Can Meal-Kit Providers Emerge Stronger in 2021?

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Can Meal-Kit Providers Emerge Stronger in 2021?

Can Meal-Kit Providers Emerge Stronger in 2021?

By Thad Rueter - 06/24/2020

The COVID-19 outbreak has brought suffering to most nonfood retailers. But for the meal-kit industry, all of those restaurant closures and stay-at-home mandates offered a fresh burst of revenue and a new sense of optimism after a period of doubt and investor frustration.

Take Home Chef, the meal-kit service bought by The Kroger Co. in 2018. “Sales have increased materially since the start of the pandemic and have remained high week after week,” Brian Irwin, VP of marketing for Chicago-based Home Chef, told Progressive Grocer in late May. “We have had greater sales both from existing customers as well as new customers. Customers continue to buy more meals per delivery, and order more often.”

Key Takeaways

  • The pandemic has offered meal-kit companies a fresh source of revenue.
  • The industry’s broader issues are acquiring more affluent customers, holding onto existing ones and finding the right products for their customers.
  • Expect more innovation in the meal-kit space in the coming months. 

Home Chef isn’t alone.

In May, Berlin-based HelloFresh posted a 66.4% year-over-year global revenue increase, to $754.8 million, along with an 82.3% U.S. revenue increase. Its active customer base grew by 88.6% year over year, to 2.64 million, and the number of orders jumped by 82.2%, to 8.95 million.

“2019 saw the first year of profitability at the global level, and also marked the first full year of profitability in the U.S.,” HelloFresh CEO and founder Dominik Richter told PG at that time. The company just revised its full-year revenue guidance and now expects revenue growth of up to 50% in 2020 instead of the previous estimate of up to 27%. “Meal kits are a growth category, one that is seeing rapid maturation,” added Richter.

“We expect consumers will continue to cook more at home post-pandemic, and meal kits will fit that unique consumer need.”

He continued: “Our investments in technology, infrastructure and our brand have paid off — allowing us to focus on providing a variety of product options, innovating on packaging and materials throughout our supply chain to become more sustainable, and demonstrating that meal kits can be both a sustainable and profitable business model.”

Nearly a decade on, the meal-kit industry is making fresh gains with consumers stuck at home during the pandemic, and with new and revised product selections that reflect pre-pandemic shifts in how people eat and prepare meals. Now the leaders of that industry are looking to the back half of 2020 to gain even more traction, boost revenues and recapture some of the optimistic energy experienced closer to the dawn of the meal-kit era.

Race for New and Richer Customers

For the better part of a decade, meal-kit commerce has offered what amounts to an ongoing master class in how consumers can be merciless when it comes to earning their loyalty, sustained interest and dollars. While 35% of U.S. consumers have tried a meal kit within the past year, according to recent data from Mount Pleasant, S.C.-based Piplsay, only 18% of those consumers have subscribed to a meal-kit service. Moreover, 64% of meal-kit subscribers have cancelled those subscriptions in that same period of time.

Meal-kit providers know that they face tough challenges, pandemic or not, and the race is on to acquire more affluent customers, better hold onto existing ones and find the right products for a company’s particular customer base.
Another big motivation for shoppers to opt for meal kits is to explore different cuisines and ingredients without going to restaurants.

Meal-kit providers know that they face tough challenges, pandemic or not, and the race is on to acquire more affluent customers, better hold onto existing ones and find the right products for a company’s particular customer base.

New York-based Blue Apron provides a useful example for some of those broader issues. It has faced criticism about the money spent to acquire new customers who then end up leaving the service. Some estimates over the past few years have put Blue Apron’s customer acquisition costs at between $150 to $400 per new customer, and its customer cancellation rate as high as 77%.

Blue Apron has since made more effort to land consumers with higher incomes, along with increasing its spending on brand awareness. The company aims to build on that work, along with trends set by the pandemic, to achieve more sales in 2020 and into 2021. “We’ve seen new customers turning to meal kits during the pandemic,” a Blue Apron spokesperson says. “There are people who have never tried the product and are now gravitating towards it. We have also experienced existing customers upgrading their subscriptions from a two-person to a four-person subscription.”

Back to Restaurants?

Meal-kit providers expect that those pandemic trends will take a while to fade and provide advantages to the industry. Deloitte research from the spring, for instance, showed increasing consumer confidence about going back to physical stores, but many consumers still admit being worried about the health risks of doing so.

“The data we have seen is showing us that people, post-pandemic, plan on continuing to cook at home and in larger numbers,” the Blue Apron spokesperson says.  “As restrictions ease, it will be a transition period for restaurants as well, while they figure out how to open their restaurants safely. Customers may not be ready to rush out to restaurants.”

But even if some of those pandemic trends continue into 2021 — and there is good reason to believe some will — meal-kit providers can’t place all of their bets on that possibility. Among the longer-lasting methods of dealing with subscriber churn is to offer products that more precisely mesh with particular consumer segments. Such efforts, often planned and deployed well before the COVID-19 outbreak, are certain to play even bigger roles for the meal-kit industry in the second half of 2020.

More Variety

During the pandemic, some meal-kit providers had to temporarily reduce menu variety to keep up with demand and increase fulfillment center capacity. But that’s not where the meal-kit industry seems to be headed.

Consumers tend to try meal kits to avoid wasting too much time shopping.
Consumers tend to try meal kits to avoid wasting too much time shopping.

Blue Apron, for instance, is now offering a meal prep service that taps into the tendency of many consumers — and this could include busy and relatively affluent Millennials — to prepare various meals for the upcoming week, whether for work or home, or both. According to the company, a customer needs no more than 90 minutes to transform the sent ingredients into at least eight servings that can also be reheated without loss of quality. The price runs about $72 per box, which translates into about $9 per serving.

Sun Basket, a San Francisco-based meal-kit provider that focuses on fresh, organic and sustainable ingredients — reflecting broader trends among consumers, especially younger ones — is experiencing growing demand for its new oven-ready meals, according to Vanessa Meyers, SVP of growth at Sun Basket. Those meals can be cooked in an oven or microwave in as little as six minutes, and that particular product line accounted for nearly half of all Sun Basket orders in the first half of 2020, Meyers says.

“The new normal has accelerated trial and adoption of online food delivery solutions as consumers seek alternatives to decrease the time they spend in grocery stores,” she adds. Indeed, according to Piplsay, the desire to spend less time grocery shopping and planning meals is the main reason that consumers subscribe to meal-kit programs, ahead of wanting to eat healthier food and try new ingredients, flavors and cuisine.

“We anticipate continued demand for at-home meal solutions, even as stay-at-home orders begin to decrease, as we don’t expect consumers to return in a meaningful way to restaurants or to the workplace,” Meyers notes.

Home Chef is navigating a similar path, and also using a similar product to win back old customers. As Irwin describes it, the pandemic has given the company the chance to “show lapsed customers how much Home Chef has evolved from just one product line [kits] into a broader meal-solution business featuring products such as Oven-Ready, 15 Minute Meals and Grill-Ready Meals.”

Broadly speaking, the industry — while certainly beset with significant churn challenges — still appears to be on a respectable growth path, even without the impacts of the pandemic.

About 5% of U.S consumers bought meal kits in 2019, up from 3% in 2016, according to The NPD Group, in Port Washington, N.Y. — not huge growth, perhaps, but still a juicy opportunity for those companies. Globally, the meal-kit industry is on track to hit $8.94 billion in sales by 2025, a compound annual growth rate of 17% since 2017, according to Hexa Research, a Felton, Calif.-based firm whose areas of focus include food and beverage.

HelloFresh is betting that better technology and new products can lead it to its second profitable year in the United States.
HelloFresh is betting that better technology and new products can lead it to its second profitable year in the United States.

But competition is growing fierce. The novelty of receiving a meal kit has worn off, and the industry faces stiff challenges from other businesses, not just food delivery operators. Grocers, convenience stores and other forms of food retail continue to make massive inroads when it comes to offering fresh, fun and new ingredients; ready-to-eat meals that can tilt toward gourmet offerings; and all of those other things that consumers — especially younger ones — want and that meal-kit providers are striving to provide. 

In fact, meal-kit executives, while not being specific, certainly don’t rule out new partnerships with food retailers as those trends continue.

“We may also see a growing amount of businesses and grocery stores alike adapt to offer quick ready-to-eat meal options,” Sun Basket’s Meyers says. “To keep up with the strong competition of food retailers, meal-kit companies will need to offer more than just dinner occasions.”

For Sun Basket, that means breakfast, “easy lunches” and healthy protein add-ons, she observes. For other providers, that could include holiday fare, premium boxes and other such products. “Personalization is also key,” Meyers adds. “Meal options should not be a one-size-fits-all model. At Sun Basket, customers are not bound to one meal plan, and we encourage our subscribers to try different cuisines, ingredients and meal plans.”

In any case, it’s reasonable to expect more innovation in the meal-kit space in the coming months — new ways of doing meal kits that have little or nothing to do with the pandemic. “The meal-kit industry is a crowded space, and therefore, brands are constantly innovating to provide customers with solutions that fit their needs,” Meyers notes. “Meal-kit companies will need to find different ways to attract new customers, while also keeping their current subscribers fulfilled.”