‘Food tech’ sector trying to take a bite out of US$1.4 trillion market

Credit: financialpost.com

Maybe it’s a case of serendipity.

In the same week that Canada’s first meal-kit company announced plans to go public, a U.S. brokerage company published a 71 page report on the emergence of online food models.

In the first case, Montreal-based Goodfood is aiming to be a public company via a transaction with a capital pool company. As part of that objective, Goodfood, whose services are available in the Maritimes, Quebec and Ontario, plans to raise at least $20 million.

In the second case, analysts at Raymond James presented a report. (RJ has a substantial Canadian presence with brokerage, money management and banking services.) And the analysts, all based in San Francisco, didn’t hold in their enthusiasm for the sector that is reshaping how consumers buy, prepare and consume food.

“The massive size of the end market creates significant opportunities for companies in this space,” noted the report, adding that food expenditure accounts for 25 per cent of U.S. consumer spending — or US$1.4 trillion in total.

In other words while online food adoption is still in its early stages the opportunity is massive — though, the report cautioned that there will be differences in opportunities between the four key areas (online takeout market places, meal kit delivery, prepared food delivery and online grocery).

But across all sectors, the so-called digital natives are the one constant. That group “will be a key driver of greater online adoption…. The younger consumers are more willing to order food and groceries on line,” said the report noting that in general the “food tech models work better in areas of high density.”

The report added that it expects U.S. urban markets “to continue to be early adopters, given higher density as well as younger work forces that may also have more ability to pay for the convenience afforded by online food services.”

The report seemed more enamored with the prospects for the “online takeout model.” It pointed to the success of companies including GrubHub, which allows customers to order, online, from more than 30,000 restaurants in more than 500 cities. ‘We see a long road for growth,” it said adding that restaurant chains (alongside the independent restaurants) represent a large opportunity.” But the sector is also very competitive with UberEats and Amazon hoping to grow their market share.”

As for the meal kit sector, where consumers purchase fresh pre-portioned ingredients, that allows them to “cook restaurant quality meals in under an hour, the report had mixed views. (It estimated that the U.S. was home to more than 150 such providers with revenues of US$1.5 billion.)

Aside from the pluses of convenience, trying new recipes, healthier eating and less waste – all of which have contributed to robust growth — the analysts were concerned about retention rates, namely the ability and willingness of customers to be repeat customers.

And given the sector’s initial success, the report notes that a “plethora of competitors” have entered the industry. Indeed the authors expect the market to consolidate “as we believe the market benefits from economies of scale from marketing and production perspectives.”

Indeed its possible that investors may get more demanding given that such providers generate operating profit margins of about ten per cent.

“We believe investors will want to see companies that can deliver much higher gross sales volumes,” it said noting that Blue Apron (founded in 2012), HelloFresh (founded in 2011 in Berlin and which came to Canada in 2016) and Plated are the largest players. “But the category remains early in development, with many emerging players as well,” said the report.

Financial Post


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