Retail

Why Meal Kits Have Fizzled

It was only four months ago that Chef’d CEO Kyle Ransford predicted that big changes were coming to the meal kit market in a conversation with Karen Webster, and that meal kit providers were going to need to seriously update their business models to navigate a changing landscape.

“I think the subscription meal kit, as it’s been known, will be vastly diminished in the next two years,” he said. “It won’t be something that you hear a lot of or get marketed to a lot. I think you’re going to have a lot more choices.”

Meal kits, he said, were destined to go the direction that Chef’d was pursuing, which would mean moving away from subscriptions and home delivery in favor of looking for placement in grocery stores.

“The meal kits will be like the beer aisle” one finds in supermarkets, he continued.

And, in a sense, Ransford was right about a lot of that – though probably in ways he didn’t exactly intend to be.

Meal kits are a changing market. The kits are increasingly more likely to find space on grocery store shelves and, as of this week, the playing field for meal kits has been diminished by exactly one player.

Of course, that player happens to be Chef’d, which assumedly Ransford was not counting on when he spoke to Karen Webster for Topic TBD four months ago.

So what happened? To sum it up in five words: It ran out of money.

Chef’d, according to reports from The Wall Street Journal, was burning through money at a very fast clip. Valued at about $160 million as of last year, the meal kit delivery company had the backing of venture capitalists and food companies, including Campbell Soup and Smithfield Foods, all of which looked quite promising – as did the range of relationships it struck up with supermarkets nationwide to place their product.

What was less visible, according to insiders, were the firm’s struggles to keep executives and employees on board – and its cash flow issues after it was unable to secure fresh investments from either private equity firms or banks.

“Due to some unexpected circumstances with the funding and business, I regret to inform that Chef’d has ceased all operations until our investors and lenders decide the final fate of the company,” the company’s chief technology officer wrote in an email to a supplier on Tuesday (July 17). “Consequently, please cease all work associated with Chef’d.”

When reached for comments, a Chef’d spokesperson noted that she was no longer under retainer by the company.

Chef’d was an early player in a meal kit market that got crowded fast, with what seemed like an ever-proliferating collection of increasingly specialized meal subscriptions and kits for consumers.

The WSJ reported that as of March, the firm’s sales started declining dramatically. But as its revenue was falling, its expenses continued to climb, and its operations became increasingly difficult to manage. Chef’d began burning up funds faster, just as it was pulling in fewer funds – and in recent weeks, the reality of that unbalanced equation began to set in.

Peter Testa, president of the Chicago-based Testa Produce, Inc., a major wholesaler that has supplied Chef’d, said the startup’s accounts have fallen behind.

“They are definitely having growing pains,” he said. “It is a tough business.”

The shuttering of operations comes just a few weeks after the company entered into distribution deals with Costco, Harris Teeter, Tops, Hy-Vee, Weis and Gelson’s Markets – deals that will be putatively closed unless Chef’d manages a miraculous resurrection.

The decline and fall of Chef’d is certainly sudden, and marks possibly the most spectacular flameout in the meal kit market – but it is worth noting that Chef’d and its rather dramatic exit is somewhat symptomatic of troubles in its segment, as meal kit delivery providers are struggling with scale across the board.

Blue Apron was ranked the worst-performing tech initial public offering (IPO) in 2017 after it launched at $10 and ended the year at $4.29, a decline of more than 57 percent. The firm has been beset by labor and logistics issues, and has a churn rate of over 70 percent. And Blue Apron’s troubles are not unique.

HelloFresh, which surpassed Blue Apron as America’s most popular meal kit subscription in early spring, has an even higher churn rate than Blue Apron.

The problem, one Forbes contributor noted, is that meal kits as a business model are inherently hard, and almost impossible to make profitable on their own because every element of the business is so capital-intensive and complex.

“Few business models are as unprofitable as those of meal kit companies,” Fundraising consultant Brittain Ladd wrote for Forbes on the trouble businesses in that industry are experiencing as they go forward trying to build scale.

Added to the cost and margin issues, Ladd noted, is the problem that meal kit customers are notoriously hard to attract without deep discounting, and almost impossible to keep – a majority churn out within six months, often to go to another meal kit company offering a new discount.

Subscription services, it should be noted, are moving to evolve with the times, and perhaps adopt what worked about the late Chef’d model. Blue Apron has notably struck high-profile partnerships with Costco and Walmart in the last several months.

But those partnerships come at a cost: Blue Apron had to cut the price of its meal kits by 30 percent before it could appear on Costco’s shelves.

Plus, putting meal kits on grocery shelves is a bit like the mouse running to the cat for protection from the owl. Grocery stores can more easily watch what sells for the meal kit companies they partner with, Ladd noted, than create their own in-house meal kits and offer them at a lower cost than the branded alternatives.

Which means, he said, that most meal kit companies are probably facing a reality where acquisition by a larger grocery player – that would rather buy a meal kit platform than build one – is the best-case outcome for most meal kit players. The worst is probably making like Chef’d and disappearing abruptly from the market.

And while that is a rather pessimistic take on an entire market – especially considering that HelloFresh continues to grow its customer base, and at least preliminarily seems to be leveraging its large international footprint as a hedge against changing consumer tastes in individual markets. Despite their high church rate, they have seen their stock price increase since their IPO, meaning that it might be a bit premature to declare the entire marketplace either doomed to disappear into a larger entity or doomed to die.

But getting the business model to really sizzle – that hasn’t quite happened, either. And as of this week, Chef’d proved rather publicly that meal kits, even successful-looking ones, can be much, much closer to a big marketing fizzle than most people had previously thought.

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