Online meal kits – Cooking out of the box

Scott Etzel, Wells Fargo Sector Manager, Protein and Sugar

Over the last two years, more than 150 companies have entered the online meal kit sector, registering combined U.S. sales of $2.2 billion in 2017. Although this is a small number compared to the $641 billion in total grocery store sales for 20171, it’s clear that meal kit companies have found a market niche. Further, these companies have been successful in convincing some consumers to pay a premium to have meal ingredients and a recipe arrive at their front door on a weekly basis.

In looking at meal kits, the average cost for a well-balanced meal, including a protein, vegetable, and a carbohydrate is $8-10 per person. For this fee, one can buys the opportunity to receive, store, prep, and cook enticing recipes such as “Shanghai Noodles with Steak”, “Grilled Purple Potato Salad”, “Rosemary Shrimp Skewers”, and “Penne Alla Puttanesca.” Meal options are plentiful across the many meal kit providers, and range from basic to more gourmet. Vegan and vegetarian options are also available.

Meal kits – fad or here to stay?

There is no question that meal kits have captured the attention of many U.S. consumers, and it’s no surprise given the lifestyle of today’s average American family. Bottom line, American families keep busy schedules, and simply don’t spend as many hours on meal preparation within the average week as they used to. Thus, a variety of delicious and efficient recipes are desirable. At the same time, many consumers, especially millennials, now the generation with the most buying power2, have become more health conscious. So the desire to eat a healthy, well-balanced meal is a top purchasing criteria. Couple this with convenience, and a market niche is born.

Yet, a key question specific to the future of the meal kit sector is whether consumers are willing to pay the premium for convenience, and if so, for how long, before they choose a different path?

As shown in the table below, a simple meal of grilled hamburgers topped with caramelized onions and a salad purchased from a meal kit provider can be fairly expensive on a per-person basis compared to buying the same ingredients at a local grocery store. Either way, the consumer still assumes the burden of preparation. Still, meal kits are less costly than purchasing the same caliber of burger and salad at an upscale “fast-casual” restaurant. Some believe that meal kits are meant to be the bridge between cooking from scratch and eating out, though market forces are moving meal kits closer to the cooking from scratch option.

1. Average across grocery stores in medium sized city
2. Average price across Blue Apron and Hello Fresh for two-person plan (assumes free shipping)
3. Average price across fast, casual restaurants in medium sized city

Looking beyond price

Not surprised by what my pricing research showed specific to the above three purchase options, I decided to conduct my own personal research regarding the appeal of meal kits.

Data shows that over nearly 80% of U.S. adult consumers are familiar with online meal kit companies, and approximately 20% have actually tried meal kits, or are regular meal kit customers3. Penetration is much stronger among the younger generations. Segmented by generation, 24% of “Millennials” and 17% of “Generation Xers” are regular meal kit customers, while only 4% of Baby Boomers” regularly purchase online meal kits4.

So as a “Boomer”, I’m one in a small percentage that has ventured into the sector for my personal research. With so many meal kit providers to choose from, I decided to focus on the two largest – Blue Apron and Hello Fresh. First I tried Blue Apron. I registered and utilized a coupon to buy two meals. The following week, I signed up and ordered two meals from Hello Fresh.

No doubt, the consumer’s role with respect to ordering is pretty simple. One logs on, makes a meal selection, provides a credit card, and the following week a boxed kit arrives containing a step-by-step recipe and meal ingredients packed in frozen gel packs and an insulated cardboard box to ensure the ingredients remain fresh and safe. However, I was surprised to see that the ingredients for both of the week’s meals came in the same box.

The analysis

On the positive side, both provider’s recipes were easy to prepare in a timeframe of approximately 30-40 minutes. For all four of the meals, I ordered recipes containing either ground beef or chicken breasts. All of the recipes were well-seasoned and healthy, and the meals were sufficient to satisfy our appetites. Plus, I will admit that it was convenient to have meal ingredients ready and waiting without going through the thought process of “what’s for dinner?”, and without having to round up or make a shopping trip to procure ingredients.

On the negative side, based on the meals I selected, I found meal kits an expensive option to purchase fairly average food. I discovered that for roughly 30% – 40% of the cost of the meal kits, I could have purchased the exact same food ingredients at my local Safeway or Fred Meyer grocery stores. In addition, the excessive meal-kit packaging was a turn-off. Disposal of the delivery box, insulation, and frozen gel packs more than filled my garbage and recycling containers for the week.

So in my final analysis, I decided that the completed meals were tasty, prep times were acceptable, and it was convenient to have the meal ingredients ready and waiting. But, thinking about the average budget-conscious household, I believe cost is prohibitive in the context of regular, weekly meal kit ordering, and for me that is a deal breaker.

Knowing that a meal kit carries a cost of approximately $10.00 per person, per meal, a mental calculation based on the ordering of three meal kits for two people yields a weekly total of $60.00 per week, and $240.00 per month. Adding two children to the equation for a family of four would yield weekly costs of $120.00 per week and $480.00 per month respectively. And, of course, these expenses only account for three dinners out of the seven required per week, not to mention breakfasts and lunches for all seven days of the week.

With my own personal cost objections, I was not surprised to discover the top reasons that consumers discontinue meal kit ordering, indicated in the table below.

Source: L.E.K. Consulting, Why a Shakeout in the Meal Kit Industry is Likely, 2017

What’s the sector outlook?
Statista indicates that in 2015, global revenues for meal kits were $1 billion. By 2017, meal kit revenues had grown to $5 billion, and are forecasted to hit $10 billion by 20205. LEK Consulting estimates meal kit revenues to reach $20 billion by 2025.

While this may sound like a big number, even if online meal kit sales rise to $20 billion by 2025, this number is still quite small compared to U.S. grocery store sales that totaled $641 billion in 20176. Yet, the rate of projected growth is impressive. The annual growth rate of retail brick and mortar stores sales has averaged 2.5% over the last 10 years. By comparison, meal kit sales growth is occurring at 20% a year. This, coupled with relatively low barriers for sector entry, has attracted more and more companies to the sector, all competing for Americans’ food dollar.

Despite growth projections, the picture for this sector isn’t entirely rosy. It has been difficult for even the largest online meal kit companies to make money. As contributing factors, the customer “churn” rate in this sector is high since it’s a competitive sector, and consumers are frequently hit with promotional offers from alternate meal kit companies. Enticed by special offers, consumers demonstrate little loyalty to meal kit providers. Bottom line, meal kit companies face high customer acquisition and retention costs compared to traditional grocery stores.

For 2017, the two largest online meal kit firms, with a collective 60% of U.S. market share, reported losses: Blue Apron (APRN) reported a loss of $274 million on $800 million in sales7. And, German-based Hello Fresh reported a loss of $50 million on $1.1 billion in global sales8. As shown in the below chart, Blue Apron’s stock value has declined 85% since June 1, 2017. By comparison, U.S. retail grocery chain Kroger Co. (KR) has enjoyed a 26% increase in its stock price over the same period9.

Source: NYSE

Despite the challenges, the mercurial growth of the online meal kit sector has garnered the attention of the brick and mortar grocery chains who are already facing increased competition from Amazon’s entry into the grocery business via its acquisition of Whole Foods Market. So, it’s no surprise that in the past 12 months, Kroger, Walmart, and Albertsons have all purchased established online meal kit companies with the strategy of offering prepared meal kits in store, thus eliminating the cost of delivery that is factored into online meal kit costs.

When at my local Costco earlier this year, I noticed they were selling Pad Thai Chicken from online meal kit provider, Chef’d, indicated to be 2-5 servings at the price of $14.99. At this price, it was a bargain compared to the cost of delivered online meal kits which average $8.00 – $10.00 per person. But, sadly, Chef’d, a three-year-old meal kit start-up, suddenly announced on July 16, 2018 that it was closing its doors, just more evidence of the profit difficulty for the sector. Even with financing from venture capitalists and food industry partners such as Campbell Soup Co. and Smithfield Foods Inc., Chef’d cited difficulty in raising additional capital as the key reason behind the closure10.

Only time will tell if the current meal kit trend is here to stay. But for now, Food and Agribusiness producers and processors should pay close attention to the significant growth forecasts for both online meal kit sales and online grocery sales because the grocery industry is most certainly in transition.

1. Statista – Grocery store sales in the United States from 1992 to 2017 – https://www.statista.com/statistics/197621/annual-grocery-store-sales-in-the-us-since-1992/
2. Forbes, How to Tap Into the Millennial $200 Billion Buying Power with Social Media, October 31, 2017
3. L.E.K. Consulting Webinar, The Rapidly Evolving Landscape of Meal Kits & E-Commerce in Food and Beverage. Data drawn from 2018 F&B Consumer Survey. https://www.slideshare.net/LEK_Consulting/the-rapidly-evolving-landscape-of-meal-kits-and-ecommerce-in-food-beverage
4. L.E.K. Consulting Webinar, The Rapidly Evolving Landscape of Meal Kits & E-Commerce in Food and Beverage. Data drawn from 2018 F&B Consumer Survey. https://www.slideshare.net/LEK_Consulting/the-rapidly-evolving-landscape-of-meal-kits-and-ecommerce-in-food-beverage
5. Statista, Online Meal Kit Delivery Services in the U.S. – Statistics & Facts
6. L.E.K. Consulting, Why a Shakeout in the Meal Kit Industry is Likely, 2017
7. Blue Apron, Investor Relations, https://investors.blueapron.com/
8. Hello Fresh, Investor Relations, http://ir.hellofreshgroup.com/websites/hellofresh/English/0/investor-relations.html
9. NYSE quotes on Blue Apron and Kroger through 11/1/2018
10. Supermarket News, As funding dries up, Chef’d shuts down, July 2018

Scott EtzelScott Etzel is a Sector Manager within Wells Fargo’s Food and Agribusiness Industry Advisors group with focus on the protein sectors. Scott also provides coverage for beet and cane sugar.

Scott joined Wells Fargo in 1987 as an Agribusiness Consultant focused on lending to California’s fruit, vegetable, nursery, tree nut, wine, protein, and forest product industries. He has been with Wells Fargo since then, excepting the years of 1994 – 1996, when he was employed as Director of Environmental Affairs for the Northwest Food Processors Association in Portland, Oregon. Prior to joining the bank, Scott held positions in trade association management and food brokerage representing the fruit and vegetable processing industries.

Scott is a graduate of Oregon State University and holds a B.S. degree in Food Science and Technology.