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Do Meal Kits Have a Future?

05/08/2018

CNBC recently posted a review of meal kits suggesting that the traditional model is dead and that a new approach will be necessary for producers of meal kits to survive. It is accepted that meal kits offer variety, the opportunity to be creative and to a certain extent, convenience. This comes at a high price and a delay if ordering online.

The plight of this segment of the retail food industry is exemplified by Blue Apron, which launched their IPO in 2017. Comparing Q1 of 2017 to 2018, the company experienced a 9 percent decline in orders and 5 percent fewer customers although revenue and orders per customer remained fairly constant. The profitability of the meal kit business is decidedly negative. In Q1 of 2017, Blue Apron lost $52 million with a “less bad” result in Q1 of 2018, posting a loss of $31.7 million.

The decline in demand is attributed to competition, customer fatigue and above all the company throttling back on promotion considered necessary to maintain sales. During the past quarter, Blue Apron spent 20 percent of revenue on marketing compared with 25 percent for the previous quarter.

Blue Apron has a $441 million market capitalization but carries long-term debt of $125 million. The 52-week range in share price is $1.72 to $11.00 and the share trades at about $2.30. The proportion of equity held by institutions at 32 percent certainly indicates a lack of confidence by big money.

In an interview, commentator and analyst Phil Lempert opined “It’s not a sustainable business if you’ve got to be constantly giving away $30 or $40 worth of meals to get customers.” He added “I do think what Hello Fresh and Blue Apron are doing by starting to sell in supermarkets is an opportunity.” Blue Apron is now cooperating with Costco which may encourage trial customers. The problem with meal kits is the low rate of retention assessed over a six-month period after the initial purchase. The need to continually run special offers and discounts suggests that apart from hard-core customers, there is little loyalty in the meal kit space.