HelloFresh: Business Model Economics & Strategy | In Practise

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HelloFresh: Business Model Economics & Strategy

Former MD & COO ANZ at HelloFresh


Executive Bio

Former MD & COO ANZ at HelloFresh

This executive joined HelloFresh as their co-MD for Australia and New Zealand in 2016. He spent three years at the business and led operations. Prior to this he was co-founder and CEO of Shopwings, a grocery delivery business and spent over five years as a consultant for McKinsey.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

The main aim of this interview is to better understand the HelloFresh business, specifically the unit economics of an order. Before jumping into those questions, could you give us a brief introduction to your background and your role at HelloFresh?

Before joining HelloFresh I was a consultant for McKinsey and moved to Sydney after founding several startups, one of which was in grocery deliveries. I joined HelloFresh as their co-MD for Australia and New Zealand. I was there for three years and led operations, whereas the other MD took care of marketing, top line HR and finance.

Were you more in the operations side of the business than marketing?

Yes, I was in charge of the L of the P&L.

Could you give us a break down of the unit economics of an order until you reach the contribution profit, specifically mentioning the main line items?

Yes, I can break those down in terms of categories but I cannot share numbers. There are two things to think about on revenue side, delivery fees which are minimal, and the food cost of the box. The type of box being purchased depends on both the number of meals and people per week, which is very important because that dictates the average basket size. When I was there, the main basket size was a few days per week for a small family. The main cost is the buying of the produce you put in the box, onto which you add logistics, which involves bringing the food from the DC to smaller DCs, then last mile delivery in small trucks. That can be broken down into the pick and pack component, which is the cost of all those DCs who manage all the orders, as well as perform quality checks. Those are the main costs on the procurement side.

We are trying to understand how we should think about the business in the coming years, and as you described, procurement food costs have been scaling with revenues, although there has not been much leverage. How should we think about those items as the business scales?

HelloFresh is a powerful business model because you have control of the entire supply chain when you choose all the products. Sorry, I forgot to mention packaging costs. HelloFresh have a lot of negotiating power. Another advantage is that they know exactly how much they need to buy and will only buy what they need, which allows them to have lower waste. As HelloFresh grows, there are many internal processes where people can predict their future needs by having better recipes and knowing what will be in the box in the following months. That allows them to make relevant commitments with suppliers who give them better prices. A third element, which is key on the procurement side, is in direction. As they grow and have very good quality with the right suppliers, they can almost co-develop products which are relevant to them. An example is the portion of meat because your products need to be sized for the number of plates. It will not be standard so they can co-create with a meat supplier to package the right sized chicken thigh which will be perfect for a particular dish.

There are similar dynamics on the logistics side. As you grow your logistics, you can negotiate both your rides and routes and, for the last mile delivery, there are two competing effects. On the one hand, you have an opportunity to integrate and negotiate better rates, but on the other hand, as you grow you reach more sparsely populated areas, meaning your average kilometer per box on the last mile increases as you capture more of the market. When it comes to pick and pack, they have a massive opportunity to reduce costs, which is tied to commitments you're able to make on the right DC. There are always competing effects on how many DCs you need per country because the bigger the DC the bigger the scale, and the more productivity you are able to reap from those sites. At the same time, it's good to have a DC closer to the customer, which lowers logistics costs and the supply chain in general. They are coming to the efficiency inside the warehouse and the size of the bets they place when growing a DC, and the location they choose to put that DC.

On the procurement side of the business, as you scale your relationship with suppliers improves and you get better quality and prices, which over time gives them an advantage as they can pass that onto customers or increase gross margins.

Sorry to interrupt, but one important aspect is quality. The better the quality, the better the retention and the lower the marketing costs. We saw a massive impact on the quality of the products and packaging to NPS. As HelloFresh grows, the product becomes better and you can reap the benefits from that because it increases retention rates.

Was that a strategy to compete with Marley Spoon or other competitors?

Yes, but there are two aspects in there. There is a massive benefit of scale in this business. The bigger you are, the better product you're able to get at a better price, which shows in the product you are able to offer your customers. If your product is superior to your competitor, you can grow faster which gives you more leverage; there is a snowballing effect. There comes a point where you are no longer in the same league as your competitors, even though it looks like the same market. That is something that people don't see as much.

On the procurement side of the business we're on the same page, but on the fulfillment side we've seen costs per order increase as HelloFresh has grown. That has to be put into context considering that HelloFresh has been growing massively. In the US, they now have 3.5 million customers and over 7 million customers globally, so that has been a surprise to us. We would have thought that HelloFresh would reduce fulfillment costs as they scale, which intuitively makes sense to us, but you said that specifically on logistics, as you reach less dense areas you drive more kilometers to deliver each order, which puts pressure on fulfillment costs, so is there a tipping point where we will see this scaling up?

There are three things going on. You cannot assume that fulfillment costs are flat, so you want to index it out on the average access to trucks in certain areas. Recent years have not been normal when it comes to that and access to supply of trucks has been quite tough. The growth of HelloFresh came during a tense global logistics situation. Secondly, there is a competing effect between the more you grow the better the utilization is of your trucks, and the better access and prices you have to the right couriers. That means a slight increase or a flat situation is a very good outcome. Many logistics companies are modernized in terms of price, meaning if the overall market goes up because there are no available trucks, the price goes up for everyone.

They are planning to insource most of their logistics, 20% of which are already insourced; how could that impact the cost per box? Could we expect minor improvements in that cost item or would it be the same as third party carriers?

It depends on the country, but the opportunity to insource is real and offers two main benefits: the quality of delivery as you have more control and the runs are only for you, which increases NPS, but you are removing one step so the margin of the courier is yours. However, you have to do it well and use those trucks enough during the week because you don't want huge fleets of trucks being under-utilized due to low volumes during the week. It is more a matter of doing it smartly and gradually, which is exactly what you're describing. It makes no sense to expand everywhere simultaneously. In my mind, you cannot simply say you will insource; it's more about looking at each opportunity in every city to see if it makes sense to build your own fleet.

What would you do in that sense, specifically on the US front?

The US is complex. Amazon did not insource everything but ramped up their fulfillment opportunistically. Fulfillment is complex and depends on the city and your ability to fill in your runs with other clients or do it at certain times of the day. You have to be smart and precise about it and gradually do it where it makes sense.

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