<a href="http://www.istockphoto.com/photo/farmer-s-harvest-gm488352968-74076049?st=_p_food%20package">demaerre</a>/iStock
Meal-kit services like Blue Apron are an enigma: simultaneously booming in popularity and yet struggling to retain consumers.
On the one hand, these services, which deliver fresh ingredients and a recipe, only made their US debut in 2012, yet they’re expected to generate $1.5 billion in sales in 2016. Investors gobble them up, too—meal-kit startups have drawn $650 million in venture capital over the industry’s short life span.
And yet, consumers tend to drop them quickly after signing up, new data show. Fast Company‘s Sarah Kessler got a look at proprietary research from market-tracking firm 1010data finding that only half of Blue Apron customers stick around after the first week of service, and only 10 percent are still subscribing within six months of starting. Similarly high drop rates prevail for high-profile Blue Apron rivals HelloFresh and Plated, Kessler reports. “Spokespeople for Blue Apron, Plated, and HelloFresh all said that the 1010data analysis is inaccurate, but they declined to provide accurate data,” she added.
Growing rapidly despite such low retention rates is extremely costly. To entice new customers, these companies maintain perennial “limited time offers” like this one from Blue Apron: “Get 3 Meals Free With Your First Order!” If the 1010data report is accurate, loads of consumers are taking these deals and then quickly bolting, perhaps moving on to the next meal kit dangling free food with no obligations.
Earlier this year, I dug into the meal-kit business model and found it extremely tricky: loads of packaging, delivery, and ingredients costs, balanced against a need to keep prices low enough to lure consumers away from the supermarket. The 1010data numbers suggest that customer retention is yet another daunting hurdle to profitability. No wonder food startup analyst Brita Rosenheim told me that “very few, if any,” of these are likely to be “cash-flow positive” at this point—another way of saying that they’re still burning through their venture capital to stay alive. Another market-tracking firm, Packaged Facts, delivered a similar assessment of the industry’s current profitability in an April 2016 report.
In that context, it’s not surprising that some Blue Apron workers are feeling squeezed by the companies’ need to grow fast while also keeping costs down, as a recent BuzzFeed report suggests.
But as Rosenheim explained to me, none of this means that the meal-kit biz is necessarily a flash in the pan, so to speak. Companies can make loads of money on razor-thin profit margins—just look at Walmart or fast-food giants like McDonald’s. Rosenheim’s analysis—that the industry is headed for a big shakeout, with a few big winners emerging—seems right to me. The trick is achieving vast scale—and that means having patient investors willing to accept what could be years of losses along the way.
That’s why I suspect the meal kits that end up thriving in this brutal terrain will ultimately be bought by big, profitable companies that can absorb losses and can keep help costs down with their existing expertise. Amazon, for example, has a huge part of the meal-kit proposition—packaging and delivery—down to a science. Or think about large, upscale grocery chains, which have economies of scale in sourcing exactly the kind of organic ingredients that meal-kit consumers are becoming accustomed to.
But far from “disrupting” Big Food, it seems likely that the surviving meal-kit services will start looking a lot like the rest of the industry: huge, highly consolidated, and pinching pennies to turn a profit.
