Editor’s Note: This article was written before the full extent of the coronavirus was felt in the US, leading to a well-documented jump in demand for food delivery services, including meal kits, and based on data collected in 2019. As a result, Blue Apron’s stock price now sits around $6 up from $2 on Friday when this article was published. Based on those data, the business model for this segment appeared fundamentally flawed, mostly due to the challenging unit economics related to a high consumer churn rate. But could consumer behavior and demand for these services change for long-enough to change these fundamentals in the wake of the coronavirus? Or should we expect the same issues to arise again in the aftermath? Let us know what you think! Email [email protected]
Meal kits have been a much-discussed segment since they entered the US market roughly eight years ago when now-leading players Blue Apron, Hello Fresh, and Plated all entered the US market. Like many things in life, the idea of a pre-portioned meal with step-by-step instructions dropped on your doorstep sounds wonderful. Players rushed into the space to capitalize on what was predicted to be a trend that time-starved and convenience-craving consumers would adopt. Big names like Amazon launched their own meal kits while others acquired meal-kit startups like Albertson’s purchase of Plated.
The startups’ path was littered with casualties. In most cases, the expense of aggregating ingredients, packaging, and shipping perishable food items on a weekly basis made the margins too thin to prop up some ventures.
Sprig, Spoonrocket, and Bento shuttered their digital doors and Chef’d also wound up in the meal kit graveyard but was revived when privately-held True Food Innovations acquired the brand for $160 million and relaunched it as a “clean label” meal kit company.
Even Blue Apron, which raised $135 million in venture funding at a $2 billion valuation from big-name investors like Bessemer Venture Partners, has found itself struggling; while it IPO’d at $10 per share, its share price is currently sitting around $2 (Friday, March 13).
For brands that could crack these costly variables, however, customers have been fickle when it comes to remaining loyal to a particular brand. Although the meal kit industry hit over $5 billion annually in 2019 and showed continued growth, brands combatted double-digit churn rates each quarter. Churn refers to the rate at which consumers stop doing business with a company.
Data from DigiDay suggests that Blue Apron lost 13.78% of its customers in a single quarter in 2018 and that 77% of customers cancel each year. Theories behind the high churn rate in meal kits vary. Some consumers may find a particular brand’s menu repetitive or find that another service offers meals compatible with their specific dietary preferences or it could simply be a case of consumer wanderlust.
Now, however, it seems that the high churn rate is evolving to a high burn rate for most Americans when it comes to their attitudes about meal kits.
Only 35% of US consumers have tried a meal kit in the last year and for 11% of them, it was a one-time endeavor, according to a nationwide survey research service Piplsay recently released. Nearly a quarter of respondents reported trying Hello Fresh’s service followed by Blue Apron (19%), Amazon (18%), Home Chef (8%), and Freshly (4%).
For those who did try a meal kit service and canceled, 47% of survey respondents ended their meal kit subscription because it was too expensive while 17% said they grew bored of it. Fifty percent of respondents said they are no longer interested in using a meal kit service while 27% reported they are interested and 23% are on the fence.
Surprisingly, 13% of respondents reported that they weren’t even familiar with what meal kits are, which is staggering considering the great marketing lengths most of these companies have gone to.
The primary reason that respondents listed for wanting to try a meal kit service was less meal planning and trips to the grocery store, while healthier alternatives to ready-to-eat-food following behind. Other reasons were largely centered around alleviating the mental anguish of the relentless age-old question, “What’s for dinner tonight?” New ingredients, flavors, cuisines, cooking techniques, and a desire for more variety were also on the list of motivating factors.
The tech-based retail tool that seems to be satiating their appetite for convenient, low-mental-input eating is online grocery including both grocery delivery services and curbside pickup services. At the end of 2019, 38% of consumers reported buying groceries online in the prior year, up from 23% in 2018. The value of the online grocery market also doubled between 2018 and 2018 from $12 billion to $26 billion, and many online grocers offer both prepared meals and meal kit options, potentially taking some demand away from dedicated meal kits with a one-stop shop.
Walmart is dominating the online grocery game as it competes with e-commerce titan Amazon. Walmart claims roughly 37% of market share while Amazon sits around 29%. Supermarkets who have online grocery offerings claim 22%. Players in the online grocery space are making a push to drop prices.
Like meal kits, however, online grocery poses significant logistical challenges. Retailers have to figure out the most cost-effective way to aggregate products and pack orders. Consumers have already expressed dissatisfaction with unwanted substitutions for items that weren’t available in-store, long wait times for pickup orders, and expensive delivery fees. In the curbside pickup realm, retailers have already turned to GPS location technology to help identify when a consumer is getting close to the store to cut down on nagging wait times.