Winning the meal-kit market

When meal-kit companies burst onto the scene six years ago, they were poised to take a bite out of the grocery industry. Their proposition was enticing: time-strapped consumers could cook fresh meals at home, using pre-portioned ingredients and chef-created recipes, without having to take a trip to the supermarket.

Now, the subscription-based meal-kit model is turning on its head. Online providers are striking deals with brick-and-mortar retailers to sell their products in stores, while some grocers are outright acquiring meal-kit companies, and some retailers are creating meal-kit lines of their own.

There’s been a flurry of activity in the United States, in particular, most recently with the Kroger chain’s acquisition of Chicago-based Home Chef. Walmart plans to roll out its own meal kits to more than 2,000 stores this year. Amazon, which bought Whole Foods last year, now sells meal kits on its site. And meal-kit providers Blue Apron, Hello Fresh and Plated—which all launched in the United States in 2012—have all announced plans to bring their meal kits to grocery stores. Closer to home, Metro acquired a majority interest in Montreal-based meal-kit company MissFresh last year.

“There are a couple of factors at play here,” says Sylvain Charlebois, professor in food distribution and policy at Dalhousie University in Halifax. “One is, grocers aren’t necessarily known to be good at foodservice in general. And so, they either decide to develop the talent within or they acquire it. And because grocers need to move fast in this space, more and more are deciding to either partner with a meal-kit provider or acquire one.”

Secondly, while traditional meal-kit companies are ringing in sales (US$5 billion in the United States and $120 million in Canada), they’re struggling to make a profit. Faced with operational problems, the high cost of customer acquisition and retention, and logistics issues, it makes sense for meal-kit providers to team up with grocery retailers. “The financial performance of most meal- kit providers is dismal,” says Charlebois. “They’re losing money and so I’m not sure there’s a future for standalone providers. If you can leverage your offering by using a network that already exists, you can generate some really interesting synergies between retailing and meal kits.”

DELIVERING ON CONVENIENCE
Despite the buzz about meal kits, the market is still in its infancy in Canada—as of 2017, only 4% of households purchased a meal kit in the past 12 months, compared to 25% of U.S. consumers, according to Nielsen. However, meal kits have the potential to deliver big returns to grocers.

“Meal kits today have the opportunity to provide endless meal options to consumers, and this presents endless opportunities to retailers who sell in-store,” says Carman Allison, vice-president of consumer insights at Nielsen. While consumers are making fewer trips to the grocery store, “offering ready-to-go meal kits in the store is one way retailers can provide a new shopping experience that encourages consumers to spend on additional items in their basket,” he says.

But what it really boils down to is capitalizing on consumers’ need for convenience. According to Nielsen, the top purchase drivers for meal kits are: saves time on meal planning (43%), saves time on meal prep and cooking (39%), ships directly to home (32%) and saves time on grocery shopping (31%).

While it would be easier for convenience-seekers to just buy ready-to-eat meals, they actually want to cook for themselves. “There’s a high interest amongst millennials and even Gen Z in preparing foods at home, but they don’t have the same knowledge base that older generations have,” says Rick Stein, vice-president of Fresh Foods at Food Marketing Institute (FMI) in Arlington, Va. “And so, what they’re looking for is the ability to do it with a bit of help from these meal-kit companies.”

Ran Goel, CEO and founder of Fresh City Farms, echoes that sentiment. Fresh City Farms started out as an urban farm, delivering pre-set bags of its own produce to customers in the Greater Toronto Area. It got into the meal-kit space about three years ago and quickly expanded its customer base with the acquisition of meal-kit company Fresh Canteen. Fresh City Farms now sells a range of all-organic meal kits, including gluten-free and vegan kits, and is going to start piloting the line at its new retail location in Toronto.

“There is a drive to convenience, but there is a countervailing trend where people are seeking autonomy over how their food is made. I think meal kits provide both of those,” he says. “They provide them with this authentic experience of feeling like they’re cooking and not just taking something that’s prepared and microwaving it.”

Customers are also drawn to meal kits because they go beyond humdrum, everyday meals. Gino Plevano, Metro’s vice-president, digital strategy and online shopping, finds that families and young professionals are the two biggest adopters of meal kits. “What they appreciate the most is the diversity and the fact that they can trial different recipes and different types of cuisines,” he says. “Sometimes, you end up in a routine when you’re doing the same meals over and over. With this, people can have variety and discover new meals and new tastes.”

THE GROCERY ADVANTAGE
Choice is also key when it comes to purchase channels, and grocers in the meal-kit space are bridging the digital and physical realms. While the online MissFresh service remains the core of its meal-kit business, Metro is now selling MissFresh meal kits in its Quebec stores and plans to roll them out in Ontario over the next few months. In addition, subscribers to MissFresh online now have the option of picking up their weekly orders in a Metro store. They receive $5 off for other purchases they’re making in the store, which Plevano says is a great traffic driver.

“It’s so convenient to have waiting at your door in the evening when you come home,” says Plevano. “But at the same time, you still need butter, bread and milk, so it’s a better solution to go in-store for some customers. And it’s bringing traffic to our stores, as well as complementary revenue and transactions.”

Longo’s is another retailer making a bigger push into the meal-kit space. Since 2000, the grocery retailer has been selling “Express” stir-fry meal kits that can be prepared in less than 10 minutes. The meal kit comes in a container that separates the protein, veggies, starch and sauce, and serves two for around $12. There’s also a “build-your-own option” with the four components sold à la carte. In April, Longo’s launched its new “Impress” line— more traditional meal kits with the ingredients and instructions in a box. This gourmet line has eight options, ranging in price from $19.99 to $26.99.

Gary Wildman, Longo’s director of food services, says the advantage grocers have over purely online meal-kit companies is freedom of choice. “The one thing that we provide versus a Blue Apron is choice,” he says. “When you order a meal on a Saturday for Monday fulfillment, you may be in the mood for salmon. But come Monday, you may not be in the mood for salmon. That’s why we’re well advantaged. You can come in our store at three or four in the afternoon and there’s dinner. And with just a few steps, you’re serving a wholesome nutritious meal to your family.”

THE PRICE AND PACKAGING PROBLEM
As with anything though, choice and convenience very often comes at a price. Consumers frequently cite the cost of meal-kit services as a major barrier to purchasing the kits. According to Nielsen, 63% of consumers would consider purchasing a meal kit if they were less expensive.

Fresh City Farms’ Goel says meal kits definitely aren’t for everybody. However, a big part of the price issue is perception. “People under-value their time, whether it’s time they would need to research what recipe they want shop for that recipe and put it all together,” he says.

FMI’s Stein recommends retailers educate shoppers about meal kits. “There’s a broad amount of consumers who just don’t understand meal kits,” he says. “They’re interested, but they don’t know how to do it. So, I think retailers should do some education, whether it’s in-store demos or videos, to explain how it works.”

Another issue with meal kits is packaging waste. Individual ingredients are usually packaged in plastic bags, bottles and containers, and then there are ice packs and the box itself. “It’s huge, huge, huge,” says Goel, of the packaging problem. “But you can’t get around it, as you need the packaging to keep the integrity of the food and to make sure everything is fresh and safe.”

Fresh City Farms does its part for the planet by using reusable ice packs, bags, coolers and pouches, which are picked up weekly. It also cuts back on packaging by not including kitchen staples such as salt, pepper and olive oil.

Metro has launched a pilot at five Montreal stores to make MissFresh meal kits more eco-friendly. At the pickup location, meal kit orders are placed in reusable green bins. On their first order, customers are provided free reusable bags, which they use to bring their meal kits home. “It’s more difficult from a logistics perspective doing this for home delivery— picking it up afterwards—but at store level it’s an easier process for us,” says Plevano. “So, we’ll start there and we’ll see the customer reaction.”

As for the future of meal kits, Metro’s Plevano says while it’s a small business right now, it will become more and more popular. “I think bringing the product in store is key so people can test it and trial the service. We’re going to follow this trend, see how it evolves, and make sure we’re answering customer needs.”

In Stein’s view, retailers that are partnering with meal-kit providers will eventually launch meal-kit lines of their own. “In my mind, they are buying themselves some time to figure it out,” he says. “They’ll figure out how to cut down on the amount of time it takes to put the items together, they’ll figure out what are the more popular items, and they’ll figure out a way to promote them. And when they get that nailed, they’ll start severing the ties with the deals that they’ve made .”

And while meal kits and other meal solutions will evolve, the need for convenience isn’t going away, says Stein. “And I think the consumer interest in preparing foods at home and being shown how to do it isn’t going away.”

Charlebois believes meal kits are indeed here to stay, and we’ll see more meal-kit providers working closely with grocers and restaurant chains. “It will only force companies to think differently about convenience and empowering consumers at home,” he says. “Meal kits are about empowering consumers for 10 to 15 minutes, making them believe they can be a chef at home. Why not do that?”

This article appeared in Canadian Grocer's September/October 2018 issue.