Survival of the Kittest: Why Acquisitions are Key to Meal Kit Longevity

Survival of the Kittest: Why Acquisitions are Key to Meal Kit Longevity

Many food industry experts suggest that meal kit companies can only survive if they eventually become acquired because the e-commerce subscription-centric business model is unprofitable for meal kits. As Packaged Facts points out in Meal Kits: Trend and Opportunities in the U.S., 3rd Edition, delivery of a number of packaged ingredients carries significant costs, especially when many of the ingredients need to be shipped cold but not frozen to remain fresh. When shipping is not done locally or from a distribution network that features locations near the consumer, costs go up significantly. These costs are not typically reflected in the price of the meal kits.

Additionally, meal kit companies spend large amounts of money on customer acquisition and retention while continuing to see many customers cancel service. Common reasons for cancellations include:

  • disappointment with the quality of fresh ingredients or meals
  • frustrations with the subscription model, such as needing to order a certain number of meals to lower shipping costs or per-meal prices
  • consumers or their families not liking the meal options offered
  • disconnect between the perceived value and the price of the meal kits
  • desire to switch between meal kit companies, as different companies offer the opportunity to try new meal choices while all the major competitors feature lower-priced introductory offers that encourage hopping among providers

Packaged Facts finds that meal kits as a product have massive potential and will see increasing demand. However, the current e-commerce subscription-centric business model is not working for many traditional players in the industry. These companies are trying to offer meal kits for a reasonable price while delivering a variety of fresh ingredients from limited distribution points nationwide, which is a nearly impossible goal due to the high costs of shipping these specialized products. Providers not in the scope of Packaged Facts’ report (such as grocery stores and convenience stores that make their own meal kits) have a lot of potential to develop meal kits and increase sales, which will further weigh on traditional meal kit companies as they experience increased competition. Some meal kit companies may be able to survive independently with the right strategies to keep existing customers, plus a combination of funding from investors and partnerships with favorable terms. Many others will have to be acquired by grocery stores, food companies, or e-commerce companies to survive.

Many meal kit companies will have to be acquired by grocery stores, food companies, or e-commerce companies to survive.

A growing number of meal kit companies see acquisition by a grocery store as an opportunity not only for survival, but also for expansion. Customers are already used to going grocery shopping. Even the busiest people still purchase food from grocery stores for some of their needs, even if they are increasingly using online ordering and either curbside pickup or home delivery options for greater convenience. Meal kit companies can be integrated with store infrastructure for sales either in a store or for e-commerce fulfillment. Even when a grocery store is only offering online purchases with a third-party delivery service such as Instacart, meal kits can benefit since many customers want to be able to order all of their groceries through one platform.

While online grocery services are still pricey for grocers at the moment, they offer more value for customers than meal kit delivery services alone, and are thus competitive and potentially more sustainable in the long run. Even meal kit customers who like not having to plan their meals still end up buying beverages, ingredients for other meals, snacks, and other products from stores.

The potential synergies between meal kits and grocery stores are undeniable. If meal kits are sold at grocery stores and are available for order online with a full suite of other groceries, customers are more likely to remain customers. Additionally, most meal kit companies would benefit by being able to take advantage of the grocer’s supply chain for fresh ingredients.

The supply chain advantages stem from factors such as these:

  • Grocers are able to work with food manufacturers that may be willing to produce meal kits (or portion-sized packages of ingredients for use in meal kits) and can package meal kits under a private label.
  • Some grocers may also have dedicated food preparation employees who would be able to gather the ingredients for meal kits and package them in-store to promote maximum freshness.

An additional advantage to being acquired by a grocery store is that meal kits can be produced for less money and sold at a lower price by grocery stores, even if they are ordered by a customer online for pickup or delivery. Less packaging is needed for meal kits that are sold in a grocery store, as meal kits can be displayed and stored in refrigerated areas without needing to be shipped in boxes with cooling or insulating elements. Ingredient integrity often requires separate packaging of each ingredient in a plastic pouch when a meal kit is shipped, as scents and flavors can be easily absorbed by other ingredients during the long voyage. Additionally, many ingredients require different temperatures for peak freshness, necessitating that they be separated by packaging elements.

However, ingredients may not have to be separated this way if they are prepared in a store. For instance, paper bags might be a better option for customers, as they are more easily recycled. Paper bags can be used to separate fresh ingredients more readily when a meal kit is made to order, as the expected timeline for the product to reach the consumer and to be used is shorter. More ingredients can also be packaged together if they are used in the same step, as the concern of scent and flavor transfer is of less concern with a shorter timeline.