There’s a lot of money riding on the fact that we’re all too busy to cook our own meals from scratch.
US meal-delivery startup Blue Apron went public last month, banking on investor interest in the sudden flurry of firms catering to lazy chefs.
But the IPO was a flop. Blue Apron initially planned to raise $US587 million (£450 million) from the float, but slashed its IPO range as investors cooled. All of this coincided with Amazon’s acquisition of Whole Foods and the launch of Amazon’s own meal kits.
Blue Apron’s share price finally recovered this week after Wall Street analysts decided its stock was a bargain.
Where does all this yo-yoing leave Blue Apron’s European competitor, HelloFresh, which is reportedly planning its own IPO this year?
Like Blue Apron, HelloFresh sends you boxes full of pre-prepared ingredients so you can cook your own meal without the hassle of going shopping. You tell HelloFresh how many meals a week you want, how many people you’re cooking for, and then you sign up for a subscription plan. Three meals a week for two people costs £34.99 a week, according to HelloFresh’s website.
The company already shelved plans to IPO once, in 2015. It doesn’t need investor scepticism around its numbers a second time — particularly as HelloFresh’s owner Rocket Internet “needs” the exit to improve its own bottom line.
There’s one important metric where HelloFresh outperforms Blue Apron
HelloFresh has started making quarterly reports available on its site, possibly as a precursor to going public.
Business Insider examined the company’s accounts and found the startup may be in a healthier place than Blue Apron on some metrics.
To be clear: HelloFresh’s filings don’t give the same level of transparency as Blue Apron’s S-1 filings, so there are some important numbers we don’t know, such as average revenue per user.
But an important metric is one that isn’t immediately visible on the balance sheet: gross margin. This is the number you get when you divide gross profit by revenue. It’s how much sales revenue HelloFresh keeps after dealing with the direct costs of obtaining and shipping its meal kits. The higher the percentage, the better.
HelloFresh has improved its gross margins over the last five years — except for a blip in 2015.
There are a few reasons why this figure is important, though you won’t see it on HelloFresh’s balance sheet. One is that it shows how much the company has left over from sales to spend on its operations. Another is that it shows whether the business is getting more or less efficient over time. Investors want to see increasingly efficient businesses, not companies that are squeezed.
You’ll see a dip in the gross margin figure between 2014 and 2015. Coincidentally, HelloFresh shelved its IPO plans in 2015. But then the company actually posted its best gross margin figure of around 57% in 2016.
And this is how HelloFresh compares with Blue Apron:
You can see that HelloFresh’s gross margins are still improving, while Blue Apron’s actually shrank slightly in the first three months of 2017.
A gross margin of more than 50% is also pretty good: Amazon has historically had gross margins between 30% and 37%.
HelloFresh is exploding
Gross margin isn’t the only good news — HelloFresh is growing fast and trimmed its losses between 2015 and 2016.
But it’s burning cash
Anyone who has travelled through central London on the tube over the last three years has probably been accosted by a HelloFresh salesperson offering discounts on its subscription boxes. The company pursues sales aggressively, even sending salespeople door to door in London.
That push for rapid expansion is expensive.
Business Insider calculated that HelloFresh has a considerable free cash flow deficit. We calculated this using cash from operations minus capital expenditure.
Having a negative free cash flow isn’t necessarily bad — Netflix also burns cash. Ultimately, investors won’t mind if HelloFresh bleeds cash for the time being in exchange for growth.
And marketing and fulfillment spend is going up
This is a more painful chart showing that even as HelloFresh’s revenues explode, its logistical costs and marketing spend are also massively increasing. Fulfillment costs are eating into HelloFresh’s bottom line, and until the company can cut that spend, it probably won’t be profitable.
Here are some of the problems that Blue Apron and HelloFresh share:
- It’s expensive getting customers to sign up. Both BlueApron and HelloFresh rely on aggressive (and costly) sales techniques to get customers subscribing to their meal kits.
- It’s difficult keeping customers loyal. There’s nothing stopping them from switching to a rival offering discounts, as Blue Apron has found.
- Loyal customers don’t spend more. Blue Apron’s numbers show that even loyal customers tend to spend less, not more over time.
- Delivery is expensive. Delivery drivers cost money and it’s expensive to ensure good quality ingredients that stay fresh. That’s may be why HelloFresh is dabbling with meal kits in supermarkets.
- Amazon. The most efficient logistical company in the world has stepped into meal kits — and initial batches have already sold out.
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