Environmental Analysis of HelloFresh

Lead By Example

College of Integrative Sciences and Arts, Arizona State University

OGL355: Leading Organizational Innovation and Change

Dr. B

October 24, 2020

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Introduction of Environmental Analysis of Hello Fresh

Lead By Example will present their environmental analysis on HelloFresh to

identify all external and internal elements which can affect the organization's

performance. This entails assessing the level of threat or opportunities these factors may

present. We will cover an analysis on the industry’s current status, threats of new

entrants and substitute products, the bargaining power of buyers and suppliers, industry

rivals and target markets and the competitive strategies against the competition.

Industry Analysis

During this Industry Analysis, we will assess the current business environment of

HelloFresh in order to understand the various economic components of the market place

and how these may be used to gain a competitive advantage against the competition.

HelloFresh was founded in November 2011 by Dominik Richter, Jessica Nilsson

and Thomas Griesel in Berlin Germany. Their business model is to provide buyers with a

quick and simple way to prepare healthy and organic meals using provided recipe cards

and ingredients. All recipes are designed for meals in under 40 minutes as a simplified

alternative to grocery shopping and meal prepping. The cost of their service on average

is about $65 for two people a week. As one of the first meal delivery kits in the world,

this team packaged and hand delivered the first ten packages locally, but within a few

short years they were delivering nearly a million packages internationally. HelloFresh has

grown to have an annual revenue of about 1.6 Billion with Blue Apron being their biggest

competition coming in at around 430 million in revenue. Since HelloFresh was founded,

they have participated in 7 rounds of funding and raised close to 370 million. They are

based in Germany with 253 retail companies, nearly 300 distribution locations, and
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recently acquired Green Chef, a US Organic meal-kit company in 2018. (HelloFresh

SE, 2020a, p. 16). While the company is based in Berlin, their US operations are

responsible for 60% of their revenues and have nearly 44% of the American market. One

industry concern is low customer retention, with less than 50% of the customers

remaining subscribers after the first month and under 10% after 6 months of service

(Helm, 2018).

Threat of New Entrants

The factors to set up a meal kit delivery business include access to fresh meat,

fresh organic produce, cold storage, preparation kitchens, consumer channels and

distribution. As we review the threat of new entrants, we will look at supply-side

economies of scale, demand-side benefits of scale, customer switching costs, capital

requirements, incumbent advantages regardless of scale, access to distribution, and

restrictive government policies. Consideration of price, cost, and necessary investment

can be factors that deter new entrants (Porter, 2008).

In the supply-side economies of scale there is a high threat of new entrants. In

this dimension, the most important aspects are the consumer channel (website and data

analytics), sourcing fresh products, and preparation cost. The availability and cost of

website design and coding is relatively low, allowing new entrants to create a consumer

channel and reach customers easily. Sourcing fresh produce on a national scale may be

logistically challenging; however, just like HelloFresh, new entrants can start on a local

level servicing a focus city and growing from there (Helm, 2018). On a larger scale,

HelloFresh has a supply-side advantage because their purchasing volume gives them

more buying power than new entrants. Despite this advantage, the new entrants may be
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able to differentiate themselves due to the availability and variety of ingredients from

suppliers. Preparation includes cold-storage and packing boxes for delivery. In this area

HelloFresh realizes economies of scale by leveraging the available resources like large

storage and packaging facilities to service more subscribers, resulting in a lower unit cost.

A lower unit cost puts new entrants at a price disadvantage or requires a large investment

to launch on a larger scale (Porter, 2008).

Regarding demand-side benefits of scale, the threat of new entrants is high. For

the demand-side benefits of scale, there is a consideration for the willingness of

customers to try a new entrant (Porter, 2008). A customer's ability to curate their meal or

to customize meals to satisfy their preferences may motivate customers to try several

services before selecting a primary meal kit subscription service. Switching cost is low

for consumers, as the subscription can be paused or cancelled easily. Customers do not

commit to specific equipment, hardware or systems when using HelloFresh, therefore it is

easy to switch to another company or substitute.

The HelloFresh distribution channel is via UPS and FedEx delivery (HelloFresh,

2017). These distribution channels are easily accessible to other meal kit delivery

companies and highly recognized globally. Another aspect of the distribution channel is

the website where customers manage their preferences and weekly order. As stated

previously, sourcing internet developers and data analysis is accessible and affordable.

There are relatively low barriers to accessing distribution which represents a high threat

of new entrants.
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Capital costs for new entrants include not only fixed costs for facilities but also

costs for marketing and inventory. Marketing is one of the highest costs incurred by

HelloFresh during their start-up (Helm, 2018). Customer acquisition requires

expenditures in social media, direct advertising, and influencer endorsement, and more.

The industry is not only competing with other meal kit offerors, but also traditional

grocery and food service industries. The churn rate for these meal kit companies is

estimated at around 85% per year, with half cancelling within one month according to

third-party research (Helm, 2018). Because of this, there is a continuous need to expend

marketing dollars to acquire new customers. The capital cost to acquire customers can be

a deterrent to new entrants.

Incumbent advantages regardless of scale are the distinctive advantages that

HelloFresh enjoys due to their size and age. HelloFresh has name recognition as one of

the most well-known meal kit companies. Their experience gives them an advantage in

production, data-analysis, and marketing methods which new entrants would have to

overcome. They developed specialized meal kits for families, vegetarians, pescatarians,

and low-calorie options which means that new entrants would have to venture farther into

niche categories to overcome HelloFresh advantages. New entrants that are expanding

and already have some or all of these capabilities may overcome or deflect HelloFresh’s

advantage.

Restrictive government policies do not pose a barrier to entry. While HelloFresh

does promote their attainment of the SQF-certification (Safe Quality Food), this

designation is an industry program not a government policy (Messier, 2018). The SQF-

certification is an advantage but not a deterrent to new entrants. Food safety is regulated
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locally and federally through the USDA, the FDA and local food safety and health

departments; it is relatively easy to comply with such regulations and obtain the required

permits and licenses.

In summary, the threat of new entrants in the meal kit delivery industry is high.

There are distinct advantages in supply-side economies with HelloFresh's potential lower

unit cost, existing resources such as warehouses and staff, and name recognition.

Customer acquisition and subscriber retention require a high amount of capital to

maintain long term subscriptions. These advantages are counterbalanced by the low cost

of switching, the lack of demand-side benefits, and the easily accessible distribution

channels available for customer contact and delivery. The highest threat of new entrants

is likely in local markets rather than nationally. There are relatively low barriers posed

by restrictive government policies; food safety regulations are not restrictive, and the cost

of compliance is relatively low. There is a threat of new entrants that are willing to

spend the capital to acquire new customers, compete on price, and differentiate

themselves with an added value proposition.

Bargaining Power of Buyers

The bargaining power of buyers is high. The bargaining power of the buyer looks

at the customer's power to affect pricing, quality, and services. This section looks at the

negotiating power of buyers based on the number of competitors in the market, the

volume of purchases, and the price sensitivity of the buyers as a group (Porter, 2008).

HelloFresh customers have the choice of many providers in the meal kit industry, the

U.S. has over 150 meal kit companies. This allows the customer to shop around for the

quality, price, and type of ingredients (Helm, 2018).

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There is little product differentiation between meal kit companies. Some

companies specialize in custom dietary ingredients, HelloFresh has meal kit offerings in a

variety to compete with most of these competitors. Many competitors and little

differentiation give the buyer an advantage. A variety of substitutes are also to the

buyers’ advantage. Substitutes include the competitive meal kit companies as well as

grocery stores, restaurants, and meal delivery services. The switching cost is low as the

buyer is not committed to invest in proprietary equipment or applications. These

elements also boost the buyer's bargaining power.

Customer’s purchase in household volumes which limit their negotiating power.

Additionally, buyers cannot credibly threaten to backward integrate into the industry.

These give HelloFresh an advantage but not enough to overcome the advantages of little

differentiation, many competitors, many substitutes and low switching cost.

Bargaining Power of Supplier

The Bargaining Power of Suppliers is low. Bargaining power of suppliers will

determine how powerful a supplier group is based on the supplier's ability to capture

value through higher pricing (Porter, 2008). There is a lot of competition in the food

industry and many large suppliers. Some suppliers used by HelloFresh include a variety

of small suppliers, like Narragansett Creamery which supplies cheeses and dairy

products. There are also quite large suppliers for vegetables and fruits including Curation

Foods and Ocean Spray (Meet Or Suppliers , 2020). Depending on the individual

supplier there may be a spectrum of power.

Even though HelloFresh vows to provide the freshest ingredients, it wouldn’t be

hard for them to find a company to match that promise. For example, they work with
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Prairie Fresh Meats; if Prairie Fresh decided to raise their meat prices, National Beef is a

similar alternative with low switching costs. Switching cost, along with diversified

revenues, differentiated products, few substitutions, and the ability of suppliers to enter

the market are factors in the bargaining power of suppliers (Porter, 2008). HelloFresh’s

main ingredient items are meat, produce, and fish. A main produce supplier is Curation

Foods, owned by diversified health and wellness company Landec. In the case of

Curation Foods, they have many other revenue sources and are not dependent on the meal

kit industry for revenue. Curation could credibly threaten to integrate into the industry as

part of Landec’s diversification. However, Curation’s products are not differentiated

from other potential produce suppliers and there is no switching cost to changing

suppliers.

A survey of HelloFresh suppliers revealed that they do not rely heavily on the

meal kit delivery industry, which is a point of strength. However, products are not

differentiated enough to provide the supplier bargaining strength, nor was there a cost of

switching, and there are substitutes available. These factors mean that the supplier's

bargaining power is low.

Threat of Substitute Products

Prepared meals have been a staple in households since the TV Dinner was

popularized in the 1950's. Prepared meals offer ease, convenience and affordability. In

today's environment the prepared meal comes in a variety of forms including frozen,

vacuum sealed, and deli prepared. What is commonly missing from prepared meals are

fresh natural ingredients, a value proposition offered by meal kit subscriptions.

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The acquisition of food is the most straightforward comparison of substitutions

for HelloFresh. There are a variety of substitutions for food acquisition including grocery

stores, farmers markets, food baskets, butchers, and restaurants. These industries have

access to suppliers and can offer the same fresh and natural ingredients found in

HelloFresh recipes. Other options are home-gardening, farm cooperatives, or other

producer sourced outlets.

What is missing is the convenience offered by home delivery. On this front the

substitutes include restaurant delivery from services like Uber Eats, Postmates, and

DoorDash. Grocery stores like Fry's now offer on-line ordering and delivery and

customers can choose and shop for specific recipes found on the retailers site (Flavorful

Recipes to Shop and Make, 2020). Another option is ready to cook deliveries from

companies like Home Chef and Daily Harvest. These services offer fresh and natural

ingredients already prepped and ready for the oven. Home Chef has also expanded

distribution by expanding into retail grocery outlets (Redman, 2019).

There is a relatively narrow price span between the substitution options when

considering monetary cost which makes the threat of substitution high. A comparison of

meal kit vs. grocery shopping shows a small difference (Moorehead, 2016). Price to

performance trade-off may vary depending on what the consumer values - price, time-

savings, learning, sustainability, and more. For example, consumers are increasingly

conscientious about sustainable packaging and may opt for substitutions that reduce

waste. Finding easy and delicious recipes is quite easy at sites like AllRecipes.com and

some sites will create a shopping list for creating selected recipes. Since a HelloFresh

subscription does not eliminate the need for grocery store visits, there is still the
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likelihood that subscribers are shopping for other staples and will purchase meal items

during visits. Price to performance trade-off is variable depending on what the consumer

values and there is little to no cost for switching from one option to another which makes

the threat of substitution is high.

Industry Rivalry

When it comes to meal delivery services, the industry rivalry is extremely high.

From experimenting in the kitchen for the first time, to looking for new recipes to try out

for you and your family. The industry provides you plenty of options, so it’s on you to

decide which service fits your needs. Meal-delivery services have plenty of competitive

factors that play a part. From pricing plans, food ingredients, subscriptions, cooking

time, easy to read instructions, and dietary restrictions. While HelloFresh is able to

compete in all these areas, so are a few others, like Home Chef, Freshly, and EveryPlate.

The industry for food kit meals is expected to exceed a revenue of over $ 9.3 billion by

the end of 2020. This is a good thing, as industry rivalry tends to put competitive

pressure on companies and allows for opportunities to enhance or improve a company's

position. So, how will HelloFresh separate themselves from the competition? First let's

start with identifying who is the target market.

Target Market

With service offered in 14 countries, HelloFresh has targeted specific markets

containing over 58 million households, not including the United States (HelloFresh SE,

2020b, p. 22). Within these markets, HelloFresh seeks households consisting of two to

five individuals. Although HelloFresh does not offer packages for singles, they do say

the second meal could be used for a lunch the following day (Do You Offer Plans for
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Singles?, n. d.). That being said, single individuals are not the primary target of the

company. In an interview with Forbes, Matt Fitzgerald, Vice President of Marketing for

HelloFresh, stated the target market includes busy households (Kwittken, 2018). In

addition, HelloFresh also targets individuals enrolled in college as they offer a 15%

discount on their services for any current student. According to Cleverism (Luenendonk,

2016), HelloFresh’s, “customer base is generally between the age of 30 and 50… and 80

percent of the customers are women.” A reliable or direct source from HelloFresh could

not confirm this statement.

Within the United States, HelloFresh targets the “top 50% income households,” or

approximately 63 million households (HelloFresh SE, 2020b, p. 22). Breaking the

United States market down even further, HelloFresh is targeting the individuals who

already cook at home, according to Dominik Richter, HelloFresh Chief Executive Officer

(Kang, 2019). Recently, HelloFresh has begun targeting their services to those interested

in keto-genic or paleo meals. This additional target market came after the acquisition of

Green Chef in March of 2018 (HelloFresh SE, 2020a, p. 16).

Competitive Advantage Strategies to Maintain Target Market

HelloFresh has a leading competitive advantage over its competitors after a long

mission of building and overcoming many economic barriers. In order to maintain

competitive advantage, HelloFresh must maintain its current size and continuity of

strategy evaluating every step of the way. The company must adapt to change using the

current tools and techniques while continuously making small improvements toward

making the company stronger into the future. HelloFresh’s key competitive advantage is

their ability to reach millions of customers per day through distribution channels.
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They have been very successful in making sure they connect and attract customers on all

platforms of social media which have been recognized on Twitter, Facebook, Hulu,

Netflix, etc. HelloFresh’s strategy to filter revenue back into the company has

contributed to much success in the past year. According to HelloFresh 2019 Annual

Report, the company spent approximately 405.2 million euros on marketing (p. 59) which

has decreased from 25.7% to 22.3%, which has proven to be the driving reason for the

financial margin expansion in 2019. Chart Reference: (HelloFresh Results Presentation,

2019)

This favorable development is partly driven by refinement of their pricing and

discounting strategy and favorable customer acquisition costs during the 2nd half of the

year (2019 Annual Report, p.30). So in an era of economic uncertainty, HelloFresh’s

focus on increasing scale, direct to consumer product, building a clear identity and

strengthening customer relations by feedback and data analysis, and customizing to each

individual meal must be maintained and the continuity of these strategies is vital and

crucial to the success of the company.

Moving forward, Lead by Example recommends Hello Fresh make the company’s

activities more distinctive by expanding activities and operations, offering flexibility,

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more convenience and most importantly building a stronger relationship with their

customers. HelloFresh can incorporate flexibility by offering daily options or weekend

packages where clients are able to choose certain days out of the week, skip weeks, or

even stop and restart the service whenever needed allowing the customer to not feel

obligated into committing to subscriptions. Customers would be able to choose what

days they need and be able to get meals when they need them. This flexibility would also

be beneficial for customers who may be traveling and still want to have food shipped to

where they are allowing them to preplan their meals. Refrigerated pickup locations are

another recommendation. This would allow all meals to maintain freshness and provide

convenience for busy people who have non regular schedules.

As HelloFresh’s primary targets are households of 2 or more people and college

students, HelloFresh could incorporate marketing to seniors. Many seniors struggle with

preparing nutrient-dense meals which may lead to lack of daily nutrition and health

issues. Seniors that don't have the energy or ability to shop or cook may eat more

convenience foods like fast food and frozen dinners. A high intake of these processed

foods may harm health and shorten life span (Kubala, 2020). A few reviews by senior

citizens on Facebook stated that they were interested but were not computer literate and

would need to know where to sign up. HelloFresh could advertise with infomercials,

and/ or offer catalogs and phone numbers to attract this age category.

Lead by example also recommends HelloFresh expand the discount program and

partner in a strategic partnership with Imperfect Foods. HelloFresh could offer a loyalty

program that would offer incentives to get more people to commit for longer periods of

time and give back to the customer as gratitude. As a partnership with Imperfect Foods,
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HelloFresh would donate their perfectly rejected foods to Imperfect Foods. HelloFresh

customers could then offer cash back promos that would offer their customers incentives

such as birthday rewards, and customers could also redeem and spend points on both

sites. Hello Fresh could also offer lower plans to customers that would be purchasing

cosmetically imperfect or non-organic products between their partnerships. This would

help in reducing food waste and give an option for lower income families, while

rewarding their customers for their loyalty.

In addition, as a continuity strategy improvement, HelloFresh could be even more

proactive on the internet by marketing using internet key search words for example when

a user searches food kit, meal kit, home cooked foods or advertising on food delivery

service apps so when a customer utilizes meal apps such as grubhub, Ubereats,

DoorDash, etc., this would get them more visibility, attract more customers, and growth

and success for their company.

Conclusion

While rivalry, threat of new entrants, and substitute products in this industry are

high, HelloFresh has implemented strategies to create distinctive advantages from their

competition. Using clever slogans and attractive marketing imagery they’ve managed to

expand their target market from the top 50% income households to college students with

little to no time to prepare healthy meals. In this analysis we utilized the reading

materials and Porter’s Five Forces Model of Competition to review not only HelloFresh’s

current strategies, but also to analyze future changes the company could implement to

remain profitable. We took a comprehensive look at HelloFresh’s differences in

customers, potential entrants, suppliers, substitutes and rivals and how each of these areas
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either support high performance or hinder the company. In conclusion, we found there

were numerous strategies HelloFresh could use to remain one of the most competitive

meal kit delivery companies in the industry and mature globally.

APPROVAL: plan to submit by 11:59pm 10/28/2020

Kelsey Clark - Camille Margi David Gurrola Stephen Viviana

KRC Miguel - CEM EvanSon - - DG Goodman - Ramirez

ME SMG VIR
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