Investors And Consumers Question The Value Of Home Food Delivery

The shares of meal-kit company HelloFresh dropped after the company posted a weak growth forecast for the year ahead. The company's future isn't the only one facing uncertainty in the food delivery business.

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There was no better way to combat the pandemic than to serve food with a side of technology. There is now a resurgence of old doubts: Just how many people will be willing to pay the price tag for getting their food delivered to their home just by ordering it online?

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The share price of HelloFresh HFG-10.21% fell 9% Tuesday after the company announced that it targets revenue growth in the range of 2% to 10% this year, excluding currency fluctuations - which is a range that is quite wide but is below most analysts' forecasts. A lower-than-expected profit guidance was also provided by the company.

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HelloFresh company is based in Berlin and dominates the market when it comes to cooking at-home ingredients. In the U.S., it accounted for 78% of meal-kit sales last year, thanks to various acquisitions that helped the company to grow its market share, according to a Bloomberg Second Measure analysis of consumer purchases. There were 12% of shoppers using Home Chef, a grocery store chain owned by Kroger, followed by 6% of shoppers using Blue Apron. It has been so bad for Blue Apron's stock that it was threatened with delisting by the New York Stock Exchange in December due to its poor performance.

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In the world of meal kits, HelloFresh clearly has a big position in the market. Investors should ask themselves if meal kits are likely to become a significant part of the food industry outside of a pandemic scenario. They are often less expensive than eating out, but far more expensive than cooking from scratch: HelloFresh currently charges $60.95 for a box of two meals for two people, each of which serves two people. There is a strong argument that these are little more than niche solutions for urban couples with busy jobs in the midst of a boom.

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Keeping customers is HelloFresh's top priority, as evidenced by the enormous sums they spend on it. A total of 1.3 billion euros was allocated last year to the company's marketing budget, which is equivalent to around $1.4 billion, or 17% of the company's revenue. Despite this, it still lost customers in the fourth quarter, with 7.1 million active users on a global basis, down from 7.2 million for the same period in the previous year. The growth was mainly driven by price increases, which accounted for most of the growth. A large factor in the weak profit forecasts for the coming year is the company's prediction that marketing costs will rise again this year.

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The company is part of a trio of embattled European companies that use technology to deliver food to homes in various states of preparation, such as semi-cooked, cooked, and reheated. London-listed e-commerce giant, Ocado, disappointed investors last week when it announced that its U.S. partner, Kroger, would not be rolling out dedicated e-commerce warehouses equipped with Ocado technology as quickly as previously expected. In an earnings call for the third quarter of the year, Kroger told analysts that it was taking stock of the two warehouses that it has already built with the British company to determine how to optimize its model.

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Anglo-Dutch takeout-delivery company Just Eat Takeaway.com acquired U.S. competitor Grubhub in 2021. Despite the fact that the company has long struggled to control costs, its stock has found some stability in recent months as signs have been given that its cash burn is improving.

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In various ways, all three companies struggle with the same problem: Food is a huge market, but it's not well suited to e-commerce. In the absence of preparation, it is bulky, heavy, and of relatively low value, with complicated refrigeration requirements that are unmanageable. The value of the prepared product is higher, however, it needs to be delivered within a short period of time. The consumer market expands quickly when the cost of the deliveries is subsidized by investors, but when it is not subsidized by investors, the market shrinks rapidly.

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It is at least good to know that the stocks aren't expensive. There have been huge falls in all three stocks over the past two years, and they are all trading below their pre-pandemic levels and at low multiples of sales. Investors, though, still need to be prepared to take on a certain amount of risk as there is so much uncertainty surrounding the future of food-tech business models.