Meal kits, a recipe for success?

The meal kit industry has grown rapidly in recent years and has seen a spate of stratospheric valuations and targeted acquisitions as grocery retailers move to get a slice of the pie (or part of the delivery box?). But, this rise has led to increased scrutiny and raised a set of questions that the industry must answer as it seeks to transition to sustainable growth. Do meal kits really have a future as bright as the market once assumed?

While meal kit companies have posted impressive growth figures and achieved unicorn-level valuations, their underlying business model, and in fact their proposition, remains relatively untested; a testament to the faith of their investors but also to the current predilection of the tech industry to heavily weight projections of future profit in present analyses of worth. Meal kits have their valuation – now they need to prove that they have a market.

There are positive signs from adjacent industries that it can be done. The subscription ecommerce model in general has grown rapidly. Indeed, a McKinsey report found that the subscription ecommerce market has grown by 100% per year over the past five years. In 2016 Unilever acquired Dollar Shave Club for $1bn. Anyone who’s listened to an American podcast recently will have tracked the rise of these businesses, from Harry’s to Stitch Fix, by the proliferation of their adverts.

There are questions to be answered, however, about how much growth within the meal kit industry itself is sustainable. Technologists have a tendency to describe every startup as the Netflix or Uber ‘of X’. However, meal kit companies are very much not the ‘Netflix’ of food – they’re the Spotify. Netflix’s cost base is flat – they pay the same fee if one person or a million watches a film that they host on the site. Spotify, on the other hand, has a cost base that rises linearly with customer growth – they pay for every stream. Meal kit businesses, obviously, pay for every kit they produce.

Blue Apron

That means that customer retention matters. Long-term subscriptions are where the real value lies, particularly when the cost of acquiring a new customer can reach as high as $80. However, some reports suggest that meal kit consumers are migratory – taking advantage of the freebies offered by each company, hopping from business to business when their free trial period runs out.

Like many novel propositions trying to drum up interest, the meal kit industry has a marked reliance on the free offer that in previous instances has tended to be unsustainable in the long term.

There are solutions to this. The most obvious is to drop subscriptions altogether. Chef’d is a pioneer of this approach – it believes that the real offer meal kits make to consumers is convenience, and that essential to convenience is choice. If you liked that beef bourguignon, why shouldn’t you be able to order it to have at the same time next week?

Another is to expand the offering. Blue Apron now sells wine and kitchen essentials while HelloFresh has diversified its meal kit proposition to attract different groups, with the ‘classic’ box sitting alongside family meals and quick-to-prepare dinners.


The second key challenge the industry faces is how to reduce that cost base. Economies of scale will help, but they likely won’t suffice for the whole answer. The linear relationship between cost and customer numbers means that unlike some technology businesses with stunningly high margins, meal kit companies will have to be savvy operators and get stuck into the logistical detail in order to succeed. It’s a tricky balancing act that requires meeting the ever-growing customer demand for novelty while at the same time building margins and keeping complexity at a manageable level.

Grocery retailers offer a potential solution. In late March Carrefour acquired French meal kit business Quitoque and in 2017 American retailer Albertson’s bought Plated in a deal worth $200m. In fact, Plated CEO Nick Taranto has commented: “At Plated, the future of meal-kit services is grocery stores.” Many analysts see a period of consolidation and acquisitions in the years ahead as more grocery businesses attempt to carve out a space in the market.

You don’t have to be acquired to benefit from some of the synergies that can be created between meal kit businesses and more traditional FMCG companies and retailers. In 2017 Nestle led a $77m funding round in Freshly Inc. and several meal kit companies, including Hello Fresh and Blue Apron, have trialled selling through major retailers. Last year Gousto tested a click-and-collect scheme with the Co-op.

All of this has taken place in the context of a relatively uneven international expansion. Understandably, the US is the world leader in the market. The experience Stateside suggests that the next phase for the UK industry is one of proliferation and differentiation as smaller, more focused outfits spring up to target specific niches in the market, from dairy-free food to diabetic diets.

There’s also the fact that different countries have different tastes – what may prove popular in France may not do so in Germany. It will be fascinating to see how truly international meal kit companies adapt to the specific demands that each country’s culinary culture will create.

Data will of course help, and this is one area in which meal kit companies are particularly well-placed to succeed. Kevin Diestel of Sapphire Ventures, backers of Sun Basket, has compared meal kit companies to today’s tech behemoths due to the way they use customer data – “They’re riding the same wave in grocery that Netflix did in video and Amazon did in ecommerce.”

The challenges for the industry remain significant but I am excited to see how meal kit businesses adapt and innovate to meet market conditions and drive consumer demand. The question is whether meal kits really do have all the ingredients necessary for success. @MoiraBenigson | @TheMBSGroup