Meal-kit delivery services, already on a steady growth curve prior to this year, have seen sales explode with the coming of COVID-19. Now they’re scurrying to keep pace with demand — and hang on to their customers.
Prior to the pandemic, the industry was looking at a bright future. In 2018, the U.S. market had already topped $1.3 billion, according to Grand View Research, and was expected to grow at a compound annual rate of 12.8% from 2020 to 2027. A December, 2018 survey by Peapod found 77% of Americans preferring a home-cooked meal over going out to dinner, and 20% of those respondents said they planned to try out meal-kit delivery services.
At the same time, there were concerns about the industry’s long-term prospects. One was the ever-growing field of players, amid questions about the profitability of a business model that relied on a steady supply of fresh, perishable food, extensive menu variety, precisely timed deliveries, and the logistics of sourcing from multiple producers, many of them local to regional markets. In addition, early entrants were having a hard time holding on to customers. A 2017 report by Statista found that only 29% of users stuck with the services after one year.
Then came the pandemic, forcing millions of consumers out of restaurants and grocery stores, and creating the ideal environment for ready-made meal kits delivered to the home. And while customer retention remains an issue, the industry is hoping that the current trend will stick when the disease subsides.
The business today can be divided into two main segments: heat and eat, with meals fully prepared and packed into containers that need only be heated up in the microwave, and cook and eat, whereby consumers receive measured ingredients and recipes for quick assembly. According to Grand View Research, the first category accounted for more than 65% of global revenue in 2019, although the second was expected to register a faster compound annual growth rate between 2020 and 2027.
One of the companies in the heat-and-eat category to experience dramatic growth this year is Freshly Inc. Founded in 2012 by Michael Wystrach and Carter Comstock, and recently acquired by Nestlé USA, the weekly subscription service offers meals that can be heated and served in three minutes. It expects to close out this year with 50% growth in meals shipped and net revenue, according to Sanjay Setty, vice president of supply chain procurement.
COVID-19 presents both an opportunity and tremendous challenge. This year, Freshly hit a milestone of delivering more than one million meals weekly. Setty says the company had had to ramp up communications, both internally and externally, to keep pace with growth. Material managers are on the phone daily with vendors, while the corporate team is in more frequent contact with key suppliers.
The arrival of the pandemic sent everyone scrambling. “We weren’t perfect from the start,” admits Setty. Efforts to increase meetings and improve contingency planning got underway in April of this year, and continued into June. Marketing and operations executives had to assess which ingredients carried the greatest risk of shortages, and where they could acquire alternative supplies in a pinch. They ran multiple “what-if” scenarios to prepare for any number of eventualities.
Based in New York City, Freshly has been covering the U.S. with three manufacturing locations, in Linden, New Jersey; Savage, Maryland, and Phoenix, Arizona. Most of its suppliers are domestically based, although it sources some vegetables from Mexico, Europe and China depending on the growing season.
Over the last five years, Freshly has come to depend on a significant number of small “mom-and-pop” suppliers of food and packaging, many of which it has “pushed to the brink” in response to a tripling of sales, Setty says. The company conducts quarterly risk meetings, in which it assesses the degree to which it relies on each supplier. And while it appreciates the loyalty of those vendors, it worries about making any of them too dependent on Freshly for their survival.
When one buyer accounts for a third or more of a given supplier’s sales, “that is not a healthy situation,” Setty says. To prevent supplier and buyer from becoming overly reliant on one another, the company is striving to qualify additional sources of procurement.
Some of the complexities of Freshly’s business model are self-created. Each week it offers a choice of 36 meals, and hopes to bump that number to more than 80 by the end of next year. The emphasis on variety presents demand planners with a potential nightmare, as they struggle to guess which meals will be most popular with customers, and which will end up as waste. Setty says the company relies on sophisticated algorithms to balance supply with demand. At the same time, it needs to adjust quickly when things don’t go as planned.
“We can launch a meal on November 1, and if it doesn’t perform, it’s off the menu within six weeks,” Setty says.
The business is only expected to grow even more competitive when the pandemic passes, and at least some consumers to return to their old shopping and eating habits. Freshly and its rival meal-kit providers hope that a good number of them will stick with the services, but how the market ultimately plays out — and, for that matter, how long the pandemic lasts — are questions that are beyond the ability of the most skilled planner to answer.
In the meantime, Freshly is preparing for even more growth. In December, it will begin operating a new manufacturing operation in Southern California’s City of Commerce. The facility will boost the company’s meal-production capacity by 20%, along with a 22% increase in order fulfillment with the advent of a second phase of operations in March of 2021.
Freshly is also looking to increase its roster of suppliers, both large and small. “We’re working with more manufacturers to make meals under the Freshly name,” says Setty, acknowledging a growing challenge from many “small, hungry and nimble” competitors.
“We’re the biggest in prepared meals,” he says, ”but we can’t just rest on our laurels.”
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