFresh retention rate was even lower at about 17 percent.

Market Casualties

The July collapse of meal kit maker Chef’d was the most recent example of how competition is eating up some of the industry’s most promising competitors. Chef’d had been aggressively targeting retailers, including pharmacies like Duane Reade and Walgreens, which are major retailers in the northeastern U.S., as well as some major grocery store chains in other parts of the country. However, the company collapsed due to the loss of financing and shuttered in mid-July, as its retail plans were just starting to take hold.

True Food Innovations, which already was competing in the meal kit space with a long shelf life retail brand called True Chef, quickly scooped up the assets and announced that it would focus on selling through retail channels.

“We believe the retail channel will continue to grow, and we will concentrate our efforts on that portion of the Chef’d business,” Robert T. Jones, president of True Food Innovations, said last month following the acquisition.

Jones explained to PYMNTS that it’s important to get meal kits on retail shelves, because 60 percent of consumers have indicated a preference to get meal kits in stores, and he sees the trend moving further away from direct selling.

“Subscription meal kit offerings will continue to decrease as retailers provide consumers with more options and far more convenience for the 4 p.m. question, ‘What is for dinner?’” Jones said in an email response to questions.

Asked about the cost differential in selling through retail locations versus direct, Jones said the retail supply chain and distribution is very mature, and that “being able to accurately measure COGS and have margin-positive product is formulaic.

“Traditional retailers will not only sell in-store, but will offer meal kits for sale through their eCommerce offerings, and the consumer can purchase many things the store carries and delivers by one of many last-mile delivery providers like Instacart,” he wrote.

Walmart plans to sell meal kits from Gobble, a startup firm led by Ooshma Garb and backed by Reddit Founder Alexis Ohanian, according to a new report. The firm, which has mainly operated in the Western U.S., offers meal kits that are designed for 15-minute preparation. Walmart has offered meal kits through various companies, including Home Chef, Takeout Kit and other brands, and had previously announced plans to expand its meal kit options from about 250 stores to 2,000 by the end of 2018.

Holding Out

Purple Carrot, based in Needham, Massachusetts, has at least temporarily bucked the trend after a six-month pilot program that ended in March 2017 with Whole Foods, which included five northeast stores. CEO Andy Levitt told PYMNTS that they were an innovator in the retail space, but that the experiment was a bit too early; customers were not expecting meal kits in stores at the time, and there were issues about in which part of the store the meal kits should be sold.

Earlier this year, the company got a $4 million investment from Fresh Del Monte Produce, Inc., and indicated that it eventually will reconsider the retail channel in the future.

“The landscape has changed over the last 12 months, yet we still believe the retail channel is in its infancy,” he told PYMNTS via email. “Over time, it may prove to be a strong and appropriate channel for meal kits, especially for those owned by the grocer [citing Plated and Home Chef], but for many others, the dynamics may not make good sense.”