HelloFresh’s IPO By The Numbers (And What It Means For Other Food Startups)

HelloFresh, a leader in the subscription meal kit space, just quietly filed for their IPO. You may not have heard about it since the offering is in Frankfurt, but the business is fascinating to look at since the meal kit category has been a shining spot in the emerging crop of food startups. Let’s look at the numbers to see what we can learn.

Background

HelloFresh is a leading provider of subscription meal kits. They offer locally sourced and pre-portioned ingredients that enable consumers to prepare home-cooked meals each week. The company delivers food boxes to its subscribers’ doors for roughly $10 per meal utilizing a soft subscription model. Meals are delivered in a box each week, alleviating the need for consumers to do their own grocery shopping or plan out recipes. They compete directly with Blue Apron in the US but also operate in geographies where Blue Apron is not active such as Australia, Austria, Belgium, Germany, The Netherlands and the UK. Interestingly, both HelloFresh and Blue Apron essentially copied the business model pioneered by a swedish company, Linas Matkasse. In fact, Sweden has a multitude of meal kit providers doing significant revenue which is shocking given that the country only has a population of 9M people.

While the global food market is unimaginably large at $6.4 trillion ($2.3 trillion in HelloFresh’s core markets), the company estimates that the “fresh food-at-home” market is about $1 billon in 2015, growing to $8B by 2020.

Operating Metrics

HelloFresh has experienced astronomical growth, growing from $3M of revenue in 2012 to $290M of annualized 2015 revenue (note: converted from EUR to USD). If they have a strong Q4, 2015 revenue should easily exceed $300M, more than 4x over the prior year. While the company’s EBITDA loss has historically been manageable, the high growth clearly comes at a cost. In 2014, EBITDA margin was negative (18%), but will worsen to about negative (26%) in 2015. In terms of gross margin, HelloFresh has maintained right around 50–55%, quite healthy considering that offline grocers typically have just 25–35% gross margin.

HelloFresh’s service is clearly resonating with consumers, their revenue growth is a testament to that. But how scalable is their business? Their operating costs have been fairly stable as a percentage of revenue. General costs have come down dramatically, however general and administrative and marketing costs, which are interestingly almost identical as a percentage of revenue, exhibit less leverage. To achieve their 2015 numbers, HelloFresh will have to increase marketing considerably, from 32% of sales in 2014 to 36% of sales in 2015. This could mean that the company simply has many effective marketing channels that are worth piling money into to continue growing the business. If the users stick around and generate significant LTV, then this makes a lot of sense to do (not to mention that the service has high order values and thus fast marketing payback). However, the increased marketing spend could simply be making up for the high churn nature of the business. If the company is merely propping up their growth because users don’t stick around, then that is very concerning.

HelloFresh’s operating loss of (29%) in 2015 translates to significant cash burn. Annualizing their 2015 operating cash flows yields a loss of $53M. On top of that, the company spent another $15M in investing cash flows and stated that they will spend $55–65M in capex over the next three years to build out distribution centers and other facilities. Basically, it seems like they are currently burning $5–6M per month, a considerable amount. Luckily, HelloFresh has been able to raise hundreds of millions of capital to date to help support the burn. The real question is whether they have a good business on their hands once growth slows. The only way to know that would be to look at cohort retention data and see just how viable the long-term model is. Unfortunately, the company doesn’t report that information, though they do mention that they achieve 2.8x LTV/CAC after two years.

Key Performance Indicators

The company also reported a few other interesting metrics and KPIs. The business was initially 60% continental Europe and 40% rest of world but that ratio has now swapped. They are active in the US but do not break it out which leads me to believe that they have not been as successful here (Blue Apron seems to have the mindshare). However, their European markets appear to be maturing nicely — they have already achieved positive EBITDA in the Netherlands in 2014, their most mature market. Total active subscribers number 531,000 as of Q3 2015 which resulted in 13.2M meals delivered, or 25 meals per person.

Valuation

Valuation here is tricky. Should the company be valued like Just-Eat (9x forward revenue), GrubHub (3.9x forward revenue), high growth internet comps (4–7x forward revenue), restaurants (~3x forward revenue), or perhaps an online grocer like Ocado (1.7x forward revenue)? Naturally, most of the aforementioned businesses don’t trade on revenue but it’s all we can go off of since HelloFresh has no profit to speak of. The challenge for research analysts will be predicting what kind of EBITDA margins and cash flows can be generated at steady state. Nonetheless, the table below provides some rough math for what it could be worth at IPO given a range of forward growth rates.

Parting Thoughts

HelloFresh’s IPO has serious implications for other food-related startups such as Blue Apron, Munchery, Sprig, Postmates, DoorDash and many others. If the company is well received by the public markets then it will bode well for other companies. However, if things do not go well then it will cascade down to the private markets and late stage investors will become weary. Whatever the case may be, HelloFresh’s IPO is certainly one to watch.

Originally published at mahesh-vc.com on November 3, 2015.