Meal Kits: Second-mover advantages to regional grocery chains

Meal Kits: Second-mover advantages to regional grocery chains

Meal kits, which challenged the status quo of grocery and restaurant industry a few years ago, have seen a massive shift from direct-to-consumer subscription model to in-store space. The migration started with Amazon offering its own pre-portioned meal kits via AmazonFresh. Unlike BlueApron which made meal kits mainstream, Amazon started its meal kits offering without the subscription model. Amazon, in 2018, acquired Whole Foods to bolster its fresh produce sales and delivery services, also introduced its meal kits in-store at Whole Foods. In the past two years, large grocery chains have noticed the value proposition in the new industry, and have started to offer their own meal delivery services.

Walmart, Amazon’s biggest competitor in the grocery industry, announced its own brand of pre-portioned meal kits which were available for purchase at 250 stores, including the option for pickup and delivery services. The recipes were developed at Walmart’s Culinary and Innovation Centre, and kits were assembled and packaged daily in store. Other large grocery chains such as Albertsons and Krogers opted for merger and acquisition route. Albertsons acquired Plated for about US$ 200 million. Kroger acquired HomeChef for initial value of US$ 200 million, and future earnout payments of up to US$ 500 million over five years period contingent on achieving certain milestones. While other grocery chains such as Fresh Market, Publix, Raley’s, and Lowes Foods entered the meal kit industry with their private brand of pre-portioned meal kits available for purchase at stores. Instead of developing their own recipes, they established partnership with chefs and top chef owned restaurants to introduce restaurant quality and experience of local flavours. Recently Gelson’s introduced in-store meal kits from True Food Innovation under the True Chef and Chef’d brands. Meal kit has continued to build momentum in 2019, expanding from web-exclusive subscription services to in-store distribution.

Many industry experts had opined that grocery stores entered the meal kit industry defensively because grocery chains lost revenue to meal kit companies. According to Nielsen report on shoppers’ enthusiasm for meal kits, 14.3 million households purchased kits in the last six months of 2018, an increase of 3.8 million households from 2017. Nielsen reported, in 2017, 67% of consumers purchased their kits exclusively online while 30% purchased exclusively in-store. Last year, the ratio shifted, consumers who purchased their kits exclusively online decreased from 67% to 60%, and those who purchased exclusively in-store increased from 30% to 32%. While the percentage of consumers who purchased from both the channels also increased from 3% to 8%. Sales of in-store meal kits stood at US$ 93 million in 2018, and retailers introduced 187 new meal kits, an average of 3.5 new meal kits per week in 2018.

In-store meal kits have seen a strong growth in grocery stores, and grocery chains are not competing defensively anymore. Meal kits are providing a new way to increase revenue and connect with the new generation of food buyers. Walmart, Amazon (via Whole Foods), Albertsons, and Krogers have taken the lead. These grocery chains were first to market private brands of meal kits without the subscription model, and hence enjoyed significant first-mover advantage. However, the question remains, how advantageous has been the first-mover strategy in this category?

First-mover Advantages

First-mover advantage is the idea that by being the first to enter a new market, a business gains a competitive advantage over its actual or potential rivals leading to higher revenues and profits over time. Broadly there are three benefits of first-to-market:

  1. Technological Leadership - A business can gain first-mover advantage when it has understanding and use of technology in ways that are difficult for later entrants to emulate. An innovative technology can provide sustainable cost advantage for the first-mover, if the technology and the learning curve to acquire it can be kept proprietary, and the business can maintain leadership in market share. Unless later entrants can develop technologies to produce at lower costs than the first-mover did, the first-mover will have a cost advantage.
  2. Control of Resources - The second type of first-mover advantage is the ability to control a resource necessary for the business, through strategic actions, which is better than resources later entrants can acquire. For example - establishing strong relationships with the best suppliers of raw materials needed, establishing positions in geographic or product space such that late entrants find it unprofitable to occupy similar space, etc. Furthermore, first-mover advantages are typically enhanced when economies of scale are large. First-movers effectuate cost-efficient processes, and the enlarged capacity of the first-mover serves as a commitment to maintain greater output following entry.
  3. Buyer Switching Costs - Switching costs are extra resources that late entrants must invest in order to attract consumers away from the first-mover, thus, first-movers enjoy the advantage that comes from buyer switching costs. Especially for consumer products, the first-mover has the opportunity to shape consumer preferences, and build brand recognition. Satisfied consumers tend not to spend time seeking information about other products, and tend to avoid the risk of being dissatisfied. Brand recognition not only makes existing customers loyal, it also helps in gaining new customers and diversifying product offerings.

Meal kit industry is a quintessential example of perfectly competitive market; a large number of firms competing with identical products which are perfect substitutes for each other and sold by all firms, perfect knowledge of prices and technology, and very low entry and exit barriers. In addition, meal kit production is less capital intensive and requires low technology input. In such a market, first-mover advantages does not last long.

First-mover Advantages? - Walmart, Amazon, Albertsons, Korger

Walmart and Amazon have made significant investments in setting-up technology to run their meal kit operations, and establishing a brand identity among its customers. Other large grocery chains such as Albertsons (Plated) and Krogers (HomeChef) completed expensive acquisition of meal kit companies to acquire technology and leverage meal kit brands to build loyalty among existing customers and draw-in new customers. Considering Walmart, Amazon (via Whole Foods), Albertsons, and Krogers as the first-movers to offer in-store private label meal kit brands, what were their gains of being first-mover in this category, and how advantageous has been for these grocers to be first in the market?

Meal kit operation essentially has five processes: recipe and ingredients management, shop and order management, inventory management, sacheting and assembly management, and delivery management.

Numerous ERP software companies servicing the food and beverage industry, offer a full suite of services to manage main business operations. At present, ERP companies are not focused on developing a holistic software solution to service integrated management of meal kit business operations, mainly due to lacking foresight of meal kit market size. The investment made in setting-up technology by first-movers may have been justified, if there existed a steep learning curve to acquire such an integrated management system and it can be kept proprietary. Instead a fast learning curve exists, as most of the building blocks to build an integrated management system for meal kit business operations already exist. In such circumstances, technological leadership established by the first-movers does not provide lasting cost advantage.

Blue Apron, the pioneer of meal kits, has been working diligently to correct its supply chain issues. No meal kit business can succeed without implementing an optimised supply chain, including sourcing, procurement, planning, manufacturing, logistics and distribution. Blue Apron describes itself as technology-led, data-driven company. The company’s supply-demand coordination activities such as demand planning, recipe creation, product merchandising, and fulfillment operations, enable Blue Apron to coordinate customer preferences with expected ingredient supply which helps mitigate supply chain risks and drive its end-to-end value chain. Despite following direct-to-consumer subscription model with week-long fulfillment cycle, Blue Apron has still been struggling with supply chain issues. Considering the difficulties faced by Blue Apron, the strategic acquisition of Plated (Albertsons) and HomeChef (Krogers) is all the more questionable. Unlike meal kit companies which had to set-up its supply chain network from scratch, grocery chains have strong supply chain network established for sourcing, procurement, planning, logistics and distribution of its fresh produce.

Early on, eager to gain market traction, all the meal kit companies invested heavily in their marketing activities to build a strong brand identity and loyalty among its customers. However, the two largest meal kit companies by market size, are still reeling from high customer acquisition cost, extremely high churn rate, and low average revenue per customer. In such market condition, expensive acquisition of Plated (Albertsons) and HomeChef (Krogers) raises more questions. Especially when Albertsons are scaling back in-store Plated meal kits, and both Albertsons and Krogers are not keen on disrupting Plated and HomeChef existing mail-order business model. The inherent problem with these acquisitions is that the acquired meal kit companies operate across the contiguous United States with centralised operating facility, and relying heavily on logistics and distribution partners for order fulfillment. While many analysts and food industry experts have criticised the mail-order business model, it was expected that the merger of meal kit companies with grocery chains would transform the centralised operations into more localised operations, thus reducing the operational costs, and introduce more local flavours and cultural diversity into meal kit offering. Another key acquisition objective of meal kit companies was to introduce omnichannel meal kit offering at national scale. Albertsons and Krogers are yet to integrate meal kit offering into their omnichannel strategy.

Second-movers in Meal Kits Category

In essence, the grocery chains that were first to enter the meal kit market didn’t really enjoyed any first-mover advantages. This leaves the market open to second-movers to easily enter into the meal kit industry. Grocery chains such as Fresh Market, Publix, Raley’s, and Lowes Foods have started their own private brand of pre-portioned meal kit offering. Let’s analyse the strategies adopted by these grocery chains.

Publix Super Markets

Publix Super Markets which operates 1270 stores located across Florida, Georgia, Alabama, South Carolina, North Carolina, Tennesses, and Virginia. It launched its chef-created, pre-portioned meal kits under the brand name Apron meal kits. Publix launched its meal kits under three categories: simple meal kits - offering restaurant quality and experience with 6 steps or less cooking instructions; simpler meal kits - for easy everyday cooking needs with 4 steps or less cooking instructions; and simplest meal kits - offering partly pre-cooked to completely cooked meals. Following the approach of first-movers, Publix offered its meal kits without the subscription model, and no long term commitment. The meal kits are available for purchase in-store, and Publix has partnered with Instacart for online delivery options.

One common complaint across Publix meal kits was missing ingredients information and unavailability of cooking directions on meal kit boxes. For example, in Harissa Chicken kit - ingredients were clearly labeled, while in Southwestern-style Chicken kit - ingredients were not clearly labeled as it wasn’t clear which chicken parts were included in the kit. Although, market pioneers such as Blue Apron have invested significantly in marketing and educating the public about meal kits, having ingredients listed on the box along with simple cooking directions will give confidence to consumers and help Publix’s branding and marketing efforts.

Lowes Foods

Lowes Foods supermarket which operates 80 stores located across North and South Carolina. It launched its chef-created, pre-portioned meal kits under the brand name Ready Set Supper meal kits. Lowes Foods adopted an innovative strategy of offering meal kits developed by restaurants. It partnered with chefs to create recipes that are highest selling in local areas, introducing local flavours to meal kits. It partnered with North Carolina’s celebrity chef Vivian Howard (owner of Chef & the Farmer) from Kinston NC and other top chef owned restaurants such as Meridian and Sweet Potatoes from Winston-Salem NC. It also followed the similar approach of offering its meal kits without the subscription model, and no long term commitment. The meal kits are available for purchase in-store, including the options for pick-up and delivery services.

The Fresh Market

Fresh Market which operates 159 stores located across Southeastern, Mid Atlantic, and Midwest states. It launched its chef-created, pre-portioned meal kits under two categories: Market meal kits - offering restaurant quality meal kits; and Little Big Meals - affordable homemade style meal kits. Fresh Market offered its meal kits on a weekly rotation. Each meal kit is available for a limited period of one week and then next meal kit rotation starts. Fresh Market’s meal kits were also offered without the subscription model, and no long term commitment. While the meal kits were available for purchase in-store, pick-up and delivery options are missing.

Raley’s Supermarkets

Raley’s which operate 72 stores located across California and Nevada, launched its chef-created, pre-portioned meal kits under three categories: Full meal kits - offering restaurant quality meal kits with all ingredients included to make a complete meal; Quick kits - affordable meal kits which include pre-cut vegetables and cooked chicken; and Creative kits - a build-your-own type meal kits offering combination of sauces, starches, and vegetables that give customers more flexibility in deciding their meals. Raley’s meal choices are seasonal with quarterly rotation of meal kits. Raley’s also followed the similar approach of offering its meal kits without the subscription model, and no long term commitment. The meal kits are available for purchase in-store, including the options for pick-up and delivery services.

It is evidently clear that the second-movers - Publix, Lowes Foods, Fresh Market, and Raley’s - in the meal kit industry were fast-followers to learn and understand the complexities of meal kit business, and exploited the advantages left behind by the market pioneers and first-to-market large grocery chains. The second-movers accepted the industry best-approach of offering meal kits without the subscription model. They introduced innovative strategies such as establishing partnerships with top chef owned restaurants for recipe creation. They also integrated the meal kits in their omnichannel strategy, ensuring that meal kits are available for purchase in-store and online, including the options for pick-up and delivery.

Although there are enormous advantages to being first in the market, in many cases, that does not preclude later entrants from being successful. In some industries, under certain circumstances, it's rather advantages to enter late. Meal kit industry is certainly one where businesses stand to gain higher if they are able to capture greater market share. DailyKit is a technology company that enables grocery chains to better execute their meal kit business through first-of-its-kind, custom built software solution specifically designed for easing meal kit operations.

Role of DailyKit

DailyKit offers an integrated management system of meal kit business operations which improves information visibility and team productivity across the operations team. As said earlier, meal kit business operation has five processes: recipe and ingredients management, shop and order management, inventory management, sacheting and assembly management, and delivery management. At present, the flow of information between various teams involved in these processes are not very well defined. Let’s walk-through an example. Usually, the culinary innovation manager creates a recipe for meal kit and breaks it down to ingredients level. The ingredient level information is passed onto line workers responsible for portioning, sacheting, and assembly of meal kit boxes. In-between, the shop manager decides how many SKU units are required to be placed on in-store shelves, along with managing the orders being placed from online sales channel. And the inventory manager ensures the availability of required inventory to carry-on the operational process. In order to carry-out the entire process efficiently, close coordination between various teams is necessary. However, the teams are set-up in silos, and information flow is very static leading to operational errors.

The most prone area where errors occur is during sacheting and assembly process. When the chef creates a recipe for meal kit, and breaks it down to its ingredients level, she does not design the operational layout for line workers (the order in which portioning, sacheting and assembly must occur to ensure all ingredients are packed in right quantity and all ingredients are assembled in the meal kit box.) When the operations are on a smaller scale, then such errors may not arise, however, when establishing economies of scale such errors will increase exponentially leading to decline in customer satisfaction.

DailyKit’s recipe and ingredient management, and sacheting and assembly management module precisely services to streamline the operational process and relay information to achieve zero defects in the entire operations. Taking the previous example, where the chef creates a recipe for meal kit, and breaks it down to ingredients level. The chef then enters this information in recipe management tool. The operations manager can then plan how the ingredients will be packed, essentially assigning each ingredient to its weighing device operated by line workers. Each individual line worker assigned to her weighing device will receive information about the quantity of ingredients to be packed. The weighing device will print the label for a particular ingredient only when the quantity conforms to the specification entered by the chef in recipe management tool. Once all the ingredients of a meal kit are packed, the line worker has to scan the label before assembling the ingredients into the meal kit box. These two steps ensure that each ingredient is packed according to the pre-decided quantity and all the ingredients are assembled into the meal kit box. This greatly simplifies the operational process, and removes the human error in packaging and assembly of meal kit box. This also allows for maintaining quality standards in large economies of scale.

This is one of many features that DailyKit integrated meal kit business operation management system provides. Having such an integrated management system for meal kit business operations mean that grocery chains do not have to invest in developing technology for their meal kit operations. As said earlier, early entrant grocery chains in meal kit industry could have had first-mover advantage, if the investment made in technological development could be kept proprietary and the learning curve to acquire such technology was steep. However, the services provided by DailyKit greatly simplifies the technology required in meal kit business operation. This provides an opportunity for smaller grocery chains to efficiently utilise their capital budgeting, instead of allocating significant amount in technology development that capital can be productively utilised in marketing and branding efforts. Thus, the advantages left behind by first-to-market grocery chains have now been converted into second-mover advantages for smaller grocery chains. The opportunity must not be squandered away, as it would be disastrous for both, the grocery chains and the meal kit industry.