HOSP6130 Competitive Strategies in Hospitality

IND IMD-7-2250 REAL LEARNING. REAL IMPACT HELLOFRESH By 2020, HelloFresh was the number one meal kit company in the world. Following an intense and fast-paced growth strategy, the German food deliverer was able to refine its operations throughout its value chain and successfully establish itself in 14 countries. Despite being criticized for its excessive use of packaging, millions of customers, won over by its healthy products and easy access, opted for HelloFresh. In 2019, after many years of missed profit targets, the company posted its first positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) - E46.5 million. By the middle of 2020, during the Covid-19 pandemic, the adjusted EBITDA had grown to a staggering E216.7 million. Having groceries delivered at home was the go-to choice for many households that did not want to leave their homes amid the risk of infection. This enabled HelloFresh to move from 2.5 to 4.2 million of customers in less than a year. But 2020 also represented an important milestone for the company from a sustainability standpoint. Conscious of the importance of the environment and wanting to further differentiate HelloFresh from the competition, its founder and chief executive officer (CEO) Dominik Richter announced on 4 August 2020 that the company aimed to become the first carbon-neutral meal kit company globally, primarily through its participation in carbon offsetting programs. On the evening of Friday, 23 October 2020, news programs around the world were filled with negative updates about Covid-19 infections in several of HelloFresh's key markets, ranging from the US to Germany. Going beyond the short-term positive outlook, partly associated with current and likely upcoming restrictions imposed by governments in these countries, Richter felt the company was at a tipping point in its trajectory. Though sales had grown as a result of the lockdowns imposed by governments in several markets, would this remarkable growth be maintained in post-pandemic times? The focus on sustainability was clearly a responsible move for the company and one that could also help its competitive position in the market. Yet, high amounts of plastics were still present in each HelloFresh box delivered worldwide. Thus, the question remained, would the carbon offsetting programs be enough to win the sustainability battle going forward?HISTORY AND GROWTH HelloFresh was an online grocery start-up that resulted from the combined ambitions and desires of two dedicated German businessmen. One was Dominik Richter, HelloFresh's founder and CEO, who, at the time, was a young graduate from the London School of Economics with the ambition to become an entrepreneur. The success of the Swedish company Linas Matkasse inspired Richter to create his startup.' The Scandinavian meal kit provider sent its customers weekly prepackaged ingredients with matching recipes. Richter was eager to test whether this business model could catch on beyond the Nordics. In an interview, speaking on his and his partners' behalf, Richter said: Our decisive impetus for founding the company was our great interest in the food market and the potential of being able to order food on the Internet. [...] So, in 2011 we were looking for a business model that avoids the weaknesses of a classic online supermarket and that's how we ended up with our HelloFresh box. We were all immediately enthusiastic about the idea of a cooking box with coordinated, measured ingredients. The other was Oliver Samwer, CEO of Rocket Internet, a German internet company that incubated and invested in online startups. In the years previous to 2011, together with his brothers, Samwer greatly expanded their wealth by launching European versions of overseas internet startups. Samwer, however, strived to do more than just acquiring mere market share of an industry; he wanted to fully own it* and saw the meal kit market as his mean to fulfill this desire. In November 2011, once the funding was secured, Richter, together with Jessica Nilsson and Thomas Griesel, co-founded HelloFresh, formerly known as Jade 1314, in Berlin. 5 The business model was about the delivery of meal boxes with prepackaged ingredients that were meant to create delicious meals. Customers could use this service by subscribing on the website. HelloFresh services were operational at the end of December, only forty days after the founders' first meeting. Soon after, its rapid international expansion began. "We started at the end of last year, and we're now active in seven German cities and five countries - the UK, France, the Netherlands, and Australia," announced Richter during one of his many interviews. "Growth" was the main goal pursued by Richter and his colleagues. In less than two years, HelloFresh's headcount grew from 0 to 100 employees.' In the meantime, in August 2012, Blue Apron - what would become HelloFresh's future biggest competitor (see Exhibit 1) - was starting its operations in New York City. This pushed HelloFresh to continue with its expansion spree. In 2013, HelloFresh secured $7.5 million, which was used to help the company set up its business in the US - which soon turned into its biggest and most profitable market. 10 The beginning of hyper- competition in the meal kit industry began in 2013. " Venture capitalists invested millions of dollars in meal kit startups. By 2018, there were nearly 150 recipe-box providers competing in the market. 12HelloFresh continued to persevere with its expansion and growth objectives, and in 2015, it had an important moment for its reputation in the industry; after a funding round of 75 million, it was valued at 26 billion, achieving the title of the fourth largest unicorn in Europe.13 In the previous three years. the company had grown about 400%.\" Richter started to discuss the possibility of going public. seeing this move as something that would "strengthen our nancial exibility and actively support our growth strategy."15 HelloFresh managers aspired to invest in new delivery centers, speed up the process% and reduce xed costs to raise margins.\" This was a critical issue for HelloFresh. Despite the large increase in revenues, the logistics and marketing costs were too high to allow for prots.\" However, the initial public offering (IPO) plans were postponed to November 2017, when the company successfully debuted on the Frankfurt stock exchange. selling 27 million shares at a price of 10.25 each.1a Between 2015 and 2020. HelloFresh entered new gadgraphies, extended its product range and created new brands. By adding Belgium, Canada, Switzerland, Luxembourg, France, New Zealand. Sweden and Denmark, the meal kits were available in fourteen countries (see Exhibit 2). '9 In Germany, ready-to-eat meals were available in vending machines located in corporate ofces. This \"intelligent refrigerator" concept called HelloFreshGO ultimately became a full subsidiary of HelloFresh in 2018, following its success in Germany.20 Since 2018, several changes had occurred in the US market. Firstly. products were made available ofine. Following the delivery businesses' new trend aimed at gaining more customers, HelloFresh entered into a partnership with Ahold Delhaize to sell its products in 600 grocery supen'narkets.21 Furthermore. the company expanded its target group with the launch of EveryPlate, \"the affordable meal kit for everyone."22 It also acquired the American competitor Green Chef, which allowed HelloFresh to attract Customers with special dietary needs with its vegan or gluten-free menus.23 With the launch of EveryPlate and the acquisition of Green Chef. the company was able to extend its boundaries and spark the interest of customers in the value and premium segments, respectively. These additional investments further delayed the company's ability to break even in 2018. The rst positive results ultimately materialized a year later. With more than 280 million kits sold in 2019, HelloFresh was able to post its rst adjusted EBITDA protability of 465 million. showing a margin of 2.6% with a revenue of 1,809 million (see Exhibit 3). In the fourth quarter of 2019, the Group had nearly 3 million customers worldwide. showing an increase of 45% compared to the same quarter of 2018 (see Exhibit 4). GLOBAL MEAL KIT INDUSTRY The total value of the food and grocery retail industry was $9.9 trillion in 2018, and it was expected to grow to $12.9 trillion by 2023. The food-related products in this category accounted for 72.8%.24 The meal kit industry, which represented only a small fraction of this business, was valued at $2.52 billion in 2017. and it was expected to have a compound annual growth rate (CAGR) of 17.15 % by 2025.25 The business model, which essentially created the industiy as a whole, originated in Sweden in 2007; it then quickly spread to other northern European countries such as Belgium, Denmark, Germany and Switzerland. Although Europe was the birthplace of meal boxes, it was not the most dominant market in this industry in 2019.26 Globally, the US - the most lucrative geographic area for meal kit companies - was expected to reach a value of $5 billion by 2025.27 In the Asia Pacic region. Australia was identied as the main market, given that in 2018 neariy 200,000 Australian households subscribed to a meal kit plan.28 A few factors stimulated the development of pre-packaged delivered groceries. In the last decade, the number of global intemet users grew almost twofold - up to 62% of the world population in 2020.29 The growing use of the intemet and digital technologies altered the dynamics of many industries, and the food trading industiy was not left far behind. Consumers turned to e-commerce platforms to buy a variety of goods and services. including their groceries. The past years saw a rapid expansion of online users ordering food from websites or apps.an This new attitude toward online grocery shopping positively beneted the merchandising of prepackaged food boxes. Another important factor was the convenience offered by meal kit companies. The worker of the 21bit century had to deal daily with a hectic schedule, long working hours and dreary commuting. This busy lifestyle made the home delivery of groceries utterty appealing, as customers were looking to eat healthier, unique meals without having to spend too much time an them.31 HelloFresh's competitive position Meal kit providers were expected to deliver perishable goods in impeccable condition. Their recipes needed to appeal to customers' taste, and the ingredients had to be seasonal and available locally. Flawless organization between the suppliers and fulllment centers was essential. All of this relied on the ability to accurately forecast the consumer demand for the grocery boxes. Over the years, HelloFresh was able to master these activities, most of which were performed within the operational infrastructure of the organization. The data-driven approach that the German company followed was key for creating its complex value chain and making deliveries more predictable. According to one HelloFresh senior manager, \"Data is fundamental and part of our working culture. It helps us validate hypotheses, make smarter decisions, push new initiatives, seize opportunities, and power discovery."'3'2 Fresh and healthy menus were provided each week by employing advanced business intelligence and statistics. Customer subscriptions were the primary data source for improving HelloFresh's forecasting. However, other sources like customer feedback, surveys and website activa were also used to improve the smooth functioning of its operations.33 Because of its ability to coordinate activities and knowledge, HelloFresh won the Industrial Excellence Award Europe in 2018.34 Because of stiff competition and high churn rates, HelloFresh was forced to rely heavily on marketing to gain market share, which weakened its ability to turn a prot. Social media inuencers played a large role in its marketing strategy, as these people were able to engage more directly with multiple consumer niches, where there would be skepticism about simple ads. High-priced celebrities like Jessica Alba, Lea Michele and Mandy Moore were hired to instill a positive image for the brand?5 HelloFresh engaged in other costly initiatives such as paying pcdcasters to talk about its meal kits or creating soap- opera-Iike video ads to increase its visibility.36 From 2016 to 2019, the company's marketing expenses accounted for approximately 25% of its yearly revenues (see Exhibit 3). Jaqueline Parisi, HelloFresh's senior manager of content and copywriting, saw ample opportunity to strengthen the company's brand positioning. As she explained, "The task at hand isn't to convince people to use meal kits, it's to get them to use HelloFresh."3T With more than 150 meal kit companies virtually selling a similar product, it was important to stand out from the crowd. HelloFresh took on this challenge by creating compelling content across different online channels and especially on its blog - Fresh Times. This was where customers could truly experience what HelloFresh stood for, beyond the box. HelloFresh was also focused on growing existing markets.33 Throughout the years, the Group pursued a fast-paced cross boarder strategy. Of all its meal kit competitors, none had the substantial international reach of HelloFresh. For example, Blue Apron, HelloFresh's biggest competitor, operated only in the US. The majority of other meal kit services operated only in their home markets in the US, Europe and Australia. In terms of global expansion, HelloFresh could be compared to Mariey Spoon. Founded in 2014, this Benin-based meal kit provider operated in seven different geographies, where HelloFresh was also present. By focusing on attracting more customers in its existing markets, HelloFresh would be able to improve its operations and differentiate itself from its competitors. Different factors represented ongoing challenges for HelloFresh in the market. Retaining customers and building market share was the number one ccncem. The retention problem was related primarily to pricing and taste. Special dietary needs and excessive packaging were among the reasons why meal kit consumers discontinued their subscriptions. Also, discount offers provided by the various meal kit suppliers hampered the loyalty of consumers, who would jump from brand to brand to get the best deal. Few customers would continue purchasing their meal kits after the rst order. In 2019, HelloFresh's 12-month retention rate was only 11%.39 Furthermore, new large players were entering the competition. Logistics giant Amazon acquired Whole Foods in 2017 and started to sell its meal kits in select markets.4o Grocery retailers began their own recipe-box businesses. In the US, retailers like Walmart, Kroeger and Publix sold meal kits in their brick-and-mortar stores. By 2018, in-store customers accounted for 32% of all meal kit users.'*1 Nonetheless, HelloFresh executives were not alarmed by grocery corporations' attempts to enter the industry. According to HelloFresh's chief nancial ofcer (CFO) Christian Gartner, When it comes to the quality of the offering there's nowhere near what a specialist meal kit company can do, whether that's ourselves or even some of our smaller competitors."42 Changes following the Covid-19 pandemic In 2020, things ultimately changed for meal kit companies, as it did for the rest of the wortd. At the end of 201 9, a new, severe acute respiratory system coronavirus - Covid-19 - was detected in the city of Wuhan, China. Due to the extreme contagiousness of Covid-19, governments around the wortd started imposing social distancing measures between March and April 2020 to counteract the outbreak. This drastically changed the buying behavior of consumers. People started to do fewer trips to the supermarket because of the fear of infection and spent the majority of their time at home. The Iockdown measures prompted a growth in demand for meal kit deliveries, which fueled HelloFresh's revenues. For the rst quarter of 2020, it reported a year-on-year increase in customers of 68.5% from 2.48 to 4.18 million (see Exhibit 4). The increase in revenues was astonishing: HelloFresh ended the rst six months of 2020 with an adjusted EBITDA of 131.5 in its US segment and 110.4 in its international segment, resulting in a year-on-year growth rate of 948.4% and 268%, respectively. By mid-2020, HelloFresh had delivered more than 260 million meals worldwide. These results were achieved with a meaningful drop in marketing expenses (14.5% less in the rst quarter compared to 2019).43 Clearly, the meal kit industry was thriving during the pandemic. The crisis that brought thousands of businesses to their knees was a goldmine for companies like HelloFresh. Meal kit providers were condent that the positive trend would continue in 2021, as many people would still want to cook their meals at home, even after the pandemic.\" However, skeptics asserted that the rate of growth was unsustainable because households would not be spending as much time at home as during the pandemic.45 In that case, meal kits would once again start competing against restaurants and grocery stores. This tension was also felt in the stock markets. At the end of May, HelloFresh's stock price fell 6% following the announcement by the US. National Institute of Allergy and Infectious Diseases about the probable availability of a vaccine by the end of 2020.\"6 Yet, at HelloFresh the overall outtook for the future of the business post-Covid-19 remained positive. The claim was that, since customers had become accustomed to cooking at home with its meal kits, the habit of consuming meals at home would likely be maintained post-pandemic.\" The slowdown of infectious cases during the summer season was only a short break for Western countries. Unfortunately. as of September, a new spike in infections marked the start of new restrictions across European countries as well as in the US. This translated into above-market expectations for HelloFresh. The sales continued to climb during the third quarter of 2020, and a further increase was materializing in the early part of the fourth quarter. Revenues for the third quarter were expected to reach approximately 971 million, a great increase compared to 03 in 2019, where they amounted at 440.6 million. This positive outlook led the company to increase its full year revenue growth predictions from between 75% and 95% to between 95% and 105%.43 SUSTAINABILITY AT HELLOFRESH HelloFresh's main mission was to "impact society in a positive way\"? while giving "every household the opportunity to enjoy fresh, delicious and healthy meals."5 This mission was expressed through four key points: 1. Budget. aimed at "helping consumers to save real money with every order.\" 2. Health, aimed at \"democratizing access to healthier and more nutritious meals.\" 3. Taste, aimed at \"providing food related opportunities to enjoy a varied and tasty die ." 4. Sustainability, aimed at "supporting a better ecosystem and reducing environmental impact." 5' With the fourth point. HelloFresh tried to address the worldwide issue of food waste. The need for this was clear; nearly 1.3 billion tons of food produced every year for human consumption was wasted.52 This amount accounted for approximately 8% of the wortd's total carbon emissions. Since its inception, HelloFresh took on the challenge of decreasing waste along its value chain. Through its accurate forecasting method, the company operated at a close to zero inventory base. Its orders to suppliers were meant to fulll only the demand for its delivery boxes.53 Customers were provided with the exact amount of food needed for each recipe. leading to a substantial reduction in household food waste, which HelloFresh viewed as one of the biggest benets of its service.54 HelloFresh's direct-to-consumer business was indeed more sustainable than a trip to the store. A study published in the Resources, Conservation and Recycling journal found that meal kits produced 33% less gas emissions compared to grocery meals.55 The major environmental impact was due to food waste, but other factors related to logistics contributed to the lower emissions. However, it was the packaging of meal kits that caused consumers the most concern because the ingredients that came in the boxes were individually packaged, which created a signicant amount of visible plastic and carton waste. As Dr. Miller, one of the authors of the study, explained: "There are lots of people who really liked meal kits but were saying 'Ah. there's so much plastic and I feel so bad because [it's] so terrible environmentally.\"5" HelloFresh's sustainability strategy broadened in 2018, with the acquisition of Green Chef. The American company, founded in 2014, had always been focused on having the most sustainable meal kit in the industry. Since its beginnings, it took part in supporting sustainable measures along the value chain, Green-e certied Renewable Energy Credits (RECs) programs as well as carbon and plastic offsetting programs. The acquisition of Green Chef allowed HelloFresh to quickly obtain the knowledge it needed to strategically focus on sustainability. 57 To live up to its company mission, HelloFresh announced on 4 August 2020, its wish to become the rst global carbon-neutral meal kit company.53 According to Tilman Eichstadt, senior vice president of International Product and Procurement: We are currently prioritising mitigating the emissions that we directly produce. Our highly optimised production facilities emit significantly less 002 per Euro of revenue compared to traditional food retailers, which need to cool, heat and light thousands of stores. Furthermore, we deliver our boxes as efficiently as possible, for example by shipping them in batches and reducing the number of kilometers travelled through our innovative planning software. This carbon offset initiative is another important milestone towards carbon neutrality and perfectly complements our existing e'orts towards becoming a more sustainable company. 59 In April 2020, to achieve this goal, HelloFresh started to track and reduce its carbon emissions per meal following the UN Sustainable Development Goal (SDG) 13. Moreover, in cooperation with Planetly (a climate-tech company), it offset its carbon emissions by investing in sustainable projects such as the Yarra Yarra Reforestation in Australia and the Farm Biomass Project in Canada, among others.\" In the US, it worked together with Terrapass, with the aim of offsetting about 50,000 tons of carbon emissions and 24,000 megawatt hours of electricity. 5' Among its competitors in the global meal kit industry, HelloFresh was the rst to publicly commit to supporting carbon offsetting programs. However, the general sentiment toward these plans was partly negative because of the risk of complacency and lack of their real effectiveness.62 As explained by Niklas Hagelberg, coordinator of UN Environment's subprogramme on climate change, \"Carbon offsets are not our get out of jail free car ". The argument was that before attempting to offset their emissions, companies should rst put more effort into reducing their overall emissions.63 Thus, one of HelloFresh's crucial challenges was to remain focused on its customers' main concern, namely reducing the amount of plastic and cardboard packaging (see Exhibit 5). According to HelloFresh's Sustainability report, published for the rst time in 2019, the company launched a few initiatives aimed at tackling this problem. It started to monitor the ingredient packaging within the boxes, avoided packaging whenever possible, designed lighter cardboard and offered pick-up cardboard seniices. However, these initiatives were not implemented consistently across all its different markets (see Exhibit 6). 2021 AND BEYOND: WILL HELLOFRESH MAINTAIN THE MOMENTUM AND WIN THE SUSTAINABILITY BATTLE? By 2020, HelloFresh was winning the race vis-a-vis its competitors. It had expanded in 14 Western countries and extended its product range to fulfil the needs of many hungry market segments, while maintaining its relevance despite the fierce competition. The acquisition of Green Chef helped HelloFresh focus its business on sustainability. The company made great strides in terms of sustainability; these culminated in its commitment to become the first carbon-neutral meal kit company. Nonetheless, HelloFresh still needed to address customers' main concern over excessive packaging. The arrival of Covid-19 proved to be the perfect opportunity to fully succeed after years of hard work. However, the pandemic was an abnormal situation that unusually favored HelloFresh's business. Maria Castroviejo, consumer foods analyst at Rabobank, summarized the issues as follows: One of the things that has happened is marketing costs have gone down a lot [during lockdown] because they didn't need to attract consumers. So they will need to escalate marketing costs [post-Covid]. ... With regard to packaging, she said: Pre-Covid this was one of the main criticisms. [.. .] During the crisis, people haven't cared about plastic as much; it was more about hygiene; but when things return to normal those concerns will be there. There is increasing legislation. Regulators are behind their backs and they need to find new solutions. In 2020, HelloFresh was experiencing a year of major successes. On the evening of October 23, Richter, while reflecting on the huge milestones the company had achieved, was mindful about the several challenges that lay ahead. Would the remarkable growth enjoyed in 2020 be maintained post-pandemic? Would the carbon offsetting programs be enough to win the sustainability battle