HelloFresh has surprised the market by announcing it’s near its first-ever break-even year. Has the meal kit model finally come of age?

Here’s a fact: DTC recipe box companies are growing quickly.

With their promise to perfectly fulfil the needs of time-poor, health-conscious customers by delivering perfectly portioned ingredients for delicious meals directly to their doors, many have made headlines for achieving skyrocketing sales and receiving millions in investment.

Between them, HelloFresh, Gousto, SimplyCook and Mindful Chef have received investment of around £400m or more, with HelloFresh receiving the lion’s share, or £300m.

The only caveat? So far, most don’t seem to be making any money. US operator Blue Apron, one of the biggest, reported a $122m loss in its latest full-year accounts to 2018, despite $668m revenue in the same period and $200m investment to date.

But last week, global meal kit leader HelloFresh surprised the market by announcing it is eyeing its first-ever full-year break-even since launching in 2011, after its second consecutive quarter of profit growth. The German-based business generated over €1.3bn in sales in the first nine months of the year, managing to attract over 2.6 million active customers. That is worldwide - across 12 countries including the US and Australia - but it shouldn’t be regarded as anything short of a huge achievement.

Naturally, early HelloFresh backers cheered the announcement, with shares in the company rising 6.6%.

So, is this a sign that investors have been right, and the recipe box business model does work? Or has HelloFresh done something different from the rest?

Marketing costs

The key obstacle to profitability so far for the sector has been the notoriously high marketing expense required to grow, partner at KPMG Chris Stott says. Businesses need to spend hefty amounts to attract and retain customers and “until they get scale, costs will always be disproportionate to sales”.

“People think DTC businesses are bad because they lose money but that is the wrong way to think about it. DTC businesses lose money because they are growing quickly and spending a lot to achieve that,” says Alessandro Savelli, founder of fresh pasta meals supplier Pasta Evangelists.

“In the short to medium term we understand that we will be facing losses. However, these losses are a function of very high growth, they are not a function of an unprofitable business model.”

Like Gousto’s founder Timo Boldt, Savelli claims his business could easily break-even if it only decided to slow down revenue growth.

Which is where scale starts to matter.

“Any of these businesses can become profitable but that comes at the expense of growth,” says an industry source. HelloFresh has only been able to start eyeing profits after reaching over €1bn in sales, a size which allowed it to reduce marketing spend.

Others cannot scale back marketing costs due to the proliferation of operators, making it harder to win customers’ loyalty.

“So far, what we have seen is there is limited loyalty to brand and people are price-driven rather than brand-driven,” says a City source.

As one of the first recipe box companies to market, HelloFresh has the advantage of the pioneer. Other brands must work harder to differentiate and offer something unique if they are to succeed in the now busy market, the source adds.

Perhaps unsurprisingly, all believe they do. Savelli’s answer is to be “very focused” and offer a single product, in his case fresh homemade pasta paired with the right sauce, impossible to find in store.

Riverford and Abel & Cole, like HelloFresh, are profitable, albeit not as pure recipe box operators. The former, with over 80,000 active customers a week, has an advantage by integrating the offer with organic meat and veg boxes, says MD Rob Haward.

Abel & Cole offers recipe boxes alongside a full organic weekly shop.


Aside from differentiating the the offer, another way to gain a point of advantage is by tapping alternative channels, says Savelli. Pasta Evangelists is an omnichannel business, with presence in retail and foodservice as well as online, he says. To be successful, “you have to be selling across multiple channels, which are less marketing-hungry than DTC and drive customers to your website”.

Others such as SimplyCook are also turning to retail to scale up and acquire new loyal customers. The brand, already available in Asda, Waitrose and Co-op, launched into 300 Tesco Express stores this week with a view to expanding the partnership in future.

After all, retail is a tried and tested model for DTC businesses to access new customers, with Graze and Huel already reaping the benefits of inking grocery deals, claims Stott.

Nevertheless, with few operators anywhere near the size of HelloFresh, there will be a long wait before “the industry as a whole can start to slow down and look at profitability”, the City source says.

KPMG’s Stott says he would not put his money in the sector. Not yet, at least. “If I was an investor I would be waiting as I am yet to be convinced that there is huge return on this format.”

He’s not alone in his scepticism of a business model that so far seems to require continuous funding to achieve growth.

“Personally, I am cautious on the DTC food delivery sector,” a source says. “It is quite competitive and structurally its model doesn’t lend itself to an attractive or smooth road to scale and profitability for all the contenders.”

Though they all have a chance to become profitable, the smaller players may have to spend even more than HelloFresh did to get near its size, the source adds.

“With some of them being so niche, there will be a lot of money lost along the way to keep up and reach a size that allows them to turn off the tap from a marketing point of view and switch on profitability.”

HelloFresh backers may not be the last recipe box investors with cause to celebrate. Blue Apron improved its net loss position by 76% in this year’s second quarter to $7.7m, compared with a loss of $38.2m in the same period last year.

But for some of the smaller operators, the rewards could be on slow cook.