The perfect business model for a pandemic was serving food with a side of technology. Old doubts are back with a vengeance: just how many people will pay what it costs to have grub delivered to their door?
HelloFresh shares fell 9% Tuesday after the company said it was targeting revenue growth of anywhere between 2% and 10% this year, stripping out currency movements, a wide bracket but below most analysts forecasts at the midpoint. Its profit guidance came in below expectations.
HelloFresh is based in Berlin and dominates the market for cook-at- home ingredient packages. According to consumer-purchase data from Bloomberg Second Measure, the U.S. accounted for 78% of meal-kit sales last year, a growth that was helped by various acquisitions. Home Chef, owned by Kroger, came second with 12%, followed by Blue Apron with 6%. Blue Apron's stock has performed so badly that the New York Stock Exchange threatened to delist it in December.
HelloFresh is a big player in the meal-kit business. The question is whether meal kits are big in the food business outside of a pandemic. They tend to be less expensive than eating out, but they are much more expensive than cooking from scratch: HelloFresh charges $60.95 for a box of two meals for two people each. Bears argue that they are little more than a niche solution for urban couples with busy jobs in boom times.
The money that HelloFresh spends on keeping customers supports this thinking is a big part of the extra money that's been spent. In the fourth quarter, the number of customers with 7.1 million active was down from 7.2 million for the same period of 2021, down from 7.1 million in the fourth quarter. Price increases were the main drivers of the growth. Marketing costs will go up this year, a factor in the weak profit guidance, the company said.
The company is one of a trio of European companies that use technology to deliver food to homes in various states of preparation. London-listed Ocado disappointed investors last week by saying its U.S. partner, Kroger, wouldn't roll out dedicated e-commerce warehouses stacked with Ocado technology as fast as previously expected. On an earnings call, Kroger said that it was taking stock of the two warehouses it has already built with the British company to understand how to optimize that model. Then there is Just Eat Takeaway.com, an Anglo-Dutch takeout-delivery company that bought U.S. peer Grubhub in 2021. The business has struggled to control costs for a long time, but its stock has been stable in recent months, as it has signaled an improvement in cash burn.
All three companies wrestle with different forms of the same conundrum: Food is a huge market, but it isn't well suited for e-commerce. It is bulky, heavy, and of relatively low value, with complex refrigeration requirements, and is unprepared for it. Prepared, it is of higher value but requires rapid delivery. Consumers are happy to take deliveries when the cost is subsidized by investors, but when it isn't the market shrinks fast.
The stocks aren't expensive. After huge falls over the past two years all three trade below their prepandemic levels and low multiples of sales. With so much uncertainty about the future of food-tech business models, investors still need to have a stomach for risk.