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.

{audio:0:04:35} It would be great to start with a bit of your background to better understand your role in the industry, particularly at HelloFresh.

{audio:0:05:37} First of all, industry wide, I've done a lot in logistics. I’ve done a lot of the final mile type delivery stuff to direct to consumer, but I've also been in manufacturing, globally, as far as lots of times in the Philippines and Malaysia, over in Europe doing the full supply chain, from the materials and the manufacturing and so forth. I've had a blessed career with a lot of different experiences. I would say that, for the most part, direct to consumer has been definitely the focus and also the passion where I just love it because it’s ever changing.

{audio:0:06:24} In terms of HelloFresh specifically, I used to work for the President of HelloFresh USA back when I was at eBay Enterprise and GSI. I moved on after eBay bought the company and then he moved on after me. He went to HelloFresh to help open up the US market and, for three years, he recruited me and I kept saying no, no, no. Then finally, I went to work for him, so I reported right to the CEO of HelloFresh USA and I was there to solve their biggest problem, which was their final mile; the logistics was not performing well. They just didn't have the right leadership there.

{audio:0:07:04} I went there to go in, assess and fix which we did. If you're familiar with NPS scores, the detractor was always red; it was the worst part of the experience for the consumer and it took about six, seven months, but we did fix that and I turned that to a green so it wasn't a detractor anymore.

{audio:0:07:29} Then there was designing and building out the logistics part. I slowly took on more and more so I had all order management, all outbound logistics, all inbound and started working with procurement because, typically, procurement would buy a ton of chicken and it would include all of the final mile logistics to delivery to our buildings. We were splitting that up and saying procurement, you just buy the chicken and I'll take care of the logistics because I'll save us money and I also won't be at the mercy of when somebody else is managing it. I’ll offer full visibility because I'll manage it. Those are the three big pillars that I was responsible for there.

{audio:0:08:19} I was also responsible for our strategic growth and initiatives as far as where we were putting buildings. I worked with the commercial real estate people trying to locate buildings. Before Covid we had a plan and then Covid hit and it was like, give me any cold, empty building – chilled, refrigerated and freezer building – I need it, because we were growing so fast. But our other buildings were also being limited because of Covid impacts, less employees coming and social distancing. So to produce the exact same amount of boxes, we just needed more space.

{audio:0:09:01} I was doing all that, navigated through Covid and then I was living in the Philadelphia area; HelloFresh is based in New York city. Basically, it took me two trains to get to work. It was a five-and-a-half-hour round trip. I didn't do that every day – I stayed over in New York a couple nights a week – but I kind of knew that I didn't want to go back into the New York subway system. I’m more a country boy to begin with, and I eventually left.

{audio:0:09:48} We are interested in understanding better the two main cost items that are above contribution margin; procurement of goods and the fulfilment side. Starting with procurement which, as you said, was the biggest problem when you arrived, what happened with last mile? What was the problem you came to fix?

{audio:0:10:23} It was two things. One is that the food delivery in any industry is kind of unique because there's very little room for error. If is not getting there on the day that you expect it, you can have food quality issues. It’s very easy to piss off people. If you chose Wednesday as your delivery day and it doesn't show up, chances are you're going to pause your subscription. We don't tell you the day; you pick the day, so it's your choice as a consumer. If we're not meeting that promise then it it's easy for you just to turn it off. The churn that or membership pauses that are created because of a bad delivery experience from the final mile end is high.

{audio:0:11:32} The goal is, if I get every package to the final mile carrier on the day with a good label, good box, I expect a 100% to be delivered that day. When I got there, the team were using some regional carriers but they just didn't know how to manage it and that was really the biggest thing. If we used five different carriers, they had five different people, each were assigned a carrier but nobody ever saw a carrier's operation. I don't hire you unless I visit you. I want to see your operation. As a matter of fact, the last carrier that I brought on before I left HelloFresh, I went out and did 10 deliveries. I wanted to see their technology the day we launched them.

{audio:0:12:32} You’ve got a bunch of people out of college; they’re news reporters. They know how to download data, they know how to make fancy PowerPoint charts, but they don't how to write anything. I want newsmakers working for me. I'm going to teach you how to make the news. When I get an email from you, you can have all the attachments you want; I really don't give a shit about the attachments. In the top three bullet points of email I want you to tell me what I need to know. I want you to make the news; don’t just report it and throw it in PowerPoints.

{audio:0:13:04} My first challenge was that I had good people but they just didn't understand how to manage the network, how to manage the carriers and how to understand the data and trends. A lot of my time was spent building the department to think how I want them to think; and then the second part was then also making sure we had the right network of carriers and we had the right suppliers and that were performing at the level we want.

{audio:0:13:38} It was two things. It was getting the team where I needed the team to be which they did. It took about six, seven months; as I said we turned it to green. Secondly, it was also making sure we had the right network of carriers that were dependable and that we could count on. They were going to have great service so that, if we did everything right on our end, with getting the trucks to them and all that stuff, that they could then make sure they execute daily; that was huge.

{audio:0:14:12} When you came you had to put things in place and organize the delivery and the carriers from that side. What was the impact on the churn? How did you guys impact the underlying customer experience in that regard? What’s the way of measuring that impact?

{audio:0:14:39} Our marketing and revenue folks were looking at churn; that's their number one thing to reduce but it wasn't 100% just because of logistics. Yes, we knew, on the NPS score, we were a detractor but people wanted more choice. They wanted more culinary choices. They wanted more variety of this or that. Culinary is doing their thing. Some people say it costs too much, procurement are trying to get the cost down. There's a whole balancing act. I'd say, between culinary, procurement and logistics and fulfillment, we all work together and I think as leaders and as each department improved, then we'll say in total that churn improved. It wasn't just myself and my department or it wasn't just procurement or culinary.

{audio:0:15:37} I really can't give you a number to say I improved churn by X percent. You couldn't measure it like that. I was more focused on the NPS score where it was a detractor and then, eventually, it was not a detractor. It wasn't the worst score that we had in our surveys and so that to me obviously equated to less churn, but it was really hard to get an actual number. We knew it was a big impact, for sure.

{audio:0:16:13} Did you guys compare yourselves with other meal kit providers in the US to benchmark your operations in last mile delivery?

{audio:0:16:26} We were just crushing everybody, so our growth didn't matter because, at that point, the last thing I care about is what a loser's doing. We’re winning and we’ve just got to keep winning. We’ve just got to keep our heads down and keep and be internally dissatisfied. In my world and my career, it’s how I'm wired. I don't really care about the left of the right. I care about me, my team and where we're going. We're never going to be perfect but every exception is an opportunity to fix it. I focus on what our goals are and where we need to be, so it's really hard for me to comment on what Blue Apron or somebody else was doing because I really don't know.

{audio:0:17:19} My marketing people might look over their shoulders. To me, it’s about execution; every day's a challenge. I think what makes HelloFresh successful is, from a leadership point of view, we're very likeminded in that we're never satisfied. There's always a room for improvement because there's always mistakes. Until everybody gets their box perfectly on the day, 100% every day, then I have opportunity. There's mistakes, there's misloads, there's things that happen. There's carriers that have breakdowns. You’re never perfect but, until we are, how do I build that perfect supply chain? That really was my goal.

{audio:0:18:06} How would you break down the fulfilment costs within the business? One of the big parts of that expense would be last mile delivery, but how would you break down fulfilment expenses within the HelloFresh’s US business?

{audio:0:18:23} When you look at fulfillment expense, it really depends on what you're looking at. Typically, I look at fulfillment expense as two pieces. There's warehouse operations, so that's the people that are building the meal kits, building the boxes, binding the meal kits with the protein. There's that piece of fulfillment and then there's my side of it where I focused on all the logistics elements. You’ve built the box, now the box needs to go somewhere. Deciding the carrier mix, deciding the loads, when the loads depart, all that stuff is my side.

{audio:0:19:10} If you look at the three big buckets of costs, it's the procurement, the cost of goods; what did the protein and rice and vegetables cost? You have your product cost, you have the actual warehouse operations, and then after the warehouse operations the fulfilment. I was focused on reducing the fulfillment side. Without a doubt, we always want to gain margins so you have two ways to gain margin; reduce costs or charge people more. We were really focused on leveraging our growth to reduce costs in all areas. In fulfilment, try to reduce costs through automation and things like that, doing things smarter. In procurement, trying to reduce costs by negotiating better contracts and hedging the market. It was negotiating with carriers as I grow. My attitude is, I'm growing, I gave you X amount of million last year, I'm going give you X amount of million this year, show me some love and give me better rates; and not just rate concessions but then also how can I move stuff? Are you familiar with the term ‘first mile?’

{audio:0:20:40} If you can elaborate, that would be great.

{audio:0:20:45} First mile would be if you have a warehouse and let's say UPS or FedEx or DHL picks up at your warehouse and takes it to their warehouse and then they process it. You build the packages but then you don't control anything after that; first mile is trying to control that. If I was building packages in, let's say, New Jersey, I'd move them to Florida to get to UPS, then UPS would take it over and do the final mile. Controlling the inter legs and other things is, again, opportunity for reduction of costs.

{audio:0:21:24} As I said, there's things you can do in logistics. It's just not about trying to fight for a cheaper contract. You take cost out of the picture by density. Think Amazon. Amazon started, they sold books and CDs and 100% went to UPS. Then as they grew, they said, wait a second. We're so big now we don't have to have UPS pick up. We'll make loads and we'll drop ship and they did that. So they first started then when they went into logistics, they started with the in between, the trailer movements.

{audio:0:22:03} Then they got bigger. They said, wait, we can actually do final mile cheaper because we have the density to do it, so they started doing final mile. I look at it the same way. With logistics, have you grown to the piece where now you can take on different ends of it and take on different pieces of that pie to save money. That's kind of exactly how we were always doing everything.

{audio:0:22:34} One of the things were trying to understand, in the US since 2018 the total number of orders for HelloFresh has gone up four times, from something around 15 million to 60 million. Revenue has gone up a bit more but we’ve got this 4X, since 2018, in total number of orders. Then if you take a look at fulfilment cost, it’s gone up more than five times in that same period. Despite that much larger scale that HelloFresh has gained in the US, the fulfilment cost has gone up five times instead of four times for total number of orders. Why did that happen; and if we can expect operating leverage and specifically in which cost items we can expect operating leverage and margin improvement in that side?

{audio:0:23:52} When you look at the fulfillment costs the number one driver has been labor in the last two years. Covid has crushed labor costs. In the US, minimum wage has jumped more in the last two years than ever and it can vary by state; there's government mandated state stuff. Prior to Covid, I could pay a warehouse worker $11.50 an hour. Those jobs now are $15 to $17 an hour jobs, just to get the people.

{audio:0:24:39} As far as fulfillment per se, they can make some gains in automation and process improvement but the biggest driver by far and especially the biggest increase by far has been the labor costs. I can't speak globally. I can only speak for the US but, without a doubt, that is the biggest driver. You can't pull that back. You're not going to pull that back. It should stabilize at some point. You would hope that we get to a point where there's not going to be these big wage increases and that it will go back to the 3% to 4% a year type wage increases. Right now, in terms of the frontline warehouse workers, you have to encourage people. If we're all fighting for the same person then the person that wins is the person who probably pays the most. There's a lot of economic pressures on fulfillment on just paying the people to get them in the door.

{audio:0:25:57} To what extent can automation help to reduce or scale that cost item? If labor has been the one driving the increase in costs above growth, to what extent can they invest in automation to reduce that cost item?

{audio:0:26:20} That’s where the trick comes. Where can I use automation to help offset that? It used to be we want to use automation to decrease costs. Now it's more a conversation of, how do I get automation to offset something or to not make it as bad. But the problem with automation is, typically, it is not cheap. It takes a lot of capex with the growing market for me to be successful; HelloFresh have to be in multiple locations as far as more warehouses are concerned. If you go from three to six to seven warehouses and you try to automate all them, that's a lot of capex. Now I'm not saying that you don't do that but a company has to figure out where it's going to spend its money.

{audio:0:27:28} Do you want to put it in marketing? Do you want to put it in this or do you want to put it in automation now? HelloFresh is at the point where they need to do more automation because the labor market’s not going to get better. You’ve got to do things in warehouses and I’m into warehousing, I'm in the 3PL world now, where you have to make those smart decisions so that you are doing things to try to need less people down the road. That's important. Automation obviously gives two things. Usually, automation gives you less manpower needed to do something, and it also improves quality.

{audio:0:28:16} It's just hard to understand exactly what that right ratio of spend is and that’s the appetite of the company. If we say, what do we want to put in capex this year and then what do we want to do and what's the feedback and all that stuff? But years ago, you tried to do an ROI on the spend and say okay, I'll invest this if I get it back. Now it’s like no, you need to invest because you aren't going to have those people. Don't think about it as necessarily a return on investment. Think about it as survival, because it is a labor-intensive product.

{audio:0:29:01} Can we break down total expense between warehouse operations and transportation. Let’s say automation can help to reduce warehouse operation costs, that’s fair. Then the other will be transportation or logistics. What has been the performance of that cost item? How can they improve operational leverage from that cost item?

{audio:0:29:45} Similar to the fulfillment side, the final mile’s gone up. In the US, during Covid, UPS, basically, fired their shippers. They said, hey listen, if you're not profitable enough for us, we're not picking up your packages. I know that we got letters that said their rates are going to go up 10%, next month and in six months they are going up another 10%. This was happening all over. In the US market, the logistics has definitely gone up.

{audio:0:30:22} When I was there, it was before all that hit. It hit me at the end but we were diversifying through regional carriers because, typically, if you use a small regional carrier, you’re going to save money and we were building the density that could make the loads to get to the regionals, so as I was bringing the logistics cost down and improving equality both at the same time. Two hard things to do is improve quality and save money, we were doing it; that's when Covid hit. Quality was still there but the costs have definitely gone up and unfortunately, it's a carrier's market and the shippers don't have a lot to say right now.

{audio:0:31:06} The pendulum is going to swing. It's going to take a little time but the pendulum will swing and the shippers will be able to command better pricing, but we're still probably a year away from that. There has been a tremendous increase in the last year to the final mile costs, no doubt. But HelloFresh could pass that on, so even though it's a cost, it doesn't mean it has to impact your margin. I think when I left, they were charging $9 shipping and handling along with the cost of the box. I think it was $8 when I got there and, at one point, we added a dollar. Even though this cost can go up, HelloFresh can easily pass that on to the consumer if they want to and they could be cost neutral on that, if that makes sense.

{audio:0:32:11} Would it make sense to think that HelloFresh, with the scale they’ve got and the fact that they are growing well above competition, this will be a way let’s say to better compete against the Blue Aprons of the world and competitors in the US because of the density that they’re building. Do you see that?

{audio:0:32:29} Correct. Let’s say for instance, Blue Apron, I don't know what they're doing now, they’re basically choking to survive. Let's say they had a warehouse in North Jersey, we had one in North Jersey, our warehouses were minutes apart. I'm producing so many packages that I can make a direct load all the way down to Florida, all the way down to North Carolina, I can make a load going to Chicago. So I have enough packages, I can depart these loads every day and I only pay for the final mile. Blue Apron doesn't have the density, don't have the volume so that means at their New Jersey building next door to mine, all their packages are going right to UPS or FedEx, and that courier company is moving it to Florida.

{audio:0:33:17} You’re paying for that and when you do it yourself, you pay less. It’s just an underlying game at that point. The more volume you have, the more you can control. We talked about the Amazon effect; the more you can control, the more you can cut costs out. Without a doubt, if they're still managing things right post me leaving, I'll guarantee you that HelloFresh has to have a lesser final mile or logistics cost than any of their competition because they're just that big and they can leverage that. They can do stuff more on their own.

{audio:0:34:00} Would it make sense to build their own logistics networks as they gain scale?

{audio:0:34:08} Sure, absolutely. I used to have pictures of a HelloFresh tractor trailer that was all branded. We didn't have any. I had my daughter do it electronically so I could use it as my Google background. If I was in a video, you'd see a HelloFresh tractor trailer behind me. Again, it’s density and scale. You don't start with the final mile, you start with the inter-transport. You've heard the term reefer trailer. Do you know what a reefer trailer is?

{audio:0:34:511} A reefer trailer we call them in the US, would be a climate-controlled trailer. I can have a trailer at freezing. I can have a trailer at just above freezing. A lot of our stuff needs to move to cold chain as far down as I can. To help improve quality too, if I'm moving something from New Jersey to Florida, I'm putting it in a reefer trailer. If I'm Blue Apron, at UPS there's no climate control. I'm kind of getting off a tangent on quality, but again size can also not only save you money, it can improve your quality. Where I had runs, where I'm constantly going back and forth, I could go down to Florida, take a trailer of packages and then I could pick up produce and come north.

{audio:0:35:43} How do I build? Almost all the produce, all the stuff that we consume comes from the south; it can grow year-round. So my eventual plan was, how do I complete that supply chain with my own tractor trailers and what savings would that be? To me that's inevitable. They haven't done it yet but I think that that's definitely on the roadmap and, again, that'll save costs down the road.

{audio:0:36:16} That’s helpful because it was a bit counterintuitive for us to see the volumes going up. One would expect, with the density they’re getting in the US, that should be at least flat if not decreasing and seeing operating leverage there. Moving on to the procurement side, how do you think they can build an advantage there and compete better in the future?

{audio:0:37:13} The biggest thing procurement guys would do, typically, is just about leveraging your spend to get cheaper pricing, so buying procurement 101. The cost of a chicken's the cost of a chicken, so you're only going to drive the costs down and then it's going to plateau. I think HelloFresh has gotten to that point where I don't think they can get chickens any cheaper. They can't get tomatoes any cheaper. Anecdotally, I was told when I was there that HelloFresh was buying more chicken than Walmart. At some point it flatlines.

{audio:0:38:00} Then you say, how do I get it cheaper? I'm not saying they're going to do this but do they do partnerships? Do they buy a chicken producing company? When you do that, not only do you think you can maybe eventually get it cheaper but you can maybe also control the supply chain a little better to make sure that you always have enough for your needs. I can't see their procurement costs getting any cheaper and I think that that supply chain is suffering the same as logistics and warehouse, where everybody's costs are going up tremendously. We're getting ready for a recession, but we're in massive inflation times right now.

{audio:0:38:52} Stuff is at like a 40 year high here in the US right now for everything, so it's not going to be about getting anything cheaper, it’s just going to be not taking as big of an increase. I would've had a totally different conversation with you a year and a half ago, but it’s very hard to say you're going to reduce procurement costs, fulfillment costs, logistic costs right now. It's just a bad time. Now what can you do so that the smack in the head isn't as bad with the increase? I think I eventually would have wanted to control more of the downstream; that an option. I'm not telling you they’re doing that, but that would be an option for procurement.

{audio:0:39:47} You’re done negotiating anything cheaper because you're already consuming too much. Nobody's going to give you a better price if they're going to lose money on it. Now it's really about, can they do different things with partnerships, relationships and and even maybe acquisitions to not only get a better price but also to secure their supply chain.

{audio:0:40:16} How do you think HelloFresh is positioned to navigate this inflationary environment on food?

{audio:0:40:24} I think they’re positioned well because I believe in their management.

{audio:0:40:29} Is it because of their management or because of their business model itself?

{audio:0:40:35} People ask me this all the time; why is HelloFresh more successful than Blue Apron? I say it’s because of the management. It's a rigor to wanting to be the best. It's a rigor to not accept failure. I don't want to waste your time but I can remember back in my 3PL days, I dealt with Sports Authority and Dick’s Sporting Goods. Are you familiar with both those companies?

{audio:0:41:09} They’re big US sporting goods companies, big box retail stores. I did all their ecommerce for both stores and, at the time I was launching shift from store and pick up in store and all that stuff. Everybody does it now, but back then it was new. The Sports Authority people tried it and tested it and they didn't think it was really anything worthwhile. Dick's Sporting Goods ran with it, they loved it, they saw the vision. I can tell you right now fast forward eight years, Dick's sporting goods is the leader in the US and Sports Authority went out of business and that was all due to management. It was all because they both sold the same product and the exact same business model. The only difference was the management at Dick's was relentless. They got it. They were always looking to push, push, push.

{audio:0:42:06} The Sports Authority people weren't and Sports Authority was probably bigger than Dick's at one point. They don't exist anymore. They’re one of those retailers that went out of business. For me, biggest difference at HelloFresh is it's a bunch of people like that. We push, they hire people like myself, they hire people who were not satisfied.

{audio:0:42:29} When you say management team, you mean the management team that work in in the US or something more global?

{audio:0:42:43} I can't speak to the global team. HelloFresh was split into two divisions. It was international and US. The year I left, we did about 1.2 billion in the US and all the international, the other 12 countries did about 1.2 billion, so we were kind of managed and we did what we wanted in the US. We kind of ran independently because we’re in the US; we don't give a shit about anybody so we do things ourselves anyway. We were sourcing our own software, we were doing things our way, but I would have to think that the company, on the whole, was incredibly successful. I think it is that attitude of how you hire and hiring the right people; we'll call it getting the same DNA. You can get a job tomorrow at Google and you don’t need a grade. You can get a job without any type of education because they hire the person, they analyze the person, they interview the person and if they get the right Google light they call them, then they'll teach them what they need to do to be successful in the job. They're just trying to find the right person.

{audio:0:43:52} That's kind of like my theory on how I hire. I don't really care about your resume. I just want to know you and, if you're the right person, you'll be successful and I'll put the callouses on your hand, I'll teach you the knowledge I have. For me I think what makes HelloFresh different is the people. It's the management, without a doubt.

{audio:0:44:20} If we take a look at the performance of HelloFresh versus the other competitors within the meal kit industry, it has been amazing. They smashed every single competitor, not only in the US, but in every single region which they operate. How do you see the meal kit industry competing within the grocery space? Do you think that it’s something that has seen a boom because of Covid? Do you think it’s going to last? I’m trying to understand your take on demand, if you think this is going to keep growing as fast as we’ve seen or is there too much hype to keep this growth rate?

{audio:0:45:09} It’s actually one of the reasons it took them three years to convince me to go join them. I was not sold on a business model personally. I’ve turned around, I think they do have a good business model but in the US there’s other companies, the shaving companies like Dollar Shave Club, Harry Shave. All these companies were subscription based on meteoric growth, crazy growth, in the first years. Then what do you do now if you're on Harry's or Dollar Shave, the actual razor and blade is just a piece of the company. Now they're selling underwear and cologne, to stay relevant.

{audio:0:46:04} They had to diversify because it went down. At some point, HelloFresh is not going to keep growing the meal kit business. Just forget Covid; obviously Covid changed that for a little bit, but once you get into, I'll call it a normal state, get back to a normal life, no, they're going to struggle. But they're diversifying. What did they do? When I was there, we bought Green Chef. Not only were they doing meals but now they could do paleo, keto; we launched EveryPlate. They're trying to hit more markets.

{audio:0:46:45} Then what did they do last year? They bought Factor. For every HelloFresh, Green Chef, EveryPlate plate box you had to cut, slice dice and bake and make the meal, but they never had a product to compete with the ready to eat meals. That was a whole nother industry, so they bought Factor. Now they have a ready to eat meal capability. Now they’re going into grocery; I don’t know much about grocery, but why don't we sell plates, knives and other stuff that goes along with eating.

{audio:0:47:22 To me, the growth isn't going to be in meal kits. I think that that's going to hit a saturation point and if they want to continue to grow revenue, they're going to have to diversify in other markets and in other products and whether that's their own product, whether that's partnerships, 3PLs, white labeling, there's no way they can sustain the year over year growth they've had in the next five years. I just don't see it.

{audio:0:47:53} The saturation point just in meal kits, would it be fair to say it’s 90% saturated or closer to 50?

{audio:0:48:05} It's hard to put a number to it. I just think that to the current market, the age group, the people who are interested in it, I think their struggle is to maintain. I don't think you're going to grow tons in that space right now because you've already hit all the different markets. Everybody knows who you are. Every day I get emails from them. They're marketing like hell right now. During Covid, we pulled back all marketing. We didn't need to market, people are finding us, but right now they're back to like advertising like crazy. I see the emails, I see the advertisements. When they're spending that much in marketing that tells me that they're looking for people, if that makes sense.

{audio:0:49:01} Do you think that there’s something else that you believe it’s important to the overall thesis of or future of the company? If not if you can highlight any kind of risk that you can see for HelloFresh that you believe is important, that would be great to end the call.

{audio:0:49:28} In that space, their headwinds are going to be competition. There's nothing fancy about a meal kit business. HelloFresh’s chicken is not a special chicken that nobody else has. HelloFresh’s peppers and onions are no different from anybody else's. All HelloFresh is doing is putting it together and marketing it and coming up with great recipes, so there's nothing proprietary, maybe other than their recipes per se, that anybody else can't do.

{audio:0:50:13} I think like one of their biggest risks would be, why doesn't Amazon go into it? Why doesn't the largest grocery stores, Albertson's and stuff like that, why don't they do it? They already have all the ingredients. They have the same buying power. To me, it wouldn't be hard for a big grocery chain nationwide or an Amazon to get into the meal kit business if they wanted to. I think they easily could and so I think that's a threat that nobody's done yet. Probably because of Covid, everybody shelved those ideas. I'm sure somebody will come out there but they don't have to come out as a startup like you and I start up the business and having no buying power and our expenses are high.

{audio:0:51:01} You have some companies out there that probably have the infrastructure and the buying power to come out as a formidable foe. To me, their number one risk of future growth is just having real competition. Right now, they don't have real competition. The second is just the supply chain from the procurement side. If anything were to happen to the poultry industry or any of that stuff, that could have devastating impacts on their business model.

{audio:0:51:40} That will impact every single player in the grocery industry on the same level, right?

{audio:0:51:46} It would. It wouldn't be specific to them but if you're looking at their stock, investments and growth, if that's where people are looking to invest in, I'm just saying that's just a potential for them. It could hit other industries, but I don't invest in every industry and every company, so it's really just looking at the company I'm investing in.

{audio:0:52:16} In 2021, HelloFresh were expected to gross 60%. For us it’s hard to judge how much of that might have still been Covid tailwinds or they are now facing their reopening headwinds. Where do you think we are in that sense?

{audio:0:52:55} I think we're in a really crazy time. It's a great question, you just look at the news daily here in the US. Covid is at an all-time high, but yet everybody's saying it's just a cold. How it impacts the actual behavior to increase sales there and buy, it’s just really unpredictable. I wish I knew. It’s so unpredictable to understand that. As I was stating earlier, let's just say we're back to normal, I think there is a saturation point and look at the way I see them advertising right now. They’re advertising like crazy, $90 free, 14 free meals.

{audio:0:54:02} We’ve talked about fulfilment, logistics and procurement. What you didn't bring up was the CAC, cost of customer acquisition. It's very expensive at HelloFresh. That was a huge, huge cost because of the churn. You spend all this money on customer acquisition, the average customer would only about three, four weeks, so that was a big thing how to change that. Throw that out the door with Covid, but the fact that they're advertising the way they are right now tells me that they have the capacity and they don't have and they need to grow. We were throttling growth during Covid. We were offering only one day a week delivery. We didn't want to say no to anybody but we weren't being as flexible with picking your delivery days to try to throttle back the demand. Now they're asking for the demand. It tells me that they definitely have more capacity.

{audio:0:55:04} You mentioned, initially, that as you improved the recipes, you improved procurement and delivery experience, churn came down. How much room do you think HelloFresh has to continue along those lines or do you think they are more or less hitting saturation point and that they’ve made the bulk of potential gains in terms of product value proposition, let’s say.

{audio:0:55:34} I would think that when it comes to those type of customer experience things with the logistics, I think they definitely have knocked it out of the park and you just can't hit the ball any further. You can only drive a golf ball so far. I think that they've hit the driver, they're hitting 340 yards out there every time. I definitely believe in that. Now if I want to score better, it's the other things they need to try to figure out. Maybe it’s about diversifying. At the end of the game, it's all about growing revenue. If you and your wife are ordering three meals a week, I can't get you to order six meals or eight meals.

{audio:0:56:26} Their whole thing is, how do I grow the value of the box; revenue and cost per box were the two main KPIs. So what is my revenue per box? Well, hey, let's do add-ons. I can buy garlic knots for 25 cents and sell them to you for $2. Awesome. Win-win, everybody's buying garlic knots as an add-on. So that's the kind of things they were doing; add on extra protein and then you'll have leftovers for lunch the next day. It was about always coming out with things to grow the revenue per box, to get that $66 to $70, to $75 without having the costs come with it of course.

{audio:0:57:07} That's why they're into the grocery now. I don't know the full grocery business model, but again how do I sell you and your wife just not the $70 box, but now I'm selling you grocery items and things like that. That's really where, as I said, I think they've hit the driver as long as they can. I think now it’s doing those parts of their golf game that'll continue to grow. I can't see them, post-Covid, growing the year over year growth that they've had the last five years.

{audio:0:57:42} Are any of these markets which are add-ons, such as ready to eat, keto, particularly exciting or we should be watching because of growth retention?

{audio:0:57:55} The meal kit industry’s peak season is Q1; Jan, Feb, March. It's like gym memberships and then it tails off. They're going to see a spike in Q1 like they should. As I said, it's January, they're advertising like hell right now. They're trying to grow that. They're trying to hit the Q1 goals but I think things like keto, they're kind of like fads, they're diets. It’s the new thing. People that want organic or they want those type of things, it appeals to a market but just a small percentage of the market.

{audio:0:58:52} Even though they're diversified and they can appeal to the different market segments, that's not going to be where the growth's going to come. It's not going to come from the people that have FU money that don't care that they're paying for paleo and keto. That won't be hyper growth for sure. There will be growth, but it's not going be hyper growth.

HelloFresh Group - US Logistics

Former VP Operations & Logistics at HelloFresh USA

inpractise.com/articles/hellofresh-group-us-logistics

HelloFresh Group - US Logistics(February 3, 2022)

Former VP Operations & Logistics at HelloFresh USA

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