The HelloFresh Business Model – How Does HelloFresh Make Money?

Executive Summary:

HelloFresh is an online food delivery company that creates and ships meal kits for groups of two and four. Customers can choose from a variety of plans, including vegetarian, family-friendly, or low-calorie meals.

The business model of HelloFresh is based on charging customers a subscription fee. The price paid is dependent upon the frequency of food ordered (two to four times per week) as well as the number of people it’s ordered for (two or four).

Founded in 2011 and headquartered in Berlin, Germany, HelloFresh became one of the world’s leading providers of meal kits. The continued growth culminated in the company’s IPO in 2017. Today, HelloFresh generates close to $2 billion in annual revenues, but struggles with profitability remain.

How HelloFresh Works

HelloFresh is an online food delivery company that ships ready-to-cook meal kits. The packages contain both the recipe as well as ingredients to be cooked.  

helofresh how it works

HelloFresh offers personalized plans that allow customers to decide for how many people they want to cook for, how often in a week food should be delivered, and the type of food (e.g. vegetarian or low calorie). HelloFresh offers over 20 recipes to choose from at any given time.

The number of meals delivered range between three to five and are shipped within one single delivery. Ingredients are made to last for about a week. Proteins are packed outside of meal kits and come with an ice pack to keep them fresh.

One of HelloFresh’s major selling points is the flexibility of its plans. Customers can easily opt-out of their subscriptions for any time frame they desire.

Users can place orders from the company’s website as well as their Android and iOS apps. The service is available in over 15 countries across the globe, including the United States, Germany, or Australia.

A Short History Of HelloFresh

HelloFresh, headquartered in Berlin, Germany, was founded in 2011 by Dominik Richter (CEO), Thomas Griesel, and Jessica Nilsson.

HelloFresh is a product of Germany’s Rocket Internet, a startup incubator responsible for the creation of companies such as Zalando, Delivery Hero, Lazada, and many others.

The company, founded and led by Oliver Samwer, is known for copying successful businesses and deploying copycat companies all around the world.  In the years prior, Samwer made billions off building and selling European versions of YouTube, eBay, Groupon, and more.

To build these companies, Rocket seeks out the most talented individuals from the world’s best business schools. Work experience in management consulting and investment banking, as well as a competitive background in sports, round up the profile.

Richter and Griesel were both fitting the mold. They possessed degrees from WHU-Otto Beisheim School of Management in Vallendar, Germany (Samwer’s alma mater), and the London School of Economics, possessed work experience at Goldman and OC&C Strategy Consultants and played soccer on a semi-professional level.

The initial idea for HelloFresh came from Sweden. Linas Matkasse, a Swedish startup, offered meal kits with corresponding recipes that shipped weekly via the mail. In Sweden, the model was highly popular. In its fourth year of operation, Linas Matkasse was projected to accumulate revenues of $45 million.

Richter, who joined Rocket Internet first, then recruited Griesel (a former WHU classmate of his) and Nilsson (who left the company in 2014) to join him in building HelloFresh.

Armed with an initial investment from Rocket, the trio immediately got to work. The company shipped its first meal kit within three months of operation. Weeks later, the team sends employees to Amsterdam, London, Paris, and Sydney to launch local HelloFresh subsidiaries.

A year later, in the summer of 2012, the company announced its first major round of funding. $10 million were poured into the startup by existing investor Rocket Internet as well as Holtzbrinck Ventures and Kinnevik. At this point, HelloFresh employed more than 100 people across seven global offices.

Around the same time, word got out about the US launch of competing services Blue Apron and Plated. Weeks later, the founders decided to open an office in New York City. The company closed 2012 with $3 million in revenues.

While impressive, these numbers were nowhere near the $10 million in annual revenue that Samwer traditionally expects from his first-year startups. Furthermore, the startup’s extreme focus on growth came with a variety of operational problems.

First and foremost, the company was spending huge amounts of money to acquire customers. Its marketing spend rose from $2.3 million in 2012 to close to $30 million in 2014. Meanwhile, the newly acquired customers were often only testing the meal kits out for a couple of weeks and dropping the service soon after sign-up.

Furthermore, shipping groceries, building up warehouses, storing large amounts of ingredients, and employing hundreds of people were all very costly activities. By 2014, the company’s operational cost (excluding marketing budgets) made up over 80 percent of the revenue it generated.

To make matters worse, employees in the American warehouses were caught taking drugs and having sex while at work. One former employee even posted to social media, holding a gun at work and claiming he’d shoot anyone coming his way.

Rocket’s interest in continuing to fund the startup began to dwindle. Existing investors Holtzbrinck and Kinnevik bailed on the company altogether and sold their shares.

Luckily for the founders, Jeffrey Lieberman, founder of Insight Venture Partners, came for the rescue. His company led a $34 million round (at a $178 million valuation) in June 2014. The company’s new investment round rekindled Samwer’s interest in the company.

In February 2015, Rocket Internet led another funding round of $124 million, valuing HelloFresh at a whopping $700 million. As a result, Rocket’s stake in HelloFresh rose to over 50 percent.

That very same year, news from inside broke that the company tried going public. Unfortunately, investors weren’t comfortable with the company’s extreme cash burn and its lagging path to profitability.

As a result, HelloFresh decided to raise another round of funding. The company furthermore worked on improving its operational metrics and hired more experienced executives. Additionally, the company decided to raise minimum wages to $13, leading to higher employee satisfaction and less turnover.

In the meantime, the meal kit industry began its consolidation. Its competitors were either brought out by larger players such as supermarket chain Albertsons or simply saw their sales volumes decline (for instance Blue Apron).

By 2017, HelloFresh became the de-facto market leader for meal kit deliveries in the US. Other markets, such as the UK or Australia, followed suit. The continued growth led to the company’s IPO in November 2017, allowing them to raise another $330 million at a valuation of $1.9 billion.

Today, HelloFresh claims to have over 1.5 million customers in the United States alone. It reached profitability in a few selected markets but remains unprofitable overall. Over 5,000 employees work across 15 different offices are now working for the company.

How Does HelloFresh Make Money?

HelloFresh makes money by charging a weekly subscription fee on the meals that it delivers to its hungry customers.

The price range of a meal kit varies depending on the amount of food ordered the frequency as well with which a customer places his/her order. For instance, the price per serving for a two-person meal is $8.99 while ordering for four gets you a cheaper rate of $7.49.

HelloFresh can offer a cheaper rate for mass offers due to the fact that the company is vertically integrated. This means that the company manages the whole value chain, including sourcing the ingredients, creating the recipe, or storing and delivering the food to customers.

This is also the reason why the company was and still is losing money. Building up warehouses, renting delivery cars, hiring employees, and creating a variety of meals are just some of the initial setup cost that only amortize over time.

Furthermore, the company has taken a page out of Netflix’s playbook (or shall I say cookbook), allowing customers to cancel their subscriptions at any time.

HelloFresh Funding, Valuation & Revenue

According to Crunchbase, HelloFresh has raised a total of $367.5 million in six rounds of venture capital funding. Notable investors during the company’s startup life include the likes of Rocket Internet, Insight Partners, Baillie Gifford, Phenomenon Ventures, and many more.

The company raised another €320 million (at a valuation of €1.7 billion) during its IPO in November 2017. Three years later, the food delivery giant has more than quadrupled its valuation to over €7.4 billion in 2020.

For the fiscal year 2019, the company posted revenues of €1.8 billion, representing a 38 percent increase from the previous year. Due to the pandemic (and more people ordering food online), the company expects even stronger growth numbers for the year 2020.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.