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May 23, 2019

What’s for Dinner? Meal Kit Fatigue!

MHT Partners  | Consumer Investment Bank

The American diner is continually searching for ways to get dinner on the table quickly, as evidenced by the meal kit phenomenon of the last several years. The plethora of meal kit choices is almost overwhelming for the consumer. Need a paleo box? Options abound. You want to eat all organic? No problem. Vegan? There’s a box for that. While the optionality for the consumer is appealing, it highlights the challenges of the meal kit market – it is a crowded space with high customer acquisition costs and significant customer churn (not to mention the difficulty of managing perishable ingredients and challenging distribution dynamics). With numerous competitors in the space competing for consumers’ attention, such as Blue Apron, Hello Fresh, Sun Basket, Gobble, Home Chef, and Plated, just to name a few, it is no wonder that many of these companies are struggling to retain customers and turn a profit. As one data point on the challenges in the meal kit market and investors’ view of the space, Blue Apron’s (NYSE: APRN) stock is currently down more than 90% from its IPO pricing of $10 a share.

So why the meal kit fatigue? Some of the challenges faced by meal kit companies are the result of consumer backlash – consumers don’t necessarily find many kits “easy” enough since they still require the user to prep and cook the meal. Beyond that, the packaging and shipping of meal kits to consumers have raised concerns about the environmental impact of these services. Meal delivery services, such as Door Dash, Uber Eats, and Grubhub, have also eaten into the meal kit business (pun intended), capitalizing on consumer loyalty to and familiarity with local restaurants to generate midweek business. All that said, the U.S. market for meal kits, which is relatively nascent, has grown very rapidly over the last few years and was expected to generate an estimated $3.1 billion in sales in 2018 according to Packaged Facts. Much like the trend of meal preparation retail locations (such as Dream Dinners) that rose in popularity a decade ago, busy consumers are continually eager to find ways to streamline their dinner preparation process and still manage to eat balanced, nutritious, and delicious meals.

The grocery market clearly sees the value in trying to capitalize on the consumer demand for getting dinner on the table quickly and over the past couple of years, the major grocery players have scrambled to get a toehold in the sector. In 2017, Albertson’s bought meal-kit service Plated to make a foray into the space. In June of 2018, Kroger (NYSE: KR) acquired Home Chef, the largest private meal kit company in the U.S., for $200 million (plus potential contingent payments of up to $500 million). Beyond acquisitions, there have been a number of joint ventures / partnerships between grocery retailers and meal kit services, such as a former Costco / Blue Apron coupling and Walmart forging a partnership with Gobble in 2018 to sell meal kits online. Amazon / Whole Foods, which continues to shake up the grocery industry, also offers meal kits to customers both online and offline – given Amazon’s e-commerce dominance, vast distribution networks and now significant brick-and-mortar retail grocery presence, this represents perhaps one of the biggest potential threats to other meal kit companies.

As consumer investment bankers, we are interested in continuing to follow the evolution of the meal kit market and specifically how standalone players will fare and grocery retailers will continue to market and profit from this concept. It remains to be seen if the consumer will ultimately deem meal kits too challenging and simply opt for ready-made “heat and eat” food, or if this concept will have lasting power.

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