Age of Convenience: the impact of meal kit startups on the food supply chain

February 16, 2017

Editor’s note: this post was contributed by guest author Matilda Stump, Sustainable Business Development Coordinator at Rabobank, Australia. Matilda is passionate about food and the future of farming, and loves having one foot in the city and one foot on the family property in Northern NSW.

Packaged produce as a way of cutting culinary corners? Yes please! In an age where convenience is king and people are increasingly looking for fresh, clean, traceable produce, meal kit startups are booming. Such companies deliver fresh produce that’s ready to be assembled into a meal right to your door. Sounds ideal, right? Packaged Facts, a market research company, explains that in 2016 the US meal kit startups generated $1.5 billion in sales. Yet, in a time where sustainability and productivity are crucial for our food system, is the delivery of pre-chopped meals a viable option for all players along the food value chain? Do these companies deliver on their promise or is there a cost to this convenience?

Meal kit mechanics and the food supply chain

There are a huge number, and variety, of meal kit companies around the world. In the US alone there are over 150 companies! Major players include:

  • HelloFresh, endorsed by Jamie Oliver and backed by venture-capital firm Rocket Internet, offers customers “everything but the chef” and is valued at over USD $2.8billion.
  • Blue Apron specialises in unique produce, like fairy tale eggplant and nettle pasta, and works directly with 150 farms to provide fresh produce. They claim to waste just 3% of all the food the company buys.
  • Marley Spoon uses seasonal ingredients and works with small-batch partners, like Vermont Creamery and Brooklyn Cured meats, to provide a ‘Netflix’ style model where recipes change weekly and customers select the ones they like the most.

These are the most well-known, but there are hundreds of others with specialisations across ethnicities, diets and locations. Sydney local The Cooks Grocer focuses on locally sourced produce that is minimally packaged. New Zealand company My Food Bag has over 15 000 customers and uses fresh, local and seasonal produce delivered within a two-hour window. Around the world, meal kit startups are competing on the price of their product, the range of food they offer, their location, their waste management and recycling solutions, the provenance of their ingredients and the timeliness of their delivery. On top of this, meal kit startups need to build a solid relationship with growers and customers.

Sowing the seeds for growers, customers, and startups

Meal kit startups need to engage with various stakeholders along the complex supply chain from farm to fridge. To effectively balance the needs of growers, investors and customers startups need to look at the marketing, technology and waste management of their product.

Marketing forms the base of a meal kit startup’s success in this balancing act. The first thing HelloFresh did after raising over $126 million in capital was to ramp up their marketing to gain market share in this highly competitive landscape.

But, all the marketing in the world cannot cover up an incomplete or undesirable product. Meal kit startups need to use technology to help curb the significant challenges of customer retention, inventory management and profitability. When Bentley Hall, the CEO of meal kit startup Good Eggs, was looking to fix the company’s relatively low order fill rate, he used technology to create a tighter connection between the company’s inventory and website to show true product availability. Inventory management is a challenging problem and digitised processes can help reduce human error.

Meal kit startups market on zero, or limited, waste-to-landfill goals. And yet, many generate substantial waste with their packaging. There is a gap in the market between customers wanting sustainable packing and the challenge of affordably procuring such packaging. Blue Apron came under scrutiny for their “Farm Egg”, a packaged single egg. Jordan Crook’s article on TechCrunch debated the seemingly ludicrous packaging of one egg…yet, if one egg is all the recipe requires, perhaps it is actually economical?

For meal kit startups to be financially sustainable, they need to acquire customers, use technology to improve customer experience and optimize supply chains, and deal effectively (and authentically) with their waste. Danielle Gould of Food Tech Connect explains, “Investment dollars and valuation do not equal success. In food ecommerce, the winners will be the companies who can profitably meet their customer’s evolving needs while growing sustainably.”

Harvesting profits in the growing market for fresh, convenient produce

There is room for growth in this market — in 2016 only 3% of adults tried a meal kit delivery service — and investors are taking note. Customer retention and geographic positioning are keys to success. Companies need to be clever in how they target their customer base. Brian Barth, author at Modern Farmer, describes the variety of dietary requirements companies are tailoring to: vegans (Purple Carrot), Paleo fanatics (Caveman Chefs), and non-GMO purists (Sunbasket). More than just a niche marketing strategy, investors are looking for companies with proven customer acquisition strategies. The customer experience of the product, and consequent retention, is what matters for meal kit startups.

While the geography of the US has worked well for meal kit startups — the cities where they have been most successful, e.g. New York and San Francisco, are geographically situated near small farming communities — this is not the case for countries like Australia. The investment model Down Under has thus far been based on the experience overseas. But, procurement is tricky as it is geographically complicated to deal directly with producers, impacting the ability for food to be seasonal, varied and accurately traced back to its origin. Investors are looking long term, to solid products that can attract, maintain and feed the customer appetite. It’s not clear whether any have emerged.

In this new supply chain — are the odds in favour of the farmer?

A direct relationship with a meal kit startup can mean a premium price for a farmer. Chris McLoghlin, Founder and Director of The Organic Mushroom Farm, explains that a wholesale agent’s business model does not, in most cases, allow for sufficient margins for the on-selling to processors or meal kit providers to allow them to build a commercially viable dish. There is not much incentive to alter this, as the scale of buying is relatively low (e.g., compared to grocery stores or food service companies). Working directly with a meal kit company can mean producers pick up an extra 20–25% on the input. But, on the flip side, the volume these companies are looking for can be hard to justify. Chris McLoghlin currently sells several tonnes of organic mushrooms a week through organic wholesale agents. He delivers twice a week on fairly fixed orders (10% variation week-to-week) and this volume is then dispatched five days a week to various markets. For Chris, the idea of supplying 150g of mushrooms to a meal kit startup a couple of times a week is not economically feasible or logistically convenient.

There is also the question of branding. Startups can leverage the farmer’s brand and direct procurement strategy to instil confidence in consumers — but only if they make it worthwhile for the farmers. Farmers also run a risk throwing all their eggs in the meal kit startup basket. In a recent New York Times article, Glenn Elzinga, a beef farmer from Idaho who has sold grass-fed beef through their website for over a decade, explains the challenges and risks of working with these startups:

“That’s what happens with venture capital: They sell the business to somebody and everything changes…corporate boardroom decision-making isn’t always aligned with the small producer.”

Farmers need to be assured of the return to farm gate with meal kit startups and in Australia especially, with the geography and scale of properties, it’s not clear if this model is really feasible for startups, investors, or producers.

In this new culinary landscape, where people crave fast, fresh and convenient food, will these startups continue to win? And, in this quest for convenience, is there a loser?