Continuing our look at the on-demand delivery of food, which is becoming mainstream in 2018, it is time to explore subscription food delivery pioneered by publicly traded Blue Apron and HelloFresh in the U.S. and Europe, respectively.
Boxed meals provide curated ingredients and recipes to cooks who prepare the food at home. It is the second leg of a growing home delivery industry, one that provides potentially powerful marketing advantages compared to grocery delivery (see the previous installment). Like groceries-on-demand, these companies seek to relieve the customer of shopping for the raw materials of a meal. Restaurant delivery, which will be our next subject, seeks to displace food preparation altogether.
The meal-in-a-box model has even captured President Donald Trump’s attention. His administration has suggested “Harvest Boxes” of produce and cheese have been suggested as a new alternative to food stamp programs in the United States. Trump’s idea may be a prescription for monotonous eating straight out of the 1960s, but commercial food boxes have focused on providing variety, intriguing culinary choices, and add-on products, such as wine.
We believe subscription food services are the most flexible marketing platform among the food delivery competitors.
Born when there was an Uber for everything
The subscription food segment emerged in 2012, when HelloFresh and Blue Apron were founded on early enthusiasm for the Uber model. Like other on-demand businesses, these companies built deliberately as the infrastructure and data tools needed to coordinate logistics across the food preparation industry evolved.
HelloFresh, based in Berlin, raised $364.5 million in seven rounds before launching an $393 million IPO in November 2017. HelloFresh stock has added 47.5 percent since its debut. Last month, the company acquired GreenChef, a Denver-based sustainable ingredients subscription food company in its first acquisition.
Blue Apron, which went public in June 2017, has struggled by comparison. It’s shares are down almost 37 percent since its IPO. The New York-based company had collected $199.4 million in funding over six rounds. The company lost customers during 2017, falling 27.9 percent from 1.036 million customers in the first quarter of 2017 to 746,000 as of December 31, 2017. This may be due to seasonality in Blue Apron’s business – cooks may prefer to shop for holiday meals.
However, HelloFresh says its active customer based increased by 68.6 percent in 2017 to 1.45 million across the U.S. and European markets. For now, HelloFresh is certainly the market leader.
Unlike the market for grocery and restaurant delivery, the boxed food business is not primarily a time-saver at meal-time. As noted previously, shopping takes between 4.45 hours (among men) and 6.35 hours (among women) of time each week.
Boxed food is designed for people who savor cooking and the time it takes. It represents an opportunity to change the mix of products a cook uses, and so should be considered a direct competitor to high-end grocers, such as Whole Foods or Trader Joe’s.
Scale & Optimization
The on-demand economy is the result of converging logistical, marketing, and data management capabilities. The boxed food delivery model is the most dependent of the emerging food businesses on continuous optimization of its processes because of the higher fixed costs of operating food processing and distribution centers.
Unlike grocery delivery, which is dependent on the stock at a local supermarket, or restaurant deliveries, which also rely on a third-party to gather and prepare food, boxed deliveries are a closed supply chain to be managed. New categories of food may be added, but at the cost of added management overhead associated with food production and safety regulation. Where Instacart can add a product for a consumer by having a contractor-shopper toss it in a grocery cart, box food suppliers must plan to modify their recipes, acquire food, and plan for weekly acquisitions to make a change to their offerings.
Boxed food delivery enjoys few of the scale benefits of on-demand businesses such as Instacart and Uber. Full-time staffing in food delivery is tightly linked to the number of partnerships and supply chain sources that must be managed. Built around distribution centers, these organizations must staff heavily to certify food safety, manage preparation, and ensure timely delivery. Blue Apron reported 3,938 full-time employees in January, 2018, three months after laying off six percent of its workforce. HelloFresh employed 2,715 at the end of 2017 and added 600 employees with the GreenChef acquisition in March.
HelloFresh, Blue Apron, GreenChef, and others, such as Chef’d, which markets top chef-recommended recipes, or Martha Stewart’s Marley Spoon, which delivers seasonal ingredients, must engage in deep partnerships with growers, distributors and shipping partners to ensure profitability. Like a grocery store, the box delivery companies must work to minimize food waste, which can be a crippling cost. And the boxes used represent a sustainability issue, as they become waste in the consumer’s home after only one use.
Compared to the average revenue per employee in the grocery industry in the fourth quarter of 2017, which was $438,138 according to CSIMarket.com, HelloFresh and Blue Apron have made excellent progress. HelloFresh, at $333,296 per employee, and Blue Apron’s $221,238 per employee are progressing toward parity with grocers. This suggests that with a full range of differentiated menus and established supplier relationships, the companies can compete effectively with both grocery and restaurant delivery as consumers’ eating habits change.
A marketing platform, not simply a fulfillment system
Boxed food is curated food, making the industry a natural marketing platform. Because the delivery box is a marketing stage, in which the customer must be delighted and surprised to feel they’ve received their money’s worth, HelloFresh and its competitors are better positioned to increase sales per customer and to introduce variety into their product.
Being able to add new ingredients, mix in novel recipes, and up-sell complementary products, such as wine to go with a boxed meal, these companies can market more effectively than grocery delivery competitors. By contrast, a grocery delivery company cannot pull out an item their customer explicitly ordered to provide an alternative sample, even if it’s a better flavor or deal. Customers don’t want their choices overruled.
Ingredient box customer engagements are defined by the number of servings to be produced using the ingredients in a box. Two- and four-person packages are the norm in boxed delivery, but the variety of ingredients can be changed daily to accommodate changing tastes. The model also does not rely on the cook to select foods, but offers a “best-of” experience that cooks expect to see change. GreenChef, for example, varies ingredients by season and is exploring local food sourcing in some regions.
HelloFresh reports that it currently is “mostly focused on weeknight dinners” and is experimenting with breakfast, lunch, and weekend premium meals. It distributes seven to 12 different recipes and plans to expand the options. Growing variety will be essential to retaining customers, who can become bored eating the same foods. Selection of more profitable products, premium programs with higher price points, and in-box offers provide subscription box food companies with greater marketing power than delivery-only providers in the grocery and restaurant markets.
The human touch defines curation and it is the soul of marketing. Boxing foods and recipes, adjusting delivery timing and personalization of box contents to address food allergies, and integrating content, such as chef-lead cooking programs, are pathways to introducing many more products to the customer. These moves will come at scale, as HelloFresh and other experiment with segmentation and improved meal planning, which will amplify the variety of food experiences available.
The box may contain the seeds of a transformation in food marketing. Because of the planning and merchandizing involved in box food delivery, we believe it will remain an important part of alternative food distribution for years to come. Now, newer companies are emphasizing specific cuisines, for example, or the use of sustainable sources. We believe local food boxes can become successful based on direct-selling and grocery partnerships.
Yet the boxed food market will take time to evolve, perhaps more slowly than the contractor-based alternatives. But the prospect of deep curation of food, which can cut waste, improve diet, and reduce the complexity and cost of food supply planning make this a compelling sector for continued investment.