Business Funding reports Startups

Food For Thought: Startups Seek Sweet Spot Of Meal Delivery Business

The meal delivery business is not for the faint-hearted.

It’s competitive, crowded, and consists of a variety of different models – some more successful than others. There’s been a number of casualties, and then there are a few companies that appear to be on a strong growth trajectory.

Selected Success Stories

On Thursday, New York-based meal ingredient delivery service Blue Apron filed for an initial public offering (IPO). The company brought in nearly $800 million in revenue in 2016, up from  $341 million in 2015, according to TechCrunch. It also turned a profit in last year’s early quarters although it didn’t post a profit for the year as a whole.

(Blue Apron did not respond to our requests for an interview this week, likely due to the quiet period related to its IPO plans. Investor Bessemer Ventures declined to comment.)

Another rising star in the space is San Francisco-based Sun Basket. The organic meal kit delivery startup has seen impressive growth since it was founded in April of 2014. Today it employs about 1200 people and saw 1300 percent year-over-year revenue growth in 2016, CEO and co-founder Adam Zbar told Crunchbase News on Thursday. It raised $24.2 million over two tranches in a Series C round this spring and has brought in a total of $55.3 million in venture funding.

And then there’s Austin-based Snap Kitchen, which has the distinction of operating prepared healthy prepared meal storefronts as well as a delivery service in five markets. In July 2015, investors brought in David Kirchhoff, former CEO of Weight Watchers to run the company.

Snap Kitchen has about 800 employees, inclusive of part-time workers, and is seeing double-digit growth rates, Kirchhoff told Crunchbase News this week. It has raised just over $50 million since inception, according to the executive.

But not all companies delivering prepared meals have fared as well as this trio.

Keepin’ It Fresh Doesn’t Mean Success

In March 2016, on-demand pre-made delivery service provider SpoonRocket said it was shutting down after it was unable to raise enough money to keep operating. At the time the Berkeley, Calif.-based startup said it was planning to transition customers to competitor Sprig.

Last week, San Francisco-based Sprig announced it too was closing down. Prepared food delivery startup Maple also announced earlier this month it was ceasing operations in its home base of New York.

Meanwhile, San Francisco-based prepared food delivery service Munchery has had its share of negative headlines. In January, it slashed 30 percent of its staff ­ – just months after its founders left the company amid rumors that it rapidly burns money. Munchery has also been criticized for wasting food, which reportedly was a drag on its profit.

So what differentiates the successful from the not-so-successful in the food delivery sector?

The Ability To Deliver Is Not Enough To Succeed

According to Snap Kitchen’s Kirchhoff, having a brick and mortar concept before adding a delivery component to the business was essential to the success of his company.

“We got really good at making food before we built our own dedicated app and website with e-commerce functionality,” he said. “The combination of digital and retail together is really powerful, and practically no one is doing that (in this space). Either of those things in isolation is tough.”

During his 14 years at Weight Watchers, Kirchhoff said he was looking for a healthy food concept that was different from what else was out there.

“I’d never seen anything like it until I was introduced to Snap Kitchen by its investors,” Kirchhoff explained. “I was kind of floored and jumped at the opportunity to join the team.”

Kirchhoff believes the companies that have failed in the prepared food delivery space did so largely because they were tech companies that got into the food business.

“They had to do crazy discounting and promotion and lots of advertising to get customers because they had no brand presence in the form of stores,” he said. “So they had high customer acquisition costs. I don’t think they fully appreciated how hard the food side of the business is and found that it was almost impossible for them to make money.”

To Kirchhoff’s point, Sun Basket was also co-founded by Chef Justine Kelly, the former Head Chef at the award-winning Slanted Door in San Francisco.

Zbar is proud of the fact that Sun Basket, as he puts it, “has been very capital efficient with our money” and is on a clear path to profitability.

Since Labor Day 2016, the company has added $124 million of new annual revenue run rate, Zbar told Crunchbase News. “Our growth curve was really steep in a very short period of time,” he said.

What helps the company stand out from other meal kit players, Zbar believes, is better unit economics and stronger user retention. He claims that Sun Basket has had up to three times better retention versus other meal kit players because it doesn’t offer generic meal plans and caters to a variety of diets.

Sun Basket currently reaches about 98 percent of U.S. zip codes with three distribution centers. Long term, Zbar wants to become “the Netflix of food.” “Going forward, we want to have the ability to scale our recipes up and tailor the ones to fit a user,” Zbar said.

VC Perspective

Tim Connors, founder of Menlo Park-based PivotNorth Capital, said he had the opportunity to invest in various types of meal delivery companies but ultimately put his money on Sun Basket. His firm led the company’s seed round and has invested in each of its funding rounds since.

“Sun Basket has the ability to serve the whole nation out of three distribution centers,” Connors told Crunchbase News. “If you break it down by what it costs to acquire a user and the margin per month per user, the numbers can be so much more compelling in a subscription meal kit business than to other models that are bringing convenience to a customer but adding cost to what’s already costly.”

So whether it’s subscription-based, or a la carte, it’s clear that consumers like the idea of healthy, convenient options that don’t cost an arm or a leg. Time will tell which of the crowded prepared meal delivery market players will be able to sustain early growth and cater to health-conscious consumers, and which will not.

Top Image: iStockPhoto/TarikVision

Stay up to date with recent funding rounds, acquisitions, and more with the Crunchbase Daily.

Copy link