HelloFresh: changing how people eat forever

As with any investment, your capital is at risk.

With its innovative approach to reducing the pain of meal planning and grocery shopping, the direct-to-consumer (DTC) meal-kit delivery service HelloFresh reduces food waste by providing convenient and healthy meal options straight to its customers' doorsteps.

In a recent conversation, investment manager Lawrence Burns hears from Dominik Richter, co-founder and chief executive of HelloFresh, about the company’s progress in its mission to “change the way people eat forever”.

Food, glorious food

The genesis of HelloFresh was three friends that wanted to flex their passion for entrepreneurship by addressing a large market need. They alighted on the $7bn global food industry, where they recognised households struggle to find the time and resources to cook healthy and nutritious meals.

Having identified consumers’ problems and challenges in maintaining a varied and balanced diet, they worked backwards to pioneer the meal-kit concept. Starting in Germany in 2011, HelloFresh expanded across Europe to North America and is now in 18 countries worldwide.

Reducing food waste by building strong supplier relationships

Traditional food supply chains often result in large amounts of waste. Richter states, “About one-third of the [US] harvest never makes it to the customer.”

With HelloFresh, it’s a case of less is more:

The fewer touches a product requires, the fewer stops, the fewer intermediaries, the fresher it is and the more potential to extract margin you have. So, it’s both good for business and the consumer; it’s good for the environment, so it’s a win-win.

The company has built direct, “very tight integrations and relationships” with around 2,500 suppliers globally. That helps maintain the quality and variety of its meal offerings.

An art and a science

Creating and delivering the “right” recipes and meal-kit menus at scale is complex. Richter notes:

We develop the recipes and menus and then source all the ingredients, repackage them into the exact quantities you need to cook these delicious meals and deliver them to your doorstep.

Meticulous recipe development and menu creation sets HelloFresh apart from its competitors, whom he says have “really underappreciated the art and science behind that”.

To begin with, “It was about ‘what are five or ten meals that have mass market appeal, and how can you still ensure that you have variety week over week, month over month?’”

Today, HelloFresh boasts a recipe database of about 10,000 recipes. It delivers approximately a billion meals annually and caters to a wide range of customer groups, cost, taste and variety preferences.

Factoring in a better consumer experience

A focus on improving the customer experience is the hallmark of HelloFresh’s culture. Richter confirms,

We continuously work on the proposition and the customer experience. My north star is that I want to be very confident that, every year, the product we’re building is much, much better than the product we had in the previous year.

This was evident during the Covid-19 pandemic when it entered the ready-to-eat (RTE) market by acquiring Factor75. The move was motivated by customer research, which identified that, unlike the meal kits, “ready meals are usually consumed when you’re alone”.

With this applying to less than 10 per cent of HelloFresh’s meal-kit customers, this is a complementary market where HelloFresh can quickly leverage its existing capabilities to rapidly expand its total addressable market.

“A lot of the muscles we need to be good at operating a ready-to-eat business are the same muscles that you need to operate a meal kit business,” he says.

That’s why Richter thinks his company can offer a larger range of more nutritious, much tastier and healthier ready meals than its retail competitors at a competitive price point.

In doing it well, HelloFresh can address consumers’ challenges in eating well in different circumstances, such as when you need a quick meal, but don’t want to compromise on nutrition or taste. He says, “In my view, there is very little reason why this business line shouldn’t become as big as meal kits is today.”

Burns agrees that, “what’s next in the journey . . . with ready-to-eat, with new DTC offerings over time,“ earns the company its place in the Scottish Mortgage portfolio.

Delayed Gratification

Here, it sits alongside innovative food-related companies, from Ocado to Delivery Hero and DoorDash. Looking across these companies helps the managers’ ascertain how the food industry is changing and evolving.

Burns notes, “[HelloFresh] could have reached profitability sooner and produced much higher margins than it does today had it decided to sit back and not reinvest that money into the product.”

But the fact that Richter hasn’t and “is willing to delay gratification to achieve that ambition is vital” in aligning HelloFresh’s management with Baillie Gifford’s long-term investment horizon.

If HelloFresh continues to enhance its offerings, even a slight increase in market share could lead to significant growth over time due to the vast global food market. The company is poised to shape the future of the food industry, providing consumers with convenient, healthy and sustainable meal options.

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