Meal kit delivery startups are eating into supermarket revenue

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Companies that deliver meal kits directly to consumers are gaining traction in the UK, with spending on services like HelloFresh and Gousto growing by nearly 65% in the first half of 2016, compared with the same period in 2015, according to a report from analytics company Cardlytics.

The volume of orders placed with these services grew by more than 47%, compared with H1 2015, according to the study, which analyzed the spending habits of 5.8 million UK banking customers. Meal kit delivery services allow customers to select individual meals that they’d like to prepare themselves, and then deliver all the necessary ingredients for the meals to the customers’ front doors.

The success of these services is drawing “a small but noticeable bite” of business away from traditional supermarkets, Cardlytics said in its report.

  • Customers who use these services spent 2.8% less at supermarkets in the first half of this year, compared with the first half of last year, the study found.
  • These customers also spent 2.2% less on eating out at restaurants in the first half of 2016, compared with the 2015 period.

The market for meal kit delivery services both in the UK and US is still tiny compared with the market for traditional supermarkets. However, meal kit delivery startups are growing in popularity and drawing more attention from investors.

  • Revenue generated by meal kit delivery services in the US will top $1.5 billion this year, according to research firm Packaged Facts.
  • Berlin-based HelloFresh has raised 220 million euro ($233 million) from investors at a valuation of more than 2 billion ($2.1 billion) euro.
  • In the US, Blue Apron has been valued at more than $2 billion.

The success of these services has been driven largely by convenience, as they allow customers to skip a trip to the supermarket and have their groceries delivered right to them. The services also provide recipe instructions and pre-portion the ingredients for their recipes, making them easy for customers to prepare. This convenience should continue to fuel growth, though these services won’t take a huge chunk of revenue from supermarkets anytime soon.

Digital platforms are now enabling the entire restaurant industry to plug into online delivery. In the dominant on-demand meal delivery model, platforms like Grubhub serve as a middleman that connect people to food using the scalability of the internet.

Although some industry leaders are processing hundreds of millions, even billions, in annual food sales volume already, they're a drop in the bucket in terms of the total addressable market (TAM) for food delivery, which is valued at $210 billion, according to Morgan Stanley Research estimates.

Companies are adopting diverse business models in the market to deliver these meals; some, like Postmates, are focused on the logistics of delivering food, while end-to-end providers like Sprig cook, facilitate ordering, and deliver the food themselves. Ultimately, order-focused platforms like Grubhub/Seamless and Eat24 appear to hold the strongest positions in the market. The former controlled an estimated 59% of total order volume in 2015, while Eat24 held an estimated 7% share. Moreover, Grubhub/Seamless could pose a threat to the logistics companies DoorDash and Postmates if it pushes further into proprietary delivery services, especially in markets its competitors haven't expanded to yet.

Despite varying advantages and disadvantages, all stakeholders will have to navigate some challenges in the market, including cooling deal volume, consumer resistance to delivery fees, potential industry consolidation, and downward pressure on take rates, which measure the revenue a company actually earns out of the volume they process.

BI Intelligence, Business Insider's premium research service, has compiled a detailed report for on-demand meal delivery that sizes the market for on-demand meal delivery, outlines the main business models, assesses which key players are in the best and worst position in the market, and also analyzes the underlying risks that all stakeholders will have to navigate.

Here are some of the key takeaways:

  • There is a massive unfulfilled market opportunity. As of 2015, about $210 billion worth of food is ordered for delivery or takeout on an annual basis in the US, according to Morgan Stanley Research. But two of the industry leaders, Grubhub/Seamless and Eat24, generated a combined $2.6 billion in food sales last year. This means the market is underpenetrated but massive, which will incentivize continued competition and, potentially, an influx of new entrants.
  • There are three main business models that companies adopt. The dominant business model so far has been platform aggregators whose primary function is to support online orders. These include Grubhub/Seamless and Eat24, which control a combined 66% share of the market so far. Other models include delivery-focused logistics models and full-service models in which companies cook the food themselves.
  • There are a number of risks that all players in the ecosystem will have to navigate. SpoonRocket, a once promising full-service delivery provider, shut down earlier this year in the face of insufficient capital and intensified competition. This, along with cooling deal volume, could signal upcoming consolidation in the industry. Other risk factors include consumer resistance to delivery fees and lowering take rates, which measure the revenue a company actually earns out of the volume they process.

In full, the report:

  • Overviews the on-demand meal delivery market and quantifies the opportunity for expansion.
  • Explains the three main business models meal delivery companies adopt.
  • Runs through the main competitors in the market and assesses which are in the best position to succeed.
  • Identifies the underlying market risks and how they might disproportionately affect certain types of competitors.

To get your copy of this invaluable guide, choose from one of the following options:

  1. Subscribe to an All-Access pass to BI Intelligence and gain immediate access to this report and over 100 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> START A MEMBERSHIP
  2. Purchase & download the full report from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of on-demand meal delivery.

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