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Can Online Groceries Keep Meal Kit Companies Growing?

By Rich Duprey – Aug 6, 2021 at 6:21AM

Key Points

  • Meal kit delivery got a big boost during pandemic lockdowns.
  • Now that consumers are going out to eat again, meal kit companies need something else to retain customers.
  • HelloFresh is launching a new online grocery store with a curated list of produce and pantry necessities.

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Perhaps adding grocery offerings can bolster meal kit sales as the pandemic eases.

Blue Apron (APRN -2.86%) has yet to devise a winning business model that can sustain it over the long haul, but maybe meal kit rival HelloFresh (HLFF.F 1.44%) is showing the way.

The Berlin-based HelloFresh announced in late July that it would launch an online grocery business to supplement its meal kit operations and give consumers another one-stop shopping opportunity. While there's certainly no shortage of online supermarkets to choose from, the company at least provides meal kit buyers a convenient option for supplementing their grocery purchases. Yet is that a winning formula for growth?

Father and daughter preparing a meal

Image source: HelloFresh.

Ready-to-prepare meals have limited appeal

The meal kit business was a hard-knock industry prior to the pandemic. The novelty of having ready-to-prepare food delivered to your door had worn off long before the COVID-19 outbreak, but lockdowns and stay-at-home orders turned meal delivery into a necessity, let alone a convenience.

Blue Apron was once the premier name in the business, but the high cost of delivery sent its business into a tailspin. It went from 1 million customers at its peak in 2017 to about a third of that just before the pandemic. It just reported it ended the second quarter with 375,000 members.

HelloFresh surpassed Blue Apron years ago to become the biggest meal kit company in the U.S. It has 10 times the number of domestic active customers as Blue Apron, and serves almost 7.3 million worldwide. (One big caveat: HelloFresh includes users who receive a free trial as "active customers" -- without saying how many -- while Blue Apron only counts those who actually pay for a subscription.) 

HelloFresh also filled over 15 million U.S. orders (29 million globally) compared to almost 2 million for Blue Apron, and U.S. revenue jumped to $4.5 billion in 2020 versus $461 million for Blue Apron. Where the German meal kit company reported $283 million in adjusted earnings last year, Blue Apron earned adjusted profits of $6.7 million.

HelloFresh has apparently found a way to succeed that still eludes Blue Apron, and now it's introducing a potential new competitive advantage: the online grocery store HelloFresh Market. 

Produce being delivered

Image source: Getty Images.

Dog-eat-dog markets can chew up competitors

The meal kit business is a harsh one. Customer churn is a hellish vortex -- several analyses have shown HelloFresh has an even worse customer churn rate than does Blue Apron, with only one in five customers keeping their subscriptions for six months or more. 

That means the meal kit companies need to continue spending exorbitant sums on marketing to keep new customers coming in. Turn off the spigot, as Blue Apron once did, and the numbers for new subscribers crater. And now with restaurants reopened and consumers willing to dine out again, attracting new customers will be that much more difficult. Maybe offering groceries can help.

Not that becoming an online grocer in the U.S. is going to be easy for either HelloFresh or Blue Apron. Walmart (WMT -0.10%) and Amazon already dominate the space, and they also offer meal kits.

Moreover, food delivery is just as cutthroat a business as meal kits. Walmart, for example, is losing market share to Instacart as its leading share declined from 40% before the pandemic to 31% in February, while Instacart jumped from 20% to 30%.

Importing a fresh idea

The meal kit leader says the introduction of HelloFresh Market is part of what it calls its "mid-term growth strategy" as it seeks to eventually transition into a "fully integrated food solutions group." To do so, it will offer not only ready-to-prepare meals, but also a curated selection of fresh produce and grocery essentials.

The program started in the Benelux region (Belgium, the Netherlands, and Luxembourg), offering 150 separate items for sale. HelloFresh said its success was based on the finding that the more products it offered, the greater the number of purchases customers added to their orders.

While its product selection does seem broad, the U.S. grocery market is different than in Europe, which typically doesn't have the kind of supercenters that Walmart and others operate.

Moreover, shoppers are returning to in-store shopping. U.S. shoppers bought $6.8 billion worth of groceries online in June, down 23% from 2020 and off 3% compared to May. 

Online shopping app

Image source: Getty Images.

Table scraps might be all that is available

Breaking into what is already a highly competitive landscape looks like it won't improve the bottom lines of meal kit companies all that much, and might even worsen them as they need to have more products available on hand to meet whatever demand they do find.

Meal kit subscriptions appeal to a relatively small portion of the population, and adding groceries to the mix does not seem like it will boost subscriptions all that much.  

HelloFresh has been far more successful than Blue Apron, but as the world normalizes, online groceries probably won't be a long-term growth option for either of the two companies, nor will their stocks likely be attractive to investors.

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 Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

HelloFresh SE Stock Quote
HelloFresh SE
HLFF.F
$26.75 (1.44%) $0.38
Walmart Stock Quote
Walmart
WMT
$153.22 (-0.10%) $0.15
Blue Apron Holdings, Inc. Stock Quote
Blue Apron Holdings, Inc.
APRN
$1.02 (-2.86%) $0.03

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