Meal kit market due for gut check as COVID-19 pandemic wanes

A pile of coupons and offer codes for meal kit boxes arrived at Carol Boeira’s door at an opportune time.

It was February of 2020, and the Ottawa-based communications specialist was running low on inspiration for new meal ideas but tired of racking up lofty take-out bills.

Boeira says she started testing out a variety of meal kits services, which sees companies send pre-portioned ingredients and recipes to consumers’ doors on a semi-regular basis.

By the time she was getting used to the convenience, which drastically cut down on her trips to the weekly grocery store, the COVID-19 pandemic was just starting to hit the nation’s capital.

As restaurants shuttered their doors and grocery stores started installing arrows on the floor, suddenly the upside of getting dinner in a box became about more than saving time.

“At the beginning, when we didn’t know exactly how the virus spread, I was scared to touch everything. It was a super stressful situation just to grab a grocery cart. I was trying to gather everything in my arms because I didn’t want to touch anything,” she says.

“Just having that peace of mind was really helpful during the pandemic.”

Boeira isn’t alone, as online food ordering — including meal kits, online grocery orders and traditional take out dining — took off during the pandemic.

But as vaccination rates climb across the country and many restaurants reopen their doors to the public, some experts believe the meal kit market’s gains from the past year-and-a-half will face new threats in an increasingly digitized food industry.

Providers, meanwhile, say they’re hoping new strategies such as expanding into the grocery market itself and catering to an ongoing work-from-home reality will help them keep the customers they captured in the pandemic and convince more Canadians to give meal kits a try.

Dalhousie University in Halifax has been tracking consumer habits in Canada’s food industry since before the pandemic began through its Agri-Food Analytics Lab.

Researchers said in a November 2020 study that 45.4 per cent of respondents surveyed said they ordered food online in some form or another in the previous six months, up from just under 30 per cent pre-pandemic.

Of the 7,290 people surveyed online, 12.8 per cent said they were getting meal kits during the pandemic.

Sylvain Charlebois, the lab’s senior director, tells Global News that while meal kits are not a new idea, the past few years have seen the market mature with providers such as Montreal-based Goodfood Market Corp. going public in 2017.

Major players in the industry, which also include global provider HelloFresh and its subsidiary Chef’s Plate, have seen their growth accelerate in the pandemic, he says.

“The meal kit industry was worth about $5 million a decade ago. We believe it’s almost half a billion now in Canada,” Charlebois says. “The pandemic probably skewed the path of growth for the entire industry.”

Goodfood, one of Canada’s biggest meal kit providers, reported a 24-per cent jump in third-quarter sales last week, setting a three-month revenue record of $107.8 million as a growing customer based ordered bigger boxes more frequently.

While its sales were moving in the right direction, the company still saw a drop off from the 56-per cent spike in revenue it saw in the same quarter the previous year, which captured the very beginnings of the pandemic in Canada.

Goodfood CEO Jonathan Ferrari says the early days of the pandemic saw the company scale up rapidly.

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The company had roughly 2,000 workers in its distribution centres across the country at the start of the pandemic, but quickly added another 1,000 employees to meet demand.

“So that was really kind of a great time from a demand perspective, but one of the most challenging times to be running the business as the CEO,” Ferrari tells Global News.

The company has pushed its capacity in Montreal and Toronto to fulfil same-day delivery promises and recently opened up a new distribution centre in Ottawa as part of a plan to hit similar speeds there, as well as in Vancouver and Quebec City.

But it’s not all growth in the forecast. Goodfood’s latest earnings showed the number of net new subscribers to the meal kit service slow from the previous quarter, marking the first time that’s happened in the company’s history.

Jonathan Roiter, Goodfood’s chief financial officer, told analysts on the company’s earnings call last week that he expects the regular summer slowdowns to hit the market again this year after those downturns were offset in the pandemic.

He maintained that the company is still seeing record-low levels of “churn” — the rate at which customers opt out of their subscriptions entirely.

Luke Hannan, an analyst with Canaccord Genuity, wrote in a note to investors after Goodfood’s earnings call that despite the apparent slowing momentum, the company is still showing plenty of potential for growth in a “relatively unpenetrated” market for meal kits. He maintained Canaccord Genuity’s buy rating for the company’s stock.

HelloFresh Canada, which declined Global News’s request for an interview, said in an emailed statement attributed to its CEO, that while it does not expect a significant downturn in business post-pandemic, the months ahead could see demand fluctuate.

“Of course there will always be a seasonal ebb and flow in online grocery, but we believe that those who recently tried HelloFresh will remain dedicated customers,” Ian Brooks said in the statement.

Charlebois expects that as we emerge from the pandemic, the meal kit market will settle somewhat.

Meal kits filled a key market niche when restaurants were closed, he says, but the allure of a dishes-free evening will likely push Canadians out of their kitchens more often as in-person dining returns in most cities across the country.

The Agri-Food Analytics Lab also keeps a running tally of how much Canadians are spending on food inside and outside the home. Before the pandemic, 35 per cent of food spending went to sources outside Canadians’ own kitchens, a figure that dropped to nine per cent in the early days of the pandemic.

That figure has already risen back to 29 per cent, Charlebois says, which isn’t good news for the meal kit industry.

“If you’re away from your kitchen, that’s bad business for meal kits. So as the economy normalizes, we are expecting meal kits to be negatively affected by the fact that people are just going out a little bit more,” he says.

There are a few arenas where Charlebois could see meal kit providers carving out a niche in the post-pandemic market.

One of them is the more direct online grocery stream, an offering Goodfood has staked much of its future on.

The company has built an online grocery store with more than 1,000 unique items, with plans to continue growing its stock.

Ferrari says 10 per cent of the Goodfood’s revenue is currently tied to the non-meal kit side of the business, a figure the company’s top brass expects to double by the end of fiscal 2022.

But in looking at customer orders in Montreal and Toronto, where the company has already rolled out same-day delivery, the composition of boxes is looking more half-and-half between traditional meal kits and individual grocery items — a split Ferrari expects will be reflected long-term in the rest of the business.

Even a return to the office could work in the favour of some companies. HelloFresh said in its statement that it’s preparing to launch a lunch kit soon as kids return to school and workers head back to the office.

But as meal kit providers stake their claim in the grocery market, the field’s traditional players are conversely starting to see the upside in meal kits.

Large grocery brands like Loblaw started offering their own prepared meals during the pandemic, both with their own recipes and ingredients and by partnering with restaurants to give families a chance to recreate their favourite dining out experience from their own kitchens.

“For meal kit providers, the traditional ones like GoodFood and HelloFresh, the biggest threat I think would be grocers,” Charlebois says.

But just because a grocer dips its toe into the meal kit market doesn’t necessarily mean it’s putting all its eggs in that basket. Loblaw discontinued its PC Chef meal kit program in Toronto at the start of July, wishing its customers “continued culinary adventures.”

Boeira says that for all the benefits meal kits have provided her, a near-constant pain point for most of the services she’s tried has been the sustainability of the packaging.

While the plastic wrapping and bulky cardboard has been known to quickly fill up her apartment building’s recycling bins, she also notes that lack of food waste inherent to the specifically portioned recipes has made some aspects of meal kits more environmentally friendly than the typical trip to the grocery store.

In a response that Dalhousie’s agri-food researchers marked with some surprise, respondents to their November survey cited sustainability as a minor concern when compared to other online ordering irritants like not being able to see the food beforehand and being uncertain of the quality.

Charlebois says one of the shifts in the pandemic has been away from sustainability, as convenience and safety became front of mind for most consumers.

That said, he expects environmental attitudes to make a comeback as the pandemic wanes, with recent events such as the British Columbia wildfires rekindling those concerns in consumers.

“I think companies will have to address the issue of environmentally friendly packaging, but they won’t have a choice but to increase price,” he says.

For Goodfood’s part, the company used to offer a take-back program that saw drivers pick up a customer’s previous box and the packaging in an effort to reuse the material.

That was put on hold during the pandemic and isn’t expected to make a comeback, Ferrari says. Instead, the company is rolling out refrigerated trucks for the “last mile” of delivery, he says, which can see kits packaged in thin paper bags rather than needing the bulkier preservation elements.

In the event that a customer isn’t home to receive the delivery, Goodfood says a driver will have the equipment on-hand to quickly make up a delivery box complete with ice packs to keep the ingredients fresh.

Even as Canadians return to their pre-pandemic behaviour, the Agri-Food Analytics Lab expects many of the habits formed during the lockdowns will stick around.

Almost half of those surveyed indicated they would likely order food online at least after the pandemic.

Asked whether he felt the pandemic fundamentally changed the market for Goodfood and other meal kit services, Ferrari says he felt the lockdowns and public health measures “accelerated” the grocery industry’s online shift.

“We still think we are very early days into that journey,” he says.

Even as vaccinations help swaths of the population feel at ease with in-person shopping, some still see e-commerce as their long-term solution.

Boeira says that with public health guidelines loosening and many grocery stores peeling their stickers off the floor, the return to normal is moving more quickly than her comfort levels.

As a result, she says she’ll continue to fall back on the meal kit habit she developed during the pandemic, for both convenience and peace of mind.

“It kept me safe, for sure,” she says.