Meal kit M&A talks get steamy

The meal kit solution space continues to create news, and is on the mind of many food brands and grocery retailers. Tyson Foods invested an undisclosed sum in a company called Tovala, a startup that aspires to be the ‘Netflix of food’. 

Tovala sells a steam-based oven combined with a meal subscription plan. The term ‘steam based cooking’ brings to mind painful memories of bagged frozen vegetables heated in a pot of boiling water, only made palatable with the addition of loads of butter and salt, but I’m probably not the target market for this product/service [sign me up for the hot dog of the week club]. 

Tyson is not alone. In 2017, Campbell’s invested in the meal kit company Chef’d and Albertson’s outright bought Plated. More recently, Matthew Trusz, an analyst with Gabelli & Company argued that Blue Apron might be a logical acquisition for Walmart.  

I have long been a believer in the potential for meal kit solutions because we increasingly care about food transparency and quality ingredients, but suffer from a lack of time. I also love the fact that meal kit solutions players creatively bundle a number of items into one order to make order economics sensible. This is in a world where so many e-commerce orders are not sensible [I say this shortly after receiving a $15 box of Hefty garbage bags with free shipping via Amazon Prime packaged in an enormous box, delivered by USPS on a Saturday]. 

Meal kits have three big problems, though. It is extremely expensive to drive trial amongst new users. Blue Apron’s recently released annual report revealed that it had spent $129 million in marketing expense to drive new customer trial and repeat usage in just the first nine months of 2017.

Many of those acquired customers only used the service once to take advantage of a free or discounted trial. Slice data shows that in 2017, 21 percent of those that used Blue Apron only received one order and then cancelled. Blue Apron reported that in Q4 2017, the number of orders was down 13 percent, despite having spent $155 million on marketing during the year. 

The second big problem has to do with the expense associated with shipping chilled, insulated boxes to consumers via third party shippers. Blue Apron does not reveal what it pays for the shipping expense that is bundled into customer orders, but if we were to assume that in Q4 2017 each order cost $10 to ship, it would amount to 24 percent of the company’s cost of goods sold during that period. 

The third problem is with the meal kit subscription model. It affords the consumer very little flexibility.  Do you have a busy week? You’re still going to get your Hello Fresh box unless, a week or two ago, you properly anticipated the busy week. Kids home from college for Spring Break? Hopefully you thought ahead and upped your meal count from two plates to four.

Getting the most out of a meal kit subscription service requires that the grocery decision maker in the household is a Six Sigma Black Belt. 

So let’s come back to Mr. Trusz’s suggestion that it could make sense for Walmart to buy Blue Apron. Walmart certainly has the capital to afford Blue Apron with a current market capitalization of $680 million, and has recently acquired a number of online retailers that cater to affluent shoppers [Bonobos and Moosejaw jump to mind].

The next question is whether Walmart would have more success in the meal kit solution space than Blue Apron alone. I argue that with it most certainly would. Walmart Grocery, the company’s click & carry offering, will be available in 2,200 stores by the end of 2018, and is enjoying significant momentum. 

Walmart Grocery accounted for 17 percent of Walmart’s US online sales in 2017, up from 7 percent in 2016, according to Slice data. By offering Blue Apron meal kits to Walmart Grocery shoppers Blue Apron saves the third-party shipping expense.

Perhaps as important, though, it creates an opportunity for Walmart shoppers to make multiple Walmart Grocery shopping trips per week. A busy mom can place her Blue Apron order in the afternoon and pick it up, along with other fill-in trip items, on the way home from work. Mom doesn’t have to have General George Patton’s gift for logistics. Thanks to the hundreds of millions of dollars that Blue Apron has spent on marketing, it has developed a well-known brand with a reputation for quality that might be difficult or impossible for Walmart to develop on its own.

This same logic would apply to other brick and mortar grocers that are investing in same day click & carry, and validates Albertson’s decision to buy Plated. I’m not the person to speculate on the correct price for Walmart, Kroger, or anyone else to pay for Blue Apron, but the strategic fit seems strong.  

Finally, onto the question of the virtues of meal kit M&A for food brands. Minority investments in meal kit solution providers, such as Campbells’ with Chef’d and Tyson’s with Tovala make sense to ensure that these food brands have the opportunity to understand the ins and outs of these businesses, as long as there is no promise of exclusivity. 

Campbell’s, for example, needs to be able supply not just Chef’d, but any other meal kit solution provider that might want to create a recipe with tomato juice. Outright ownership of a meal kit solution provider, however, by food brands is a flawed recipe. Suddenly that brand becomes competitive with all of the other meal kit players who ought to be customers, thus reducing their potential share of the market. More importantly, though, food brands don’t have the advantage of brick and mortar stores to improve fulfillment economics. 

Blue Apron’s struggles as a public company have led some to write off the whole meal kit solution space. Food brands and grocery retailers can’t make the mistake of throwing out the baby kale with the with the bathwater.

About Ken

Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data.

Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.