Meal kit delivery specialist Chef'd abruptly announced at the end of July that it was shutting down service after a three-year run due to "setbacks in financing." Despite successfully achieving all the things one-time industry leader Blue Apron (NYSE:APRN) was said to need to do to ensure its own survival, Chef'd was unable to raise enough cash to outpace the money it burned every month.
A week after ceasing operations, Chef'd found a buyer but the company is suspending its e-commerce efforts to focus on retail sales and will renegotiate the company's myriad licensing deals, according to the Wall Street Journal.
The meal-kit business constantly requires finely-balanced logistics to meet consumer demand, and the the struggles of Chef'd -- even though it found a buyer -- highlights just how formidable a task Blue Apron is facing, and suggests the future doesn't look very bright.
A better way to meal prep
The meal-kit industry has changed considerably in the 13 months since Blue Apron went public, with Amazon buying Whole Foods Market and upending the entire grocery marketplace.
The viability of a stand-alone delivery business has been called into question. It seems that delivery of prepared meal kits is a highly inefficient and expensive means of getting fresh, ready-to-prepare food into the hands of time-constrained consumers who still want to participate in the meal preparation process for their families.
Moreover, an unexpected trend is emerging: Making meal kits available to the broadest audience of consumers might be best achieved by putting the kits in grocery-store freezer cases. Albertson's seemed to recognize this first with its acquisition of Plated, but soon grocers from Walmart (NYSE:WMT) to Kroger (NYSE:KR) were either launching their own meal kits or buying an existing service (Kroger, which had its own meal kits, recently snapped up the third-largest meal-kit service, Home Chef).
Only a very small subset of the population can afford to pay $60 to $80 to have a few meals delivered each week. The larger opportunity is reaching the many customers who don't want to decide on a daily menu, shop for the food, and then return home to cook after a long day at work. Ready-to-go meal kits available in stores are more convenient, and a meal kit for two can retail for less than $15.
Doing everything right
To a casual observer, Chef'd's recent steps towards viability may have seemed faultless. Last year Campbell Soup (NYSE:CPB) invested $10 million in the meal-kit company and obtained a seat on Chef'd's board of directors. The plan was to help build out Chef'd's infrastructure and distribute its kits through the soup maker's "Campbell's Kitchen" website.
Also, this past May Chef'd partnered with Smithfield Foods to bring its meal kits to grocery stores in 27 states, including at Costco (NASDAQ:COST), Harris Teeter (a Kroger subsidiary), and Weis Markets. At the time the company stated: "The expansion of Chef'd into retail enables us to serve the large group of shoppers who have never tried a meal kit but are eager for non-subscription solutions."
Meal kits remain popular. Data shows meal-kit sales grew 40.7% in the U.S. last year, and some market researchers believe delivery can still grow at a 20% compounded annual rate through 2022.
Yet stand-alone delivery businesses will have trouble surviving, because it's expensive to retain existing customers and attract new ones. Chef'd burned through all the money Smithfield and Campbell invested without being able to raise more. And unless Blue Apron continuously increases its marketing spend, it will also burn through customers as well as cash.
Surveys indicate that meal-kit customers abandon their subscriptions after only a few months, and switch to a different company or return to shopping at the grocery store. Last year it was found Blue Apron retained only 15% of its customers; leading meal-kit service Hello Fresh, publicly listed on the Frankfurt Stock Exchange, retained just 11%.
Key investment takeaway
Investors in Blue Apron should be worried. The meal kit pioneer also partnered with Costco to have its kits appear in warehouse stores, launched a series of pop-up stores to generate consumer buzz about its products, and even began offering party-sized meal kits. Yet as Chef'd followed many of these same routes but saw its funding dry up, that doesn't speak well for Blue Apron's future.
Increasingly, the buyout route is looking like the one that holds the most promise for survival. Having Blue Apron kits in thousands of Walmarts, for example, would bring the prepared meal service into more kitchens. Supporting another possible scenario, recent rumors suggest Costco might be interested in making a bid.
There was much hope surrounding Blue Apron's IPO last year that's been dashed along the way. Many of the company's initial investors are likely hoping that if a buyout offer does come, they'll be able to get back to break-even. But considering Blue Apron's severely depressed valuation, that might be an outcome the meal-kit company can't deliver.
Editor's Note: A previous version of this article did not include that Chef'd had found a buyer. The Fool regrets the error.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.