Direct-To-Consumer Meal Market Is In A State Of Flux

Direct-mail start-ups face challenges from brick-and-mortar retailers and value-sensitive customers

By Kevin T. Higgins, Managing Editor

Direct sales and delivery to consumers, one of the hottest segments in food and beverage, were rocked by two recent events: the stumble by meal-kit leader Blue Apron after its initial public stock offering, quickly followed by the announced acquisition of grocer Whole Foods by Amazon.com Inc.

Pre-IPO optimism pegged an opening price of $14 a share for Blue Apron. Instead, trading began at $10. By mid-September, share price was hovering just above $5, in part because of concern over high subscriber-acquisition costs and subsequent churn.

The marriage of Amazon’s e-commerce platform with the brick-and-mortar distribution of Whole Foods is a more daunting challenge to companies that rely on common carriers like USPS, UPS and FedEx to get product to customers. Blue Apron is on track to top $1 billion in sales this year, but that pales compared to Whole Foods and is couch-cushion change for Amazon.

Going beyond celebrity endorsements to celebrity equity stakes is one avenue to customer acquisition. Krave jerky applied that strategy in the run-up to its sale to Hershey Foods for $218.7 million. Roth Premium Foods is applying a similar strategy in the launch of Fresh by Transform (freshbytransform.com), a direct-delivery subscription program involving fitness gurus Chris and Heidi Powell.

Based in Colorado Springs, Colo., Roth opened a USDA plant in 2013 to produce private label, fully cooked foods sold by supermarkets and other retailers. For its e-commerce entry, president Mitchell Roth asked the stars of ABC’s Extreme Weight Loss reality-TV show to join as business partners. The personal trainers boast more than 3 million followers on multiple social media platforms. Their engagement with that base will simplify the task of attracting customers to the prepared meals program, Roth predicts.

“Fresh, never frozen, all-natural meals with more than 25g of protein and less than 25g of carbs is what the fitness-oriented crowd is looking for,” he says. “Partnering with celebrities with an equity stake lends credibility to the product.” His inspiration was Bodyarmor, a nutrition drink that raised capital and endorsements from sports stars such as Mike Trout and Buster Posey several years ago.

The company is betting ice packs and second-day ground delivery will ensure the safety of its ready-to-eat meals to most of the contiguous 48 states. Helping to hedge that bet is skin-pack packaging and HPP pasteurization, which is done by Natural Foodworks Group, a Denver toller.

“It’s basically a vacuum pack for a tray,” Roth says of the packaging. “The tooling cost to move from vacuum to skin packing is pretty prohibitive, but it provides a lot of advantages in terms of merchandising” and withstands high-pressure treatment.

HPP allows Roth to add salt only for taste, not preservation. Nonetheless, the safety of home delivered meals came into question in a recent Rutgers-Tennessee State University study that found that 47 percent of 169 meal kits tested had surface temperatures above the 40°F threshold needed to curtail microbial growth. Perfect Fit Meals, a Houston processor of refrigerated meals that also operates an HPP tolling center, delivered products locally by van initially but now distributes through retail and seven Amazon Fresh distribution centers. “The cost of shipping (by mail) is exorbitant, and we can’t guarantee proper handling,” explains president Jasmine Sutherland.

Nonetheless, hundreds of companies have jumped into the direct-to-consumer subscription segment in recent years. An example is GreenChef, a Boulder, Colo., firm that went from a standing start to more than $100 million sales in less than three years. But as supermarket chains gear up to meet the Amazon-Whole Foods challenge, direct-sales firms could face stiff headwinds from competitors leveraging the conventional supply chain and home-delivery services.

Borrowing from the home delivery script, Birmingham, Ala.-based eMeals is working with Wal-Mart and Kroger to deliver chef-created meal kits that can be picked up curbside at stores or delivered to subscribers’ homes via Instacart. Enhancing the value proposition is an estimated cost of $5 per serving, less than half the price of most mailed meals.

“Big players that already have the infrastructure can build their online presence on our platform to redefine the notion of meal delivery and answer the question of what’s for dinner tonight,” says Scott Jones, vice president.

Meal kits will grow to a $10 billion business within five years, eMeals estimates, and the firm is targeting the family segment. But millennials are driving ecommerce food, and if optimistic forecasts of future sales are to be realized, those shoppers will determine which delivery model, price point and celebrity endorsement will carry the day.

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