5 reasons why brands should be interested in meal kits
As the previous post pointed out, meal kits have many characteristics of a disruptive innovation. Because of the small revenues, meal kits have been uninteresting for the incumbent grocery retailers.
Some retailers like ICA or Albert Heijn, have played around with meal kits, but these experiments never grew to become a serious business for these companies.
Despite the small size of the market, the meal kit companies represent interesting potential for another stakeholder in the grocery value chain: the big FMCG brands.
Some forward looking brands have already become interested in meal kits. Over the years for example Unilever has invested in at least two meal kit companies: Sun Basket (US) and Gousto (UK).
As already noted, meal kits won’t probably become a big source of revenue for big FMCG brands. However, they provide something almost as valuable for the brands.
Here are five reasons why FMCG brands should become more interested in the meal kit companies:
1. Data
Today data is the obvious reason for brands to do almost anything. In today’s more digitalised world there is much more data available, but high quality data remains rather scarce. It is often controlled by the retailers who have also realised how valuable data can be. Most obvious example of this is Amazon’s rapid moves to monetise it’s platform in the form of the Ad business.
The importance of high quality customer data was highlighted by Nestle in their recent Investor Day. Nestle’s Head of Strategic Business Units Bernard Meunier emphasised that dat “gives us a considerable competitive advantage that we never enjoyed in the analogue world: to be connected directly to our consumers more often and at the right demand moment”.
2. Direct connection with the consumer
Probably the most important reason for the brands to start thinking about the meal kits is the amount of direct consumer relationships that they have. Even though meal kits would (initially) be small in terms of revenues, they can provide rich engagement with the end consumer. Something that is normally behind the "paywall" controlled by the retailer.
With regards to the number of customers, world’s biggest meal kit provider HelloFresh has almost 7 million active customers (as of Q3/2021). Of the more local players Linas Matisse Group in the Nordics has almost 107 000 customers. Whether this is considered many customers or not, they certainly are a great source of consumer understanding.
The importance of the direct connection to customers and the potential for engagement with the customers can be seen in the numerous direct-to-consumer trials done by big FMCG brands during the pandemic. Companies like Pepsi, Heinz or AB Inbev built their own ecommerce websites. However, little has been heard about them lately.
Why meal kits, not traditional online grocery?
As described in the previous post, because of their disruptive nature, meal kits are more interesting and scalable opportunity from the perspective of a brand. Online grocery requires a lot more investment into picking and delivery logistics as well as the money tied down in the assortment.
Because of the more restricted nature of the meal kits,, they can be a much more lightweight concept to build, scale and operate. Thus, they don’t offer similar scale as the traditional online grocery, but for the purposes an FMCG brand, meal kits can have sufficient amounts of customer.
For example HelloFresh has delivered over 700 million meals in the first nine months of this year. These customer relationships and orders provide vast amounts of data about the customer behaviour from real paying customers.
If customer says she likes a product, there is a major difference whether she has purchased the product or is just responding to a survey.
These customer relationships can become a crucial fuel for improving both New Product Development and Marketing for the FMCG brand.
3. More efficient core capabilities
Having more data and direct relationships with the customers are great tools for improving the efficiency of both Innovation or New Product Development and Marketing.
For New Product Development, the direct connection to customers provides a lot of possibilities to test out different products or aspects of the products. Meal kits can include more products from the FMCG company. Or alternatively, the meal kits can have separate sample products that the customers can test and review.
Both approaches would give a lot more data for the brand about what kinds of products customers prefer and how they react to the planned new products in the development pipeline.
Besides the New Product Development aspect, the data from the meal kit customers would be highly beneficial for improving thge efficiency of all marketing activities within the FMCG company. Firstly, all marketing actions done by the meal kit provide 1st party data with a clear transactional data point.
Did these actions lead to more sales or improvement in some other metric?
At a time when the 3rd party data becomes more expensive and possibly more scarce, high quality 1st party transactional data can itself become a high value asset.
4. Digital capabilities
Fourth aspect that meal kits provide for incumbent FMCG brands are digital capabilities. The more digital the operating environment becomes, the more important it will be to have good in-house resources to build, measure and learn in the digital space.
An example of the need to acquire capabilities to build a digital direct relationship customers, is how Nike has built its Direct retail business. Nike has today more than 35% of revenue coming directly from their own retail business. During the last 12 months, Nike has product $17,5 billion in Direct revenue. Of that more than half is coming from the Digital channels.
Since 2014 Nike has acquired six data, design or content companies to boost their capabilities in building the digital tools for their customers to buy online.
With these new capabilities it is important to make sure that they are integrated in a right way into the existing corporation. As often these acquired companies are small companies with a very different kind of working culture to big established corporations.
A good example of a successful integration of a very old-fashioned company with a small and more agile acquisition target is John Lewis Partnership and the start of their online journey.
In the early 2001 John Lewis realised that they would need to do something with regards to online retailing. Just before the crash of the dot on bubble, they purchased Buy.com. In the short term it could have been viewed as a great mistake.
For a few years John Lewis let the Buy.com team operate as an external entity from the conservative and big organisation of the 100+ year old retailer. In 2002 they merged Buy.com into the existing online operations of the parent company.
During the 2010s John Lewis became a real online powerhouse. Prior to pandemic online was 40% of the revenue. After the pandemic it has hovered above 60%.
5. Leverage
Nike is a often used example of a brand going successfully direct. Too often it is also seen as too distinct from the FMCG brands to be considered relevant example. Some might think that it is not relevant for an FMCG brand what Nike is doing.
Even though FMCG brands probably shouldn’t copy what Nike is doing, they can have similar benefits to what Nike has been able to achieve. Nike has created a huge business out of the Direct business. During the last 12 months it has generated $17,5 billion in revenue. That is 75% of all Adidas revenue.
Even though revenue is not the main reason for a brand to become interested in meal kits, they can become a revenue generator also. HelloFresh has already achieved 5,5 billion € in revenue. That would be a decent sized grocery retailer itself. And they have only scratched the surface from their Total Addressable Market.
Alongside revenue, the growth of the Direct business has given Nike another important thing: leverage in the negotiations with the retailers. Nike does not need to collaborate with the retailers that it doesn’t see as beneficial for them. This has lead to a drastic reduction in Nike’s retailer network.
What would big brands provide for the meal kits?
Last consideration in the discussion around meal kits and FMCG brands is to think about what the brands could give for the meal kits they acquire? Brands after all are not accustomed to sell directly to consumers. However, they do have some capabilities that would crucial for a meal kit company to have.
In their book “Playing to Win”, AG Lafley (former CEO of P&G) and Roger Martin summarise the five fundamental capabilities of P&G as follows:
1. Deep consumer understanding
2. Innovation
3. Brand building
4. Go-to market ability
5. Global scale
They go on to summarise that: ”P&G’s competitive advantages are its ability to understand its core consumers and to create differentiated brands.”
These capabilities could help a meal kit company to become big in many countries. With deep expertise in branding and scaling internationally as well as good financial resources, a big FMCG brand could really enable new kind of growth trajectory for a meal kit company.
One could see a flywheel forming here. A flywheel where the meal kit provides the brand with better customer understanding and from that more efficient marketing. The FMCG brand on the other hand would provide the meal kit with more efficient scaling to other markets leading to more sales and more data. That again leading to more enhanced benefits back to the FMCG brand…