The Rapidly Evolving Landscape of Meal Kits and E-commerce in Food & Beverage

The Rapidly Evolving Landscape of Meal
Kits and E-commerce in Food & Beverage
July 12, 2018
The materials contained in this document are intended to supplement a discussion with L.E.K. Consulting. These perspectives are confidential and will only be meaningful to those in attendance.

2 CONFIDENTIAL | DRAFT
Sӓo Paulo
Sydney
Melbourne
San Francisco
Los Angeles
Boston
New York
Chicago
Tokyo
Seoul
Shanghai
Beijing
Singapore
London
Paris
Wroclaw
Munich
L.E.K. Consulting is a leading global strategy consulting firm
Houston
Mumbai
Established - 1983 19 Offices ~110 Partners ~1,300 Staff Leaders in growth strategy
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are
properties of their respective owners. © 2018 L.E.K. Consulting LLC. All rights reserved.

We are thought leaders in the marketplace
Executive Insights & Published Articles
(~100 in Retail & Consumer Products)
Press
Publications
Alfred Rappaport and
Michael Mauboussin
Alan Lewis and
Dan McKone
Stuart Jackson

The feedback from consumer purchasing habits in this report is drawn
from recent casework and our 2018 Consumer F&B Consumer Survey
2016
(N=1,560)
2018
(N=1,559)
2020
A robust longitudinal study L.E.K. publishes every two years …
To make sure we stay ahead of key consumers trends to gain competitive advantages …
Meal kits growth and
preferences
Consumer perception
of Amazon / Whole
Foods
Rise of the
“Grocerant” and
perimeter of store
Consumer preferences
for meal delivery
services
Importance of product
claims for specialty
foods
Continued
prevalence of
indulgent foods
Changes in
private label
preferences
E-commerce
grocery delivery
model trends
Transforming facts and information into actionable insights for our clients

Consumers are migrating from “Big Food” dominated grocery center aisles…
Consumers are shifting purchasing habits from center aisle grocery to e-
commerce grocery, meal kits, restaurant delivery and prepared foods
Prepared foods
/ ‘Groceraunt’
Meal kits
…and embracing
options they
perceive as fresher
E-commerce
grocery
Restaurant
delivery
Key defense for brick &
mortar retailers (huge
growth area)

Consumers expect their on-line grocery purchasing to increase over the next
year, mostly for center store items
Note: Approximately what percentage of your groceries have you purchased online over the following time periods?
Source: L.E.K. consumer survey
16%
25%
30%
32%
54%
43%
0
20
40
60
80
100
Current online
purchasing
N=555
50%+
U.S. online grocery purchasing rates
Percent of respondents who have purchased online* (N=571)
N=417
Expected online
purchasing 12
months from now
<20%
21-50%
66%
96%
34%
4%
0
20
40
60
80
100
Food types at least partially purchased online
Percent of respondents who purchase online* (N=780)
Perimeter Center aisle
At least sometimes
purchased online
Purchase
exclusively
in store

0
10
20
30
40
50
U.S. retail sales (value) attributable to e-commerce by selected categories (2004-22F)
Percent of total retail sales
04 06 08 10 12 14 16 18F 20F 22F
13
12
13
9
3
1
13
11
7
11
5
14
PPT Change
2012-17F 2017F-22F
Furniture and home furnishings
Sporting goods, hobby,
musical instruments, and books
Health and personal care
Electronics and appliances
Clothing and clothing accessories
Food and beverage
Source: U.S. Census, Euromonitor, L.E.K research and. analysis
However, grocery’s current on-line penetration is currently dwarfed by
other consumer sectors; that is expected to rapidly change

Online Share Online Share
Note: Online share figures meal kits; total market figures include food & beverage sales by e-commerce firms and sales by food & beverage firms
Source: U.S. Census; Euromonitor; L.E.K. Analysis
~2% ~15-20%
Meal Kits
Online Grocery
Brick & Mortar2016 2025
vs
The shift on-line will largely be driven by on-line grocery and meal kits,
with e-commerce penetration expected to increase 10X

This monumental shift in how consumers purchase their food & beverage
implies there is ~$150B of growth up for grabs
Source: U.S. Census; L.E.K research and analysis
0
20
40
60
80
100
120
140
160
180
~15
25F
Retail Food and Beverage Market E-Commerce Market – RSP (Retail Sales Price)
(2018, 25F)
Billions of U.S. dollars
2018
~150- 200
Retail F&B
Spend ($RSP)
~$800B ~$1,000B
Online
penetration
~2% ~15-20%
~$150B

As a result, retailers are moving quickly – the Amazon / Whole Foods deal
has supercharged deal activity for grocery retailers and meal kit providers
Source: U.S. Census; L.E.K research and. analysis
2016
2017
2018
Digital Labs formed
As of July 2018…
NOT EXHAUSTIVE
The Fire-starter
The on-line offering and experience to consumers provided by retailers is improving every day
Meal kits to grocery
Partnership
Partnership
Acquisition
Acquisition
Acquisition
Partnership
Partnership
Partnership

The recent deal with Ocado signals a major bet by Kroger on in-home grocery
delivery following the Amazon / Wholefoods & Walmart / Jet.com moves
 Ocado is a U.K. based e-commerce pure player
founded in 2000 and listed publicly in 2010
 On May 17th, Kroger ($122B in sales) and Ocado ($2B
in sales) announced a partnership
- Kroger will have exclusive rights within the U.S.
to leverage Ocado’s automated online order
fulfillment technology as well as other delivery
logistics technology
- As part of the partnership, Kroger will acquire a
~5% stake in Ocado
- Kroger and Ocado plan to build up to 20
automated warehouses over the next 3 years
- The deal signals a major bet by Kroger on in-
home grocery delivery, although the company
has taken steps to build out its in-store pickup
capabilities
 Earlier this year, Ocado reached a deal with Canada’s
second largest food retailer, Sobey’s to build one
automated warehouse facility
Ocado product-picking grid and robots
Source: BBC; Forbes; CNN; Bloomberg; L.E.K. research and analysis

The battle for the last mile is becoming crowded and is evolving at a brisk pace
Curbside pickup
 Stores are experimenting
with offering online orders
with in-store pickup
- Walmart added over
300 curbside pick-up
locations in 2016
(now total 900), 1000
more in 2018
- Kroger added over
420 curbside pick-up
locations in 2016
(now total 640)
Locking in store visits
 Amazon is installing
lockers in select Whole
Foods, saving on
operational costs and
attracting Prime members
to stores
Amazon crashes in
 Amazon’s acquisition of Whole Foods
threatens to deprive Instacart of an
important supplier in favor of
AmazonFresh
Instacart fights back with partnerships
 In response, Instacart has announced
a campaign to find new partners
eager to check Amazon’s influence
- Allies include Aldi, Costco, H-E-
B, and Albertsons
Ride sharing for groceries
 Walmart & Kroger are testing grocery
delivery services with Uber in various
markets including Dallas, Denver,
Washington D.C., and Phoenix
Kroger / Ocado
 The recent deal with Ocado signals a
major bet by Kroger on in-home
grocery delivery
Pickup is picking up pace The dash to deliver
Source: Business Insider; TechCrunch; Digital360; Progressive Grocer; Company websites; L.E.K. Analysis
Grocer/Storage
In-StorePickup
OnlineOrder+Delivery

While ordering groceries on-line is one thing; preparing the meals is another
Source: Huffingtonpost.com
Solution: Meal kits
Meal kits hit consumer needs of healthy, delicious meals and convenience to a degree –though
they lack instant gratification and generally require purchasing 3 meals at once on-line

0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
Estimated U.S. meal kit delivery market (2017)
Millions of dollars (RSP)
~150M*
~250M
~150M
~900M
~200M
~550M
~$2.2B
The U.S. meal kit delivery market is ~$2.2B today and is experiencing
explosive growth
Note: * Albertsons bought Plated for $200 million with potential for additional pay outs based on growth
Source: Packaged Facts, Technomic, Washington Post, Eater, TechCrunch, company websites, CNBC, Second Measure, PR Newswire, L.E.K. interviews and analysis
 In the span of a few short years, more than 150
companies have jumped into the meal-kit
industry with low barriers to entry
 The industry is experiencing explosive growth,
as Meal kits meet consumer needs for portion
sizes, convenience of home delivery, and ideas
for interesting / on-trend recipes
 Despite the explosive growth, meal kit
companies struggle to turn a profit
 As a result, there is likely to be a shake-out in
the industry – starting with the shift from on-line
to brick and mortar stores
Others (150+)

Note: Q23: With which meal kit companies are you familiar?; Q27: On a scale of 0 to 10 how likely are you to recommend the following meal kit providers
to a friend or colleague, where ‘0’ means “not at all likely to recommend” and ‘10’ means “very likely to recommend”?
*Casual defined as purchased occasionally; **Committed defined as purchased frequently or always
Nearly 80% of consumers are aware of meal kit providers (with Blue Apron
Leading the way
0
20
40
60
80
100
30
10
50
70
90
19
80
U.S. meal kit awareness
Percent of respondents (N=1,559)
16
59
25
45
34
26
18 17 17 16 14

… but only ~20% U.S. consumers have tried meal kits or are regular
customers, with higher penetration among younger generations
Note: Q22: Have you purchased from a meal kit company?; Q24: With what frequency do you purchase meal kits?
24%
17%
4%
14%
12%
6%
4%
7%
64%
77%
92%
79%
0
20
40
60
80
100
Regular customer
Overall
U.S. meal kit purchasing, by generation
Percent of respondents* (N=1,559)
Millennial Gen X Boomer +
Never tried
Tried but
unlikely to
continue

Blue Apron and HelloFresh have grown demonstrably since 2015, with growth
rates at ~60% and ~80% per annum, though Blue Apron leveled off in 2017
Notes: * HelloFresh revenues include global sales, Blue Apron sales are largely concentrated within the U.S.
Source: Company Annual Reports, CapIQ, L.E.K. analysis
0
100
200
300
800
400
500
600
700
900
1,000
1,100
16
Annual Blue Apron and HelloFresh total revenues* (2015-17)
Millions of dollars
172015
341 331
795
630
881
1,087
CAGR%
(2015-17)
60.7
81.2
Hello Fresh
surpassed Blue
Apron in 2017

More recent data shows web site traffic is down for Blue Apron and Home
Chef, while Hello Fresh and Sun Basket have seen increases
0.0
1.0
0.5
3.0
2.0
1.5
2.5
3.5
4.0
4.5
5.0
0.5
3.3
2.2
0.4
1.8
Average Total Monthly Visitors
(May ’16 – April ’18)
Millions of visitors
4.8
2.6
3.0
0.4
0.2
May ’16 - April ’17
May ’17 - April ’18
Source: L.E.K. Analysis of Similar Web
Blue Apron Turned to Chrissy Teigen
in June 2018 to Boost Traffic
Tom Brady and Purple Carrot

Despite the rapid revenue growth, meal kit companies are losing
significant amounts of money – the cash burn can only go on for so long
Note: * Includes costs for operations in North America, Europe, Australia, and ROW; ** Converted from EUR at 2017 average exchange rate (1.13)
Source: L.E.K. analysis of HelloFresh’s financials
1,087
(413)
(375)
(271)
-1,500
-1,000
-500
0
500
1,000
1,500
COGS
(10)
HelloFresh global revenue and operating costs*
(2014-17)
Millions of dollars**
79
2014
(26) (25)(35)
G&A(63)
17
Revenue
Fulfillment
Marketing
-18
-36
EBIT % (23%) (10%)
CAGR %
2014-17
135
EBIT
127
143
120
86
(78)
881
(628)
(155)
(261)
-1,500
-1,000
-500
0
500
1,000
1,500
17
Blue Apron revenue and operating costs
(2014-17)
Millions of dollars
(14)(72)
78
(22)
2014
Revenue
COGS*
Marketing
G&A
-30
-162
EBIT % (39%) (18%)
CAGR %
2014-17
125
EBIT
106
123
129
(75)

High customer churn remains a key issue, making profitability
improvements challenging
Source: 1010 Data Market Insights, CBInsights; HelloFresh Financials; Wall Street Journal; L.E.K. interviews and analysis
0
20
40
60
80
100
Netflix
12 246
Months since first order
0
HelloFresh
Customer retention rates
(March 2015 – March 2017)
Percent of customers still ordering
18
Blue Apron
 Customer “churn” is high with low consumer
retention rates
− With low barriers to entry, consumers are
constantly hit with new promotion offers and
have low loyalty
 Most meal kit providers have low / negative
profit margins
− Customer acquisition and retention costs,
packaging, labor and delivery costs are
disadvantaged vs. grocery
− Lack of “stales” are an advantage as driven
by the inherent “pull nature” of the business
(grocers experience significant costs here)
 Funding in 2017 was down significantly from
2015, and is expected to stagnate in 2018 as
investors continue to question the viability of
meal-kits
− In 2015 there were an estimated ~30
transactions and $450M in funding vs. ~18
transactions and ~$275M in funding in 2017

Pricing is a key profitability improvement lever; unfortunately ~60% of
customers who exited meal kits cited price as the primary reason
Note: Q25: What are the primary reasons you do not plan to continue purchasing from meal kit companies? Please select up to 3 responses.
60
23 22
18 17 16
14
12 11
7
5
0
10
20
30
40
50
60
70
Excessive
packagingwaste
Toomuchprepwork
Tooexpensive
Customerservice
Primary reason consumers do not plan to continue purchasing meal kits
Percent of respondents who do not plan to continue purchase and selected the criteria as most important (N=111)
Donotlikerecipes
Thepricenot
worthpreptime
Boredofmenuoptions
Excessivefoodwaste
Restrictivediet
Canmakemeals
onmyown
Recipesare
toodifficult

In an effort to encourage customer engagement and improve retention, meal
kit manufacturers have begun migrating from online-only to in-store sales
 Chef’d has spearheaded the migration to
grocery stores, with meal kits in over 300
grocery stores across the country, including
Costco, Hy-Vee, and Target
- Chef’d recently opened a $10M production
facility in Pico Rivera, California, specializing
in producing meal kits for retail
“… Meal kits in-store are likely to become the top
growing category in 2018 for all retail grocery. Over the
next couple of months, you’re going to see some really
large launches in big national retailers – hundreds or
thousands of stores at a time …”
Sean Butler (Chef’d SVP of Retail), Food
Navigator, March 2018
 In April 2018, Blue Apron began a pilot program
with 17 Costco stores in the San Francisco
area, selling beer stir-fry and chicken taco pre-
packaged kits in-store
- Blue Apron is also testing out pop-up stores in
San Francisco, with the goal of “better
engaging customers”
“… We are [deepening] customer engagement and
[broadening] our reach to attract new audiences […]
one piece of this growth strategy is the launch of our
first retail expansion with Costco across the Pacific
Northwest and San Francisco […] In our view, we have
only scratched the surface of how the Blue Apron Meal
experience can engage with customers …”
Brad Dickerson (Blue Apron CEO), 2018 Q1
Earnings Call
Source: CNBC, Food Navigator, Supermarket News, Today, L.E.K. research and analysis

As meal kits begin moving to grocery stores more regularly, grocery stores
are augmenting those options with digital ordering and fresh prepared foods
The blurring lines of digital, retail & foodservice: What’s next?
Digital orderingFresh prepared foodsMeal Kits in Store

Many retailers and other large food manufacturers have started to invest in
partnerships enabling them to offer private label meal kit options
 In 2017, Walmart launched a meal kits and specialty foods site featuring products
from partners Home Chef and Takeout Kit, along with other snack boxes and crates
from third parties; they are expected to move meal kits in-store later this year
 Albertson’s acquired Plated in September 2017 with the goal of increasing its focus
on “innovation, personalization, and customization” via an in-store and delivery meal
kit service
 Whole Foods attempted to compete with meal kits by displaying meal ingredients
together and including a recipe; it has since expanded its meal kit program to include
a partnership with Salted (currently in LA only)
 Amazon has been experimenting with its own meal kits available via Amazon Fresh
and in select Pacific Northwest Amazon Go stores
 In partnership with Chef’d, Weight Watchers has released a diet-friendly meal kit
line featuring pre-calculated “points” and personalized planning options
 Campbell’s has invested $10M in Chef’d with the goal of growing its e-commerce
capabilities; similarly, Unilever invested ~$9M in Sun Basket last year, praising its
fast growth in the better-for-you / organic meal service segment
Source: Company websites, CNBC, Fast Company, Fortune, Supermarket News, Today, L.E.K. research and analysis
Fresh Prepared Foods Digital OrderingMeal kits in-store

In addition to meal kits, grocers are turning to fresh prepared foods (FPF) to
drive traffic (‘groceranuts’): The $34B FPF grocery market is growing at 7-8% p.a.
28
20
4
16
8
12
24
0
32
36
40
44
48
52
19F
Total U.S. fresh prepared foods market* – grocery channel
(2011-21F)
Billions of dollars (RSP)
~$26B
~$45B
~$27B
~$25B
~$29B
~$31B
~$34B
~$38B
~$41B
~$48B
~$51B
2011 1512 13 14 21F16 17 18F 20F
Yoy
growth
~7% ~7% ~8% ~10% ~10% ~11% ~9% ~8% ~7% ~6%
Note: * Fresh prepared food has 5 major categories – center of plate, sides, fresh prepared produce, in-store bakery and other (chilled sauces, salad / soup bar, and other condiments)
Source: L.E.K. analysis
Forecast
CAGR
2011-17 2017-22F
~7% ~8%

Most retailers, however, are underpenetrated with fresh prepared foods
(today), signaling strong runway for growth
Directional
~20%
~4%
0
5
10
15
20
Fresh prepared category size by retailer
(2016)
Fresh prepared dollar sales as percent of total grocery sales
Market average
Source: L.E.K. interviews and analysis
 “Best-in-class” fresh prepared foods retailers
like Whole Foods and Costco lead the way with
strong penetration rates (e.g. ~20% for WF)
 The overall U.S. market averages just ~4%.
 Conventional retailers have been pushing to
catch up to higher penetration rates
− More progressive retailers like Trader Joe’s
and H-E-B have fresh prepared penetration
rates around 2X the national average
− There is a long tail of grocers who have not
yet capitalized on this growth opportunity

10 12
16
20
25
31
38
46
55
21
22
23
23
23
22
22
21
21
0
20
40
60
80
20F15
53
U.S. restaurant delivery sales – digital ordering channels and offline (2014-22F)
Billions of USD
14 1716 18F 19F 21F 22F
31
34
38
59
43
47
67
76
The digital revolution is also impacting foodservice: strong growth in digital
ordering has prompted restaurants to evaluate their digital ordering strategy
CAGR%
(2014-17) (17-22F)
Source: LEK research and analysis; Cowen 2017 report : “Dining in” is the new “Dining out”; Restaurant News
Total ~8.5% ~10%
Digital
ordering
channels
Non-
Digital
~18.9% ~18.4%
~2.3% ~( -1.5%)
 Digital orders represent
~26% of Panera’s total sales
 Adding online ordering and
kiosks to company-owned
stores has boosted same
store sales by ~12% over 2
years
 With ~18% growth in Q1
2017, Chipotle exceeded
analyst projections for same
store sales growth largely
due to investment in digital
sales (e.g., ‘smarter pickup
times’ technology, etc.)
 Domino’s digital strategies
have enabled a same-store
sales increase of >30% over
3 years
~60% of Millennials are regular
users of restaurant delivery apps

Restaurants are utilizing a variety of options to fulfill digital orders
3rd-party delivery app
Restaurants aggregator
Branded, 3rd-party managed app
Branded, store managed app
Traditional in-store orders
Consumer Order Placement
Options
Order fulfillment options
1
2
3
4
5
Traditional in-store ordersA
Store managed deliveryB
In-store pickupC
Curbside pickupD
3rd-party managed deliveryE

Thank You!
Rob has over 15+ years of experience in strategy & operations consulting and is an advisor to clients
on a range of strategic issues
Rob focuses in the consumer & retail sector, with a focus on food & beverage specifically. Relevant
experience includes:
– Corporate Growth Strategy
– M&A strategy and acquisition screens
– Consumer segmentation and DTC Strategy
– Commercial Due Diligence and Sell Side Support
– Price Pack Architecture and Trade Spend Optimization
Rob is an instructor at Merger Week at the Kellogg Graduate School's executive education center,
the premier executive program focused on acquisition best practices
Mr. Wilson was named 2015 Rising Star of the Profession for Excellence in Strategy Consulting by
Consulting Magazine
Rob received his Master of Business Administration with Honors from the University of Chicago
Booth School of Business, and he holds a Bachelor of Science in Industrial and Operations
Engineering, Cum Laude from the University of Michigan in Ann Arbor
Rob Wilson
Managing Director - Chicago
Leader in the Food & Beverage Practice
r.Wilson@lek.com
312.804.7211

The Rapidly Evolving Landscape of Meal Kits and E-commerce in Food & Beverage

The Rapidly Evolving Landscape of Meal Kits and E-commerce in Food & Beverage

More Related Content

What's hot

Similar to The Rapidly Evolving Landscape of Meal Kits and E-commerce in Food & Beverage

More from L.E.K. Consulting

The Rapidly Evolving Landscape of Meal Kits and E-commerce in Food & Beverage