News broke Monday that Amazon is partnering with Tyson Foods to develop an offering in the meal solutions, or meal kit, space; entering an increasingly crowded market with companies like Blue Apron, Hello Fresh, Plated, Chef’d, and countless others. News also broke that Jet.com was kicking off a pilot delivering fresh groceries to 875 zip codes in the Northeast. It's been a big week for the online groceries space, which we have been watching with great interest.
These are the five key facts and takeaways that we think you ought to be thinking about:
1. The online grocery category is modest, representing less than 2 percent of online sales, but the category is growing 55 percent faster than the overall e-commerce channel. And the size of the prize (total US grocery market) is substantial, roughly $650 billion annually in the US.
2. The Meal Solutions space exploded during 2015, fueled by intense advertising spend across television and online. This was in no small part fueled by $260 million that was raised during the second and third quarters of 2015, with Blue Apron leading the pack with a $135 million dollar round of financing. This advertising seems to be working in driving trial. During 2015, twice as many people tried Meal Solutions (from either Blue Apron, Hello Fresh or Plated) than bought from the full service online grocery space (Fresh Direct, Peapod, or Amazon Fresh, for example). Blue Apron saw its meals shipped per week grow by 167 percent from the week of February 21, 2016 relative to the comparable week in 2015.
3. The Meal Solutions space does have a challenge converting triers into committed customers. For example, only 47 percent of Blue Apron customers have ordered more than three times.
4. Amazon has important choices to make as it launches its meal solutions business--product delivery fulfillment and pricing:
Will Amazon offer this service through Amazon Fresh, and offer only to customers within the Amazon Fresh delivery radius, through Amazon’s own fulfillment system? Or will Amazon follow the lead of Blue Apron, Hello Fresh, Plated, etc. and fulfill through third-party couriers such as FedEx and UPS? The consequences of this are significant, as the economics of these models are very different, and the competitive impact on existing meal solutions players would be far different.
Will Amazon come in at the relatively high price points (between $10 and $14 per meal) that we currently see in the meal solutions space; or will it aspire to a more savory price point for the average shopper? Currently, meal solutions buyers over-index among the most affluent online shoppers.
5. The most interesting aspect of Amazon’s foray into meal solutions is the fact that it is in partnership with Tyson Foods. This is the first instance of such a strong retailer/manufacturer partnership that we’ve seen in this space. We believe that all food manufacturers ought to be thinking about their own play in the meal solutions space, be it direct-to-consumer or in partnership with retailers.