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Cook-from-scratch Start-ups Focus on Fresh Food and Boost Competition for Online Grocers

February 27th, 2016

It is no secret that the online grocery retail market is on the rise in Western countries. The trend first started in the US, although the UK is becoming a particularly attractive market, as online grocery shopping is increasingly part of the average consumer’s behaviour. While packaged food represents a large share of the online retail market, the strongest growth came from fresh food products.

Online grocery retailing is on the rise

Online retail grew its share of packaged food retail distribution in the UK to 5.1% in 2015, a 24% increase on its 2010 figure, while it increased to 0.8% in the US. France scored second after the UK in the European market with 3.8% in 2015, doubling its 2010 figure. Germany is lagging behind with 0.5%, although it grew 67% over the last five years. For the fresh food market, there is a similar increasing trend for the online distribution channel, with a growth rate of 35% in the UK in 2010-2014 (4.6% share of the retail market), versus 20% in the US in the same period (0.6%). In Germany, the same positive growth trend was observed, although the share of online fresh food sales reached only 0.5% in 2015.

The strong performance of the UK can be explained by its strong competition in the online channel. The major UK retailers, such as Tesco, Asda, Sainsbury’s, Waitrose, Ocado and Morrisons, already offer delivery services and some of them offer an additional click-and-collect service. E-commerce giant Amazon also wants to gain a foothold in the UK fresh food market. After operating testing grounds in the US and Germany, it launched its Amazon Fresh service in London in October, with future plans to expand across the UK. The UK is Amazon’s second largest foreign market and although it will not have the advantage of being a first-mover in the online grocery space, it most possibly will benefit from its brand awareness and reputation.

Tailored delivery services boost online fresh food trade

Players in the online retail market, and particularly in the fresh food industry, are increasingly under threat from new start-ups that go one step further by catering to time-hungry consumers through offering ultimate convenience in the shape of cook-from-scratch delivery. A prime example is the German start-up HelloFresh, delivering pre-planned meals to its customers in the form of fresh pre-portioned ingredients accompanied by a recipe and step-by-step cooking instructions. It aims to make cooking delicious food at home much easier.

In November, HelloFresh announced a record of delivering 6.1 million meals in seven countries across three continents. Delivery is available in the UK, the Netherlands, Austria, Australia, Germany and Belgium, as well as across the US (where it competes with other start-up players in the same niche, such as Blue Apron and Plated).

Another example is the other German start-up Kochzauber, acquired by Lidl in November 2015. It was founded in 2012 and, like HelloFresh, delivers boxes with healthy recipes and matching, fresh ingredients to consumers’ homes. Kochzauber already operates in Germany, although it will most likely also operate in the UK as Lidl announced earlier this year its plans to boost its sales in the UK by entering e-commerce. The company stressed that online grocery shopping is big in the UK and having an online presence there would boost its sales significantly. Hubbub is another start-up that has found a niche in the delivery of local food products at a click.

Busy foodies and DIY home cooks create opportunities for fresh food sellers offering convenience…

The increasing success of these new players in the online delivery market can be attributed to several factors driving consumer demand. The rise of the so-called “foodies” generation, or culinary generation, is one of them. Consumers are influenced by the media and social media becoming more food-focused. TV cooking and celebrity chefs are increasingly popular and they inspire consumers to cook more often as a fun experience. Also part of the “foodies” culture is the preference for organic and locally sourced products over mass-produced commodities. Start-ups such as HelloFresh and Hubbub are able to offer products from local suppliers as they are still operating on a relatively small scale compared to mass retailers.

Another important factor in the rising demand for convenient cooking solutions is the DIY (Do-It-Yourself) attitude of consumers. The digital revolution has empowered consumers to do things they could not achieve on their own before. It has made home-cooking more accessible and developed the concept of DIY cooking. For example, there is an abundance of recipe ideas and recipe videos on YouTube. Mobile applications for DIY cooking are also being used on a daily basis. Consumers, especially in the younger generations, now associate the concept of “convenience” food with “assistance” more than processed or ready-to-eat products. This need for assistance could result from a growing lack of cooking skills among consumers, especially in the younger generations. In fact, in the UK, government strategy highlighted a need to improve young people’s cooking ability. This is where convenient fresh food delivery comes into play. It offers a solution to DIY easy home-cooking for beginners, without the time-consuming activities of grocery shopping and finding recipe ideas. It is also an answer to the demand for healthier food without sacrificing on convenience.

…but it remains to be seen whether the cook-from-scratch delivery business is sustainable in the long run

The potential of new entrants in the online fresh food market could be significant in the future, although competition is fierce and they will have to adapt to other innovative players refining the niche. For example, HelloFresh markets its service as an answer to the problem of food wastage by delivering portioned products. However, there are limitations to this ethical claim. For some recipes, each ingredient is individually packed in plastic, which can result in excessive packaging, challenging the ethical responsibility of the company. HelloFresh does, however, advise on recycling all packaging and it offers the option to send a full box of packaging back for free.

One of the advantages of a start-up’s offer over consumer grocery shopping is that it is able to negotiate bulk deals with its suppliers and offer high-quality ingredients at an affordable price (the cheapest subscription amounts to £4 per meal). However, while this price per meal competes aggressively with premium foodservice delivery prices, it may not be affordable for every consumer on a daily basis. The market for “convenient” fresh food delivery service is still a niche, driven by the higher-to-middle range of income earners, as opposed to lower-income categories. Companies such as HelloFresh could see increased price competition from the foodservice industry in the future.

More generally, online grocery shopping and fresh food delivery services still represent a small share of the fresh food market versus bricks-and-mortar retail and their future potential and profitability is much under debate. As stated in our previously published opinion piece, Growing Delivery Demands and Competition in the Delivery Race, online delivery services require a high level of capital investments, they can be limited by geographical factors and fresh food products in particular need special handling. One of the solutions for the long-term strategy of start-ups seems to be leveraging other sources of revenue to complement their online fresh food delivery service. For example, Hubbub has launched Hubbub Catering for events. Logistics giants such as Amazon have the capacity for deploying online delivery of fresh food products on a large scale. This will be a limiting factor to the future growth of online start-ups. Finally, part of the special handling requirements of fresh food delivery is that the products stay fresh for a few hours even in the event that the customer is not at home and cannot store them appropriately. Heavy packaging is an answer to this problem, but it could most likely scare the ethical consumer away.

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