Hello Fresh. Hungry for More! Equity Research! Part 1/3
The Story of Hello Fresh, Products and Pricing Strategy
Hello Readers!
Today on the menu we have Hello Fresh!
Hello Fresh is a €1.5B subscriptions-based, direct-to-consumer food delivery business attempting a turnaround. In this 3 part Equity Research Deep Dive, we will look at what happened to Hello Fresh and how is the company moving forward. Furthermore, an analysis of its business model, marketing strategies, and opportunities and risks will be presented! And of course, we will conclude the report with a financial analysis and valuation model.
Today we are talking about The Story of Hello Fresh, its products, and pricing strategy.
1. What Happened?
2. The Story of Hello Fresh
3. Business Model
4. Parts 2 and 3
1. What Happened?
As pandemic-induced shutdowns locked people in their homes, cooking and eating became one of the ways people attempted to cope with the stress of the pandemic. Hello Fresh became one of the Covid darlings that saw a 107% and 60% growth in its sales during 2020 and 2021, respectively.
Consequently, the explosion of Hello Fresh’s meal-kit business, lead the stock to stratospheric heights. At its peak in November of 2021 $HFG market cap was €16.4B, an increase of over 400% from the end of 2019.
This is where Hello Fresh’s business took another turn. First, sales growth slowed down to 27% in 2022, then it collapsed to 0% in 2023. Despite flat sales, expenses increased, causing Net Income to fall 48% and 85% in 2022 and 2023 respectively. Even worse, profits turned into losses as the company lost a cumulative €105M in Q3 2023 and Q1 2024.
This led $HFG to collapse 90% from its all-time high. However, Hello Fresh has taken steps to adapt its business to the new market realities. Their sales have returned to growth, although somewhat modest 2%-3%. Furthermore, it posted a €9.1M Net Profit in Q2 2024.
I see signs that lead me to believe Mr. Market overreacted and Hello Fresh is in a good position to successfully execute a turnaround!
Let’s dig in!
2. The Story of Hello Fresh
All animals must eat, and so do humans. But what and how humans eat has changed significantly. No longer are humans eating what they can, but what they want. Eating has changed from a necessity to a source of enjoyment and entertainment. As this change occurred, more and more businesses were founded to cater to these ever-changing customer preferences.
Convenience has become one of the primary drivers in food selection. Cheap, tasty, and quick food is a must-have for a modern-day city dweller. Grocery and convenience stores are increasingly focused on fast-to-prepare or ready-to-eat meals. Fast-food, fast-casual, and premium quick-service restaurants have expanded their reach to most cities.
What if there is another way?
This is where Hello Fresh comes in. Their motto is” to change the way people eat forever”.
Dominik Richter, Thomas Griesel, and Jessica Nilsson founded the company in 2011 in Berlin, Germany. Since then, Hello Fresh has expanded to all over Europe, North America, and Australia, becoming one of the largest meal delivery companies in the world.
Cooking is a rather tedious affair if one thinks about it. It requires one to decide what to cook, where to buy groceries and physically going to buy the ingredients. Then, one needs to cook the food and clean the kitchen afterward.
Hello Fresh is building a direct-to-consumer, subscription food delivery business that caters to customers with diverse needs. Let’s look at what the company offers!
Hello Fresh Meal Kits
A meal preparation kit is Hello Fresh’s flagship product.
Customers subscribe to receive deliveries of meal preparation kits containing fresh ingredients and simple instructions on how to cook delicious meals.
The company lets customers decide how often, how much, and which meal kits they want delivered. Meal preparation kits help with all the main pain points of cooking.
What to eat – Most of us have been in a situation where decision paralysis leads to an unnecessarily long time spent on deciding what to eat. Hello Fresh alleviates such issues by offering a simple selection.
Where to buy – Once a person decides what to eat, it is not required to decide where to get it, Hello Fresh will provide the ingredients.
Physically go to the store – There is no need to visit a store, Hello Fresh will deliver the kit to your house at a time best suiting your schedule.
Cooking the food – The meal kit contains all ingredients to prepare the meal, not more and not less. Furthermore, simple instructions make it easy and quick to prepare the meal.
Cleaning after – As the kit contains pre-measured ingredients in disposable packaging, it is a bit easier and simpler to clean compared to an ordinary cooking process.
Its core customer is families who want some help in simplifying the cooking process and adding some variation to their menu.
In the first six months of 2024, Hello Fresh’s revenue from meal kits reached € 2.97B, a decrease of 8.4% from the prior year. The company is changing its strategy, focusing on margins rather than sales growth. By increasing prices and reducing promotions, Hello Fresh is targeting the highest-value customers.
Ready-to-Eat. Factor
The company entered the Ready-to-Eat (RTE) business in 2020 with its $277M acquisition of Factor. Ready-to-eat is a fancy way of calling cooked meals that only require reheating in the microwave before consuming.
RTE meals have been sold for decades at varying degrees of price and quality in supermarkets, convenience stores, and gas stations. However, these meals are often frozen and known to be cheap and low quality. Poor-tasting RTE meals have been used as the butt of the joke by many comedians.
Factor is attempting a different strategy. The company sells high-quality, “chef-crafted, dietitian-approved, and never frozen” meals. Customers can pick meals from a large selection of options that fit various diets, such as keto, low carb, low calorie, extra protein, vegan and vegetarian, and more.
In a similar fashion to Meal Kits, the company addresses the main points of eating but takes it a step further and eliminates cooking altogether.
What to eat – Just select one of the Factor meals.
Physically go to the store – Get it delivered by the same logistics team as Hello Fresh.
Cooking the food – RTE meals don’t require cooking, only reheating in the microwave.
Cleaning after – Simply throw out all the packaging.
With Factor the company is targeting a different customer group than meal kits. Meal kits don’t necessarily make the most sense for a single person, a couple without kids, or people with no desire to cook.
The TAM for this group is larger than for meal kits!
The RTE segment earned €1B in the first six months of 2024, an increase of 50% from the prior year. This segment is showing strong growth, and is very promising, with growth likely to continue.
Others. Meat and Pet Food
Under its Others segment, the company operates two additional subscription delivery businesses. One for premium meat, and the other for dog food.
As meat is the most important source of protein for humans, there is a large market for premium-quality meats. To service this large and growing segment, in 2023 Hello Fresh launched Good Chop, a subscription-based premium quality butcher.
Good Chop offers a selection of fresh meats and meat products such as sausages and burgers. Chicken, pork, beef, and even bison meats are available. Additionally, seafood is offered to those looking to mix it up. When making an order, the customer must choose how many portions they would like. To simplify the ordering process, all portions are the same price. However, the portion's weight varies depending on the animal and the cut.
People love their pets and are willing to spend significantly to spoil their four-legged friends. Increasingly new businesses are being spawned to offer high-quality premium products to pet parents.
The Pets Table is the company’s answer to this growing trend. Pets Table sells “human grade” animal food to dog parents. After a simple questionnaire, the most appropriate package is offered, letting dog parents choose the meals from multiple options.
The company earned €41.6M from Other segment, an increase of 137% from the prior year. While this segment is showing strong growth, it is still very small and unprofitable, it remains to be seen how big the company wants it to become.
3. Business Model
Winning a customer order is only half of the equation, delivering it in good condition in a reasonable amount of time is the other half. Spoiled, low-quality, or incorrect orders create disappointed customers, and such customers are unlikely to make repeat purchases. While satisfied customers are more likely to become regulars. Hello Fresh understands these dynamics and spends significantly to ensure timely delivery, maintain high product quality, and provide good customer service.
Procurement and Cooking
Procurement and cooking is the second largest cost category for the company.
In the first half of 2024, 37.4% of revenue was spent on procurement and cooking!
Procurement expenses include the cost of raw materials used by all segments. Hello Fresh sells literally, many tons of food, so the company spends significant financial and human resources sourcing high-quality ingredients. Through the years, Hello Fresh has built a sophisticated global supply chain network. The main goal of their supply chain is to reduce inventory levels, lower food waste, and deliver operational efficiencies.
“We deploy data-driven optimization approaches in our procurement operations that help us navigate volatile food markets. We do so in all steps of our menu development and sourcing process from designing and choosing seasonal recipes, to testing the attractiveness of different menus ahead of time. “ Hello Fresh 2023 Annual Report
For its RTE segment, Hello Fresh operates various commercial kitchens that cook millions of meals at a massive scale, with the goal of achieving great unit economics. The larger the plants are the lower the per meal costs, so each additional customer order leads to better unit economics.
Fulfillment
Once meal kits are assembled and RTE meals are cooked, they must be delivered to the customers. Logistics is a costly and difficult business to be in, thus it’s no surprise it’s Hello Fresh’s largest expense.
In the first half of 2024, 38.3% of revenue was spent on fulfillment!
Hello Fresh operates dozens of high-tech fulfillment centers that deliver thousands of meal-kit and RTE boxes weekly. While costly to build, the company believes that highly automated production and fulfillment facilities are crucial in delivering competitive advantages, especially in an era of rising wages and high inflation.
“Our meal-kit fulfilment centers comprise tailored fulfilment operations and technology solutions, enabling streamlined picking of ingredients into meal-kits and assembling those into boxes, despite tens of thousands of different customers order types being produced in a fulfilment center in a single week. On the ready-to-eat side, we are operating complex industrial sized kitchens, where our process knowledge and technology allows us to achieve consistency in the quality of our meals.“ Hello Fresh 2023 Annual Report
In certain areas with high volumes, Hello Fresh operates their own last-mile delivery services. In Belgium, The Netherlands, and some parts of Germany and the USA, investments in self-operated logistics networks make financial sense. Building and operating a delivery network requires a significant upfront investment, but once built, the per-order delivery expenses are lower than going through 3rd party providers such as FedEx, DHL, or PostNL. As per Hello Fresh 2023 Capital Day presentation, 25% of last-mile deliveries are done in-house.
Pricing
Hello Fresh doesn’t primarily operate in the value segment. The company’s subscription packages are targeted towards people with higher disposable incomes.
A Hello Fresh meal kit with four meals for four people in New York City would cost around $160, so $10 per meal. In Amsterdam, the same box costs € 79, so € 5 per meal. In both areas, the per-meal costs are about the same cost as a fast-food burger. However, the same meal prepared from grocery store ingredients would most likely cost 60% to 50% less. So clearly, there are more affordable and even more convenient options available. So why do people order these boxes?
Its value proposition comes from convenience, reliability, selection, and most importantly, great taste!
Some people want to cook their own meals. However, they don’t want to spend time buying ingredients and finding new and interesting recipes. These customers are willing to pay for this convenience 50% to 100% on top of grocery store prices.
A similar pricing strategy is used at Factor. In the US, a box of 8 RTE meals costs $104, around $13 per meal, whilst, without promotions in the Netherlands, such a box would cost €80, so €9 per meal.
In both regions, the per-meal cost is higher than cooking a meal yourself or picking out one of the RTE meals at the supermarket. It is about the same price, as a meal at a low-end restaurant, however, it is much cheaper than an average Uber Eats meal.
So, Factor targets those who like the convenience of RTE meals but desire something healthier and more palatable than the grocery store options. Additionally, urban customers who use Uber Eats a few times a week could improve their diets and wallets by switching to Factor.
Good Chop pet food is priced rather aggressively. A plan that mixes up fresh and airdried dog meals costs $2.4 per meal. Fifty pounds of dog food could be purchased for as little as $30. So, the company is clearly targeting those willing and able to splurge on treats for their four-legged friend.
Hello Fresh’s premium butcher Good Chop sells 6 cuts with a max 36 portions for $149, that’s $4.14 a portion. One chicken breast portion is 6 oz (170g), meaning 1kg of chicken is sold for $24.35. Two 6 oz (170g) picanha steaks are counted as one cut, costing $24.83, so $12.4 a steak.
Overall, Hello Fresh prices show that the company sells premium products to people with higher disposable incomes!
Price-conscious customers can find cheaper alternatives for all of Hello Fresh’s products.
Parts 2 and 3
In Part 2 we will discuss Hello Freshe’s marketing strategy and risks (churn!).
Hello Fresh. Hungry for More! Equity Research! Part 2/3
Whilst in 3rd part opportunities and their finances will be analyzed and a valuation model will be presented!
Hello Fresh. Hungry for More! Equity Research! Part 3/3
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