Subscription meal kit company files IPO

Frankfurt based HelloFresh recently filed for their IPO. The company is a leading provider of subscription meal kits, offering locally sourced and pre-portioned ingredients so that customers can prepare home cooked meals without having to do grocery shopping or plan out recipes, at around $10 per meal.

HelloFresh competes directly with Blue Apron in the US but also operate in geographies where Blue Apron is not active such as Australia, Austria, Belgium, Germany, The Netherlands and the UK. Interestingly, both HelloFresh and Blue Apron essentially copied the business model pioneered by a swedish company, Linas Matkasse. In fact, Sweden has a multitude of meal kit providers doing significant revenue which is shocking given that the country only has a population of 9M people.

While the global food market is unimaginably large at $6.4 trillion ($2.3 trillion in HelloFresh's core markets), the company estimates that the "fresh food-at-home" market is about $1 billon in 2015, growing to $8B by 2020.

Operating Metrics
HelloFresh has experienced astronomical growth, growing from $3M of revenue in 2012 to $290M of annualized 2015 revenue (note: converted from EUR to USD). If they have a strong Q4, 2015 revenue should easily exceed $300M, more than 4x over the prior year. While the company's EBITDA loss has historically been manageable, the high growth clearly comes at a cost. In 2014, EBITDA margin was negative (18%), but will worsen to about negative (26%) in 2015. In terms of gross margin, HelloFresh has maintained right around 50-55%, quite healthy considering that offline grocers typically have just 25-35% gross margin.

HelloFresh's service is clearly resonating with consumers, their revenue growth is a testament to that. But how scalable is their business? Their operating costs have been fairly stable as a percentage of revenue. General costs have come down dramatically, however general and administrative and marketing costs, which are interestingly almost identical as a percentage of revenue, exhibit less leverage. To achieve their 2015 numbers, HelloFresh will have to increase marketing considerably, from 32% of sales in 2014 to 36% of sales in 2015. This could mean that the company simply has many effective marketing channels that are worth piling money into to continue growing the business. If the users stick around and generate significant LTV, then this makes a lot of sense to do (not to mention that the service has high order values and thus fast marketing payback). However, the increased marketing spend could simply be making up for the high churn nature of the business. If the company is merely propping up their growth because users don't stick around, then that is very concerning.

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