Disruption in grocery retailing

“Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. 

They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream.”
Innovator’s Dilemma, Clayton Christensen, 1997

This is how Clayton Christensen wrote about disruptive innovations in his seminal book from 1997. Note that disruptive innovations don't need to be technological. Clayton Christensen himself used discount retailing as an example of a disruption to traditional full-service department stores.

The core thesis of mr Christensen was that simpler and different kinds of applications start from the bottom of the market and move up market to eventually displace established competitors.

There are not many disruptions in the history of retailing. Self-service supermarkets could be seen as one, discount retailing is one and online retailing could be seen as one. Hypermarkets on the other hand could be seen as sustaining innovations to supermarkets, which were a sustaining innovation to original self-service stores.

This implies that innovation itself is not necessarily disruptive even though it's impact could be described as disruptive to an industry.

Why would meal kits be disruptive?

Meal kits do tick many of the boxes defined by mr Christensen.

Meal kits are

• simpler: only a dinner

• they offer less: no breakfast, no snacks, no lunch, nothing else

• they have a very different package of attributes to traditional offline or online grocery: customers don't buy ingredients, they buy only a service 

With meal kits everything is priced in to the price of the box, also home delivery.

Because of the simplicity and restrictions of meal kits, for a long time they remained a niche part of the market. This made them somewhat uninteresting for the mainstream grocery retailers.

However, the pandemic has changed all that. Like any other online grocery service, meal kits saw a huge spike in demand at the start of the pandemic.

Meal kits are less volatile in growth

With the subscription service as the backbone of the business, meal kits have the potential to be more sticky in terms customer loyalty. Whereas some online grocery players (especially store based) have seen the revenues and volumes decline significantly, HelloFresh has been able to sustain the pandemic levels.

HelloFresh achieves scale

To be honest, majority of meal kit companies have remained niche players also after the pandemic. However, German HelloFresh has grown to admirable scale with the help of the pandemic. With 5,5 billion € in revenues over the last 12 months HelloFresh is 2,5 times the size of Ocado’s retail arm in the UK. Ocado has claimed to be the world’s biggest pure play online grocer. HelloFresh even starts to challenge Tesco’s dominance as Europe’s (and maybe even world’s) biggest online grocer. Tesco had £6,3 billion in online revenues.

For HelloFresh like for all parts of retailing, scale changes things.

Firstly, HelloFresh became much more profitable. Their Adjusted EBITDA margin jumped from 2,6% in 2019 to 13,5% in 2020.

Secondly, scale enabled HelloFresh to expand their offerings to new areas, such as ready meals. The company has acquired two ready meal manufacturers: American Factor75 and Australian Youfoodz. This move widens the HelloFresh service offering.

Image source: Unsplash

Thirdly, and most interestingly HelloFresh has expanded to sell traditional groceries. This means selling individual items like bananas or milk. The pilot of selling grocery ingredients was first conducted in the Benelux countries. After encouraging results, HelloFresh is expanding that to its main market of US.

By selling ingredients HelloFresh climbs up market to serve bigger portion of the customer needs. From pure dinner to include breakfast, lunch and snacks.

Meal kits are a more efficient way to organise grocery buying thus making it a potential disruption to grocery retailing. 

Like laptops or any other classic disruption, the more efficient challenger eventually starts to climb up market by taking more and more of the functionalities offered by the incumbents.

Meal kits are an efficient way to organise online groceries

For meal kits, like for so many other innovations, restrictions are a great source of innovation.

One of the key restrictions of meal kits has been slower delivery schedule.

Customers have to order several days in advance and have only one option for the delivery slot. This is quite far from the race to reduce delivery times from days to hours and now already to minutes happening in traditional online grocery.

The meal kits model of delivery slots has a lot of similarities to the logistics model employed by the Dutch online grocery retailer Picnic. The more restricted model allows the logistics to be more efficient.

Besides more efficient logistics, also picking of the orders is much more efficient for meal kits. This is because of the simplicity of the assortment. Meal kits offer a handful of recipes compared to tens of thousands of products offered by the big grocery retailers.

To compare the meal kits efficiency to the efficiency of a traditional online grocery business, meal kits can be assembled several dozen in an hour, whereas traditional online grocers assemble somewhere between two and six orders in an hour. 

Finnish meal kit provider Ruokaboksi has managed to assemble up to 60 meal kits in an hour.

In terms of deliveries, that one long delivery window enables much more efficient drop efficiencies. Ruokaboksi has been able to deliver up to 10 deliveries in an hour. This is very efficient compared to two to five deliveries per hour for a traditional online grocer with a big variety of delivery windows.

Meal kits can be highly efficient

The service offered by meal kits is in many ways inferior to traditional online grcoery. Just like with another grocery retail disruption, discount grocers, customers need to accept them in order to get something else. When customers have been taught to live with these restrictions, the service offered by meal kits can become much more efficient. 

Danish meal kit company Aarstiderne has been profitable for years. The profitability of Aarstiderne has fluctuated between 2% and 8% margins. This very well in a low margin grocery sector, let alone in online groceries. Traditionally online groceries have required high volumes to become profitablity. In the case of Aarstiderne, they have been profitable for the last eight years with only tens of millions of euros in revenue. 

Efficiencies enable profitability with lower volumes

Food suits well for subscriptions

Even though we tend to buy food spontaneously, food is also a category with very repetitive and forecastable consumption patterns. This makes it ideal for subscription services, just like meal kits.

When the efficiencies and scale have been achieved it is easier to start expanding the service to cover bigger share of the customers’ needs. This way the meal kits start moving up market just like any other disruption.

It will be interesting to see how the meal kits are able to move up market and catch a bigger share of the consumption pattern