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Why are meal kits doing so well, and whether they have real merit?

Written by - Reviewed by Consumer Health Digest Team

Published: Aug 14, 2019 | Last Updated: Sep 2, 2019

The size of the meal kit industry and how is it expected to grow further.
Meals Kits
Phoenix, Arizona, October 11, 2018: Fry's Prep and Prepared Meal Kits Display. Shutterstock Images

Life moves pretty fast these days. If you waste a moment, you might miss out on a deal, a promotion, or a networking opportunity.

We barely have time to cook – for a while, fast food filled the void, but now, many are seeking healthier alternatives. Increasingly, meal kit providers are fulfilling this need. Promising healthy, nutritious food, they are making food preparation quick and easy.

How big has this market segment grown, and where is it expected to go in the future? In this article, we’ll profile this industry so you can make your next big investment decision.

Why have meal kit companies blown up so quickly?

It’s simple – we have less free time than ever before. According to the US Bureau of Labor Statistics, the average American worked 44 hours per week in 2017. A Gallup poll in 2014 put that number at 47 hours per week. Bear in mind that these are averages. These facts mean approximately half of the working population puts in more hours than these figures.

Then, we have to factor in the average commute. In California, you’ll spend just under half an hour in traffic, each way by car – that number balloons to 51 minutes each way if you’re taking the bus/train. In other words, assuming a five-day work week, people are spending 5-8.5 hours per week commuting – on average.

Assuming you get an average amount of sleep (about seven hours per night), that leaves you about five hours at home. Do you want to spend close to half that time cooking, eating, and cleaning up? When you’ve got kids, chores, and unwinding to do, most take the easy way out.

For the longest time, this meant fast food. Pizza, hamburgers, fried chicken – all readily available via a drive-thru or a phone call. It also meant preparing boxed meals – wings, chicken burgers, and frozen pizza – all designed to be on the table within a half-hour.

There’s just one problem with this arrangement – it has been making us fat and sick for over a generation. According to the Guardian, the incidence of Type 2 diabetes surged from 150 million in 1980 to 350 million in 2011.

In 2005, the Canadian Journal of Public Health found that populations living in areas with high concentrations of fast food were 2.62 times more likely to be hospitalized for coronary issues. In 1990, just 15% of Americans were obese. By 2010, that number had exploded to 36%.

Previous generations were blissfully unaware of the impact of fast food on health. Today, working adults know and want to do better, for themselves and their kids. Given the facts mentioned above, it should surprise nobody that meal kit companies initially experienced exponential growth.

Who are the leading players in the meal kit industry?

For a company celebrating its 7th birthday in 2019, Blue Apron has enjoyed tremendous success in its short existence. This publicly-traded company took in over 667 million USD in revenues in the last fiscal year.

Sun Basket is generally considered to be Blue Apron’s biggest rival. Even still, they trail them by a wide margin – analysts estimated revenues of approximately 52 million USD in the past financial year.

HelloFresh sits in third place in revenue, with an estimated take of 10 million USD last year. However, they hold a 33% market share in the United States – enough to make them the leader in this metric.

What issues do these startups face? Profitability is a top concern for all companies – despite gargantuan revenues, Blue Apron has yet to turn a profit. They have signaled they expect this to reach this milestone in 2019 – if this company manages to do so, they’ll be one of the first meal kit businesses to achieve this feat.

The second issue is consumer fatigue. Over the past half-decade, the buzz around meal kits has led many to try them out. While some remain enthusiastic about the innovative recipes offered by these services, others have quit purchasing them. Why? Because in most cases, meal kits don’t save much time. The companies provide the ingredients pre-cut and in pre-sized portions, but you still have to cook them.

What have their growth numbers been like?

In the beginning, enthusiasm and hopes were high for meal kit companies. Blue Apron took off not long after launch – after doing 77 million USD in sales in 2014, their numbers zoomed to 881 million USD in 2017. However, last year’s results indicate trouble is on the horizon, as revenues plunged 24% YoY to 667 million USD.

HelloFresh has seen similar growth – according to CB Insights, the Berlin-based meal delivery company was worth 680 million USD in 2015. The very next year, that number spiked to 2.9 billion USD, before declining to 2 billion USD in 2017.

Meal kits have even expanded to Canada. As of May 2019, companies like HelloFresh, Chef’s Plate, and Goodfood were all doing business north of the border.

Unfortunately, competition from grocery giants and Amazon is casting a shadow over the entire industry. In August 2018, QZ.com published a report which discussed investor concerns from 2017. They included rumblings that Amazon was about to move into this space – shortly after, Amazon bought Whole Foods, proving their premonitions correct.

Indeed, many retail business analysts are urging meal kit companies to get acquired before leading grocers like Kroger start in-house brands. In the opinion of Brittain Ladd, a retail business analyst for Forbes magazine, only a handful have a sustainable business model.

By 2025, he expects half of all meal kit companies to go out of business. The honeymoon in the meal kit space is now over – only the fittest will survive the shakeout coming over the next half-decade.

How the struggles of Blue Apron should temper investor enthusiasm?

Don’t believe us? Look at Blue Apron, the highest-profile company in the meal kit industry. Their 24% plunge in YoY revenue from 2017 to 2018 should be setting off alarm bells in your head. But, let’s dive deeper so we can understand what’s going on.

Blue Apron’s current troubles are partially due to their overly-aggressive approach to growth. Two years after being founded, they were making 77 million USD per year. That’s not the problem – speed is key when you’re first starting up.

As 2014 drew to a close, though, executives made decisions that spread company resources too thinly. They strayed from their core business, moving into cookware and cookbooks, and starting a wine subscription service.

These moves overwhelmed their supply chain, causing delays in meal shipments. In late 2017, just six months after launching their IPO, losses per share came in 50% higher than predicted. In 2018, the problem was evident: customers angry over late meal deliveries were canceling their subscriptions.

On top of all this, news broke that Amazon had bought Whole Foods. Now, the e-commerce giant had the means to deliver fresh food to its customers. Given their uber-efficient supply chain, meal kit companies will have their work cut out for them.

Are meal kit companies just a fad?

Despite the gloomy outlook for meal kit companies, meal kits themselves aren’t a fad. They emerged as a response to a problem that had been festering for years: a general lack of free time.

That hasn’t changed in the last few years, but the number of competitors has. Not only do Blue Apron and HelloFresh have to ward off smaller niche businesses like Green Chef, but Amazon is now in the space.

The industry itself isn’t going anywhere – by 2025, it is expected to be worth 14.2 billion USD. However, expect a great deal of consolidation – many successful companies will be acquired over the next five years.

Our final verdict: invest with caution

The explosive growth of the meal kit industry has taken many investors by surprise. However, the boom is over – pioneer companies have run into operational issues, and Amazon is throwing their weight around.

Don’t pick a company based on their elevator pitch. Dive deep into their financials, investigate their business, and ask the tough questions. Do this, and your future self will thank you.

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