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23rd of April 2018

Economy



Upstart meal-kit companies may need a new recipe for growth

FOR all the allure of televised fare like “MasterChef” and “Chef’s Table”, the reality is that many people are loth to rustle up anything more taxing than a bacon sandwich. Cue the recent emergence of more than 150 companies to make cooking easier. Two of the largest, Blue Apron in America and Germany’s HelloFresh, deliver boxes of pre-portioned ingredients and easy-to-follow recipes to doorsteps worldwide for a fee of around $60 a week.

Blue Apron is also serving up a belly full of woe to investors. Less than a year after it went public in June with a $1.9bn valuation, its share price has fallen by 80%. Although the shares of HelloFresh, which debuted on Frankfurt’s stock exchange in November, have risen by 24%, analysts are concerned that both services may fall prey to competition not from rival startups, but from big grocers.

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Supermarkets have gobbled up the meal-kit idea and made it their own. Instead of enrolling customers in a weekly menu of meals, these companies offer in-store kits on a day-by-day basis. Albertsons, an American supermarket firm that bought a subscription-based meal-kit company called Plated in September, announced last week that Plated’s products will be available in hundreds of its stores this year. Walmart will soon do the same with its own kits in 2,000 of its stores. Amazon and Weight Watchers, a weight-loss brand, have a slice of the $2bn market, too.

The subscription services can boast legions of youthful, time-starved fans, many of whom like the convenience of home delivery and the niche products, such as organic vegetables. But in-store meal kits sidestep subscription-based brands’ biggest problems; retention and acquisition. HelloFresh doubled its customers to 890,000 last year, as well as the number of delivered meals to 20m. But, one year after joining, 89% of its American clients had stopped using the service on a monthly basis, says Second Measure, an analytics firm.

Cost deters many, as does the grind of sticking to a dinner schedule made days in advance. Blue Apron loses customers nearly as fast as HelloFresh; bungled orders due to glitches at its new fulfilment centre last year made matters worse. At its peak it boasted 1m subscribers. Its client list shrank by 15% in 2017.

When the firms sign up new customers, the cost to acquire them is exorbitant. Daniel McCarthy of Emory University finds that Blue Apron loses money on more than two-thirds of the customers it brings in. Like Blue Apron, HelloFresh is not profitable and spends a lot on marketing and promotional discounts to acquire subscribers. Mr McCarthy estimates that each new client costs the company $94; Blue Apron shells out $84.

Supermarkets already have the footfall to minimise such costs. And because of their existing supply chains, they do not incur the same cost for ingredients as the subscription-based services, nor do they have delivery charges. What they lack in novelty value, they can make up for with variety.

Blue Apron and HelloFresh are refusing to bow to the pressure. In March Blue Apron said it plans to sell its kits at selected American retailers this year. But such a large pivot, says Mark Mahaney of RBC Capital Markets, an investment bank, is disconcerting. If even the biggest brand cannot stick to the subscription model, the smaller ones may be in for the chop.

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