Wednesday, June 28, 2017

Brian Gaynor: Changing tastes spur food frenzy


The food sector is undergoing massive changes, as indicated by the recently announced acquisition of Whole Foods Market by Amazon.com and the IPO of Blue Apron, which will list on the New York Stock Exchange. Blue Apron has a similar meal kit business model to the highly successful My Food Bag in New Zealand.


In addition, this week’s a2 Milk profit upgrade demonstrates that companies offering innovative food products can be highly successful: a2’s annual revenue has soared from just $62 million in its June 2012 year to an indicated $545m in the current year.

My Food Bag and a2 Milk are great examples of companies that have taken advantage of changing consumer trends and created huge shareholder value in the process.

My Food Bag and Blue Apron are new age companies that provide customers with the ingredients to cook meals at home.

The Blue Apron prospectus describes its offering as follows: “Blue Apron was founded in 2012 premised on a simple desire – our founders wanted to cook at home with their families, but they found grocery shopping and menu planning burdensome, time consuming and expensive.

“This problem inspired Blue Apron’s first delivery: a box with three recipes – seared hanger steak, barbecue Cornish game hen, and lemongrass shrimp with soba noodles – and the pre-portioned ingredients needed to cook them.”

The company, which emphasises the quality and freshness of its ingredients, has expanded into supplying wine and cooking tools, utensils and kitchen items recommended by its culinary team.

Blue Apron has taken advantage of three distinct trends: husbands and wives both working to meet their mortgage requirements and having less time to shop; companies developing much more effective and timely home delivery services; and a growing trend towards fresh and healthy foods.

The New York based company has been highly successful, with net revenue soaring from US$78m in the December 2014 year to US$341m in 2015. Net revenue increased to US$795m last year but it reported a net loss after tax of US$55m. The company had a net loss of US$52m, on net revenue of US$245m, for the March 2017 quarter.

The losses are partly due to massive marketing expenditure, which has soared from just US$14m in 2014 to US$144m in 2016 and a staggering US$61m for the first three months of the current year.

This marketing outlay, which includes free meals, is aimed at beating off strong competition from HelloFresh, Sun Basket, Purple Carrot and other meal kit companies.

HelloFresh, which is based in Berlin, was recently ranked by the Financial Times as Europe’s fastest growing company, as its revenue has soared from just €2m in 2012 to €597m in the December 2016 year. However, the company reported a net loss of €94m for the 2016 year after spending €157m on marketing.

These huge marketing budgets are consistent with the view that one or two companies will dominate the sector and ambitious start-ups are in a race to dominate the meal kit market.
Sun Basket, which is based in California, is reported to have hired a bank to organise its IPO and Purple Carrot has partnered with New England Patriots football star Tom Brady to promote its offerings.

Earlier this week, Blue Apron amended its prospectus to signal that it planned to issue new shares at US$15-US$17 each, valuing the company at US$2.8 billion to US$3.2b.

However, Blue Apron’s new shareholders will be issued Class A common stock, which is entitled to one vote for each share, while Class B common stock, which is held by senior executives, employees, directors and their affiliates, is entitled to 10 votes each. This inequitable voting structure doesn’t appear to have deterred investors, as they either believe the company has unlimited growth potential or have become complacent following recent sharemarket gains.

According to a recent Consumer survey, the food delivery sector has four main participants in New Zealand: My Food Bag, Emma’s Food Bag, Woop! World on Our Plate and Bargain Box. The latter is a sister operation of My Food Bag.

These organisations deliver meal kits with the ingredients for home cooking. They are quite different to UberEats and other food delivery offerings that mainly provide fully cooked hot meals on demand to homes and offices.

Consumer gave the four New Zealand offerings a higher rating for couples, compared with families, partly because some of the ingredients were too spicy for children. Consumer found that the ingredients were slightly cheaper at supermarkets, but one of the main advantages of meal kits is that busy couples spend less time in crowded shops.

My Food Bag, which is the clear segment leader in New Zealand, is now 70 per cent owned by a Waterman private equity fund following the sell down by original shareholders. These include Cecilia and James Robinson, former Spark CEO Theresa Gattung and celebrity chef Nadia Lim.

There is a strong possibility that My Food Bag will eventually list on the NZX, particularly if its strong growth continues and Blue Apron is a successful stock exchange listing.

However, the US food industry was thrown into turmoil on June 16 when Amazon.com and Whole Foods Market announced that they had entered into a definitive merger agreement under which Amazon will acquire Whole Foods Market for US$42 per share in an all-cash transaction. This values Whole Foods Market at approximately US$13.7b.

Whole Foods is an Austin, Texas based company which focuses on natural and organic foods through more than 430 stores. It has 410 stores in the United States, 13 in Canada and 9 in the United Kingdom. The company reported net earnings of US$507m on revenue of US$15,724m for the December 2016 year.

Whole Foods, which would probably be positioned somewhere between New World and Farro in New Zealand, sells only foods that are free of artificial preservatives, colours, flavours, sweeteners and hydrogenated fats. It has a strong emphasis on natural foods and will not sell products that contain unacceptable ingredients that are listed on its website.

Meanwhile, Amazon has been looking to expand its food offering through AmazonFresh, a home delivery service for grocery items on a same-day or following-morning basis. The company quotes an AmazonFresh customer as saying: “Love this service! It’s such a convenience for a working mom. I can’t believe that I can order groceries in the morning and have them delivered by the time I get home from work. It’s also been a blessing not to have to drag my little one to the grocery store.”

The acquisition of Whole Foods should accelerate the rollout of AmazonFresh, which has been slower than expected. Same-day home delivery is a big threat to existing supermarket chains but will also be a major competitor for the meal kit companies because these meal kits could also be delivered with the groceries.

Amazon wants to dominate every sector in which it operates, and it is highly unlikely that it will leave the meal kit sector to others, particularly as Whole Foods has already identified this as a growth sector by supplying Purple Carrot meal kits through a select number of its stores.

No industry is safe when Amazon decides it wants to be a serious participant and the acquisition of Whole Foods indicates that the food sector, including meal kit companies, will be subject to serious disruption in the years ahead.


Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.

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