d a wariness about the challenges that lie ahead. The most obvious one is Amazon, which announced its acquisition of Whole Foods on 16 June. While the e-commerce giant hasn’t revealed its plan for the grocery chain, it’s safe to assume ‘The Everything Store’ will ramp up its fresh food offering dramatically, if not enter the meal kit space itself in future. But Amazon isn’t the only factor casting doubt on the future of meal kits, which typically combine the delivery of fresh groceries with recipes for customers to cook at home in a subscription offering. In a document filed ahead of its IPO, Blue Apron revealed that despite its heavy investment in marketing, customer retention remains a problem. This is an equation that simply doesn’t add up to long-term profitability. The situation is being closely monitored in Australia, where major players including HelloFresh, Marley Spoon and Aussie Farmers Direct promise customers fresh, healthy, convenient meal kits delivered to their door once or twice a week. Is Blue Apron the canary in the kitchen? Or will the US market leader provide a roadmap for growth? Convenience is king The popularity of meal kits in Western markets like the US, Europe and Australia can be attributed primarily to the convenience they offer consumers, according to Josh Sigel, chief operating officer of Innit, a US-based tech startup that describes itself as the operating system for the kitchen. “A lot of consumers today are hung up on decision fatigue. They don’t want to think about answering the question of what’s for dinner. Meal kits reduce the complexity and stress of the decision-making process,” Sigel told IRW. “That’s been a unique value proposition. And then by pre-portioning out ingredients and taking out a lot of prep work, meal kits are enabling people who would not otherwise cook at home. The last piece is shopping. A lot of people don’t have time to go to the store.” Even when they do, the way they buy groceries is different than in previous decades. “Consumers have shifted away from the way they’ve traditionally bought groceries, which was doing a big shop once a week. They’re shopping more frequently and buying smaller basket sizes each time,” Gary Mortimer, a professor at QUT’s business school, told IRW.   “Even structurally, the size of kitchens and prep areas in smaller apartments, don’t facilitate a large grocery shop,” he said, citing the impact of urbanisation on consumer behaviour.   But while meal kits seemingly present an obvious solution for time-poor consumers today, industry experts say the customer drop-off rate is startling high. “Financial analysts are particularly concerned about what seems to be an inability to solve the attrition problem,” Sigel said. At the same time, companies are spending an enormous amount on acquiring customers, with diminishing returns. Blue Apron spent US$144 million in 2016 and US$60.6 million in the first quarter of 2017 on marketing, including heavy discounts for first-time users, direct mail and television and podcast ads. But both the average number of orders per customer and the amount spent per order have declined over the last year. Rolf Weber, co-founder of Marley Spoon, a Germany-based meal kit company that entered Australia in 2015, acknowledged that customer acquisition cost is a key factor in profitability, but said he isn’t concerned about Blue Apron’s data. “Of course, I’ve seen the curves around customer retention for Blue Apron and HelloFresh, but it only tells part of the story, not the whole story,” Weber told IRW. “We’re very happy with where we are and have a good return on marketing spend.” Marley Spoon has recently ramped up its marketing efforts beyond online channels to include television ads and letterbox drops, as well as free referrals, which are typical among meal box companies. “We’ve had quite strong growth on the back of that. We also have a referral system, where you have a chance to send a free box to friends and family,” he said. Greater personalisation But as Sigel pointed out, high marketing costs aren’t the only challenge meal kit companies face. “The logistics and infrastructure [required] to support these businesses is fairly substantial, and it does take volume to be able to effectively drop ship a limited number of ingredients to consumers,” he said. “A lot of labour goes into the repackaging, measuring, pre-portioning, there are shipping, logistics and refrigeration costs…and all of that leads to a challenging business model because the cost-per-meal rate has to be appealing.” Amazon’s strength in logistics makes its potential entry into the meal kit space all the more alarming. But by the same token, supermarkets, which have expanded grab-and-go and prepared meal offerings, pose less of a threat. Weber suggested that smaller players like Marley Spoon have an inherent advantage. “Ultimately, we know what you’re going to eat next week and the week after. Supermarkets don’t know that, so they have to overstock to compensate.” “It’s quite a logistical challenge to keep a store stocked, and Coles and Woolworths each have 2,000 stores. We manage a much smaller number of SKUs per week,” he said. This agility will be even more necessary in future, if meal kit companies are to allow customers to personalise their deliveries, which is where the market is heading, according to Sigel. “I think we’ll begin to see the meal kit industry move away from fixed meals and toward more customised options. The ultimate winner will be the company that can figure out how to fulfil groceries at the meal level, where consumers order meals [from a range of options] and get all groceries for those meals,” he said. Julia Hunter, a spokesperson for Aussie Farmers Direct, which started offering meal kits about 12 months ago in addition to its fresh produce and groceries, agreed that meal boxes will become more personalised in future. “Everything tells us that you’ve got to give the customer what they want,” Hunter told IRW.   “We’re in a nice sweet spot,” she added. “If you’re a pureplay meal kit, which we’re not, personalisation would be harder. But because we’re carrying the range anyway, it’s more achievable. If you get a meal box with us, you can also get milk and eggs and avoid going to the supermarket entirely.”