Food tech startups are changing the way America's cooking

Blue Apron is selling dinner kits at a rate of $40 million a month and is valued at $2 billion. HelloFresh is at almost $3 billion, while Plated also has unicorn potential. Is this the future of food—or Webvan vs Kozmo redux?

Published: Nov 18, 2015 06:20:52 AM IST
Updated: Nov 18, 2015 09:15:45 AM IST
Food tech startups are changing the way America's cooking
Image: Jamel Toppin
“The market was ripe,” says Blue Apron CEO Matt Salzberg, who says he didn’t know what competitors were working on

It’s June, and the summer zucchini are just starting to poke out from the vine. Their owner, a farmer named Patrick Johnston, explains to his eager guests from a startup called Blue Apron that the zucchini have already been sold to someone else and that the corn Blue Apron has contracted to buy is farther down the road. But Matt Wadiak, Blue Apron’s master chef, barely hears him. He’s focussed on a little yellow flower he’s spotted growing in the field. “Who’s taking your zucchini blossoms?” he asks the bemused farmer.

The answer is no one. No one buys zucchini blossoms—except maybe these two guys from Blue Apron, who have a quick exchange. The flowers, they agree, would make a nice garnish for a fish dish. “If you could grow enough,” Wadiak tells the farmer, “we’d pay a lot for these.”

Johnston, who farms 800 acres in Oakley, California, is at a loss for words. He’d met Wadiak two years before at a sustainable agriculture conference down the coast, and he’s already selling Blue Apron—just three years old—entire acres of sweet corn and beans. The two plaid-shirted thirty-somethings from the food-tech startup also discuss taking the purslane, an edible weed, growing alongside Johnston’s beans. And should he convert more acreage to organic crops, they promise to buy whatever he grows. “I had no idea you did all that,” says the farmer. Few did.

Founded in 2012 by Wadiak along with Matt Salzberg, a Harvard MBA with venture capital experience, and Ilia Papas, an engineer and former consultant, Blue Apron ordered three million pounds of produce from 100 family-run farms this summer. The greens will go into the company’s meal kits, boxes of precisely portioned ingredients and instructions needed to cook exactly three dinners a week and sold on a subscription basis in serving sizes for couples or families of four. Blue Apron now delivers five million meals a month, up from 500,000 just 18 months ago. Last November, Forbes estimates, sales crossed an annualised rate of $100 million; this year, they’ll more than triple. In 2016, the company should top half a billion.

Blue Apron is tapping a rich vein. Americans spend $1 trillion each year on food, about $400 billion of that on dinner, but they’re not spending as much time as they used to cooking the food themselves. Less than 60 percent of dinners eaten at home are cooked there, according to a recent study by market research firm NPD Group, down from 71 percent in 1985.

Startups of all stripes have been eager to step in. Munchery, Sprig and Maple, for example, have bet tens of millions on cutting out the restaurants and cooking hot meals to order in centralised locations.

But surveys show that Americans still love to cook—they just feel they don’t have the time. Blue Apron’s approach, the meal kit, offers the convenience of delivery while keeping home cooks in the kitchen. The precisely portioned dinners minimise waste and allow consumers to try ingredients they might not otherwise buy, at a price they’d have trouble matching—roughly $10 per meal per person.

And yet, Blue Apron, which has raised more than $190 million and has been valued at $2 billion, has not yet demonstrated profitability and faces well-funded competitors. It also faces the looming threat of a bursting tech bubble that could turn off the venture capital spigot.

It is one of no fewer than three fast-growing, venture-backed meal kit startups based in New York City. Plated, which was founded by Salzberg’s former business school classmates, scored a Shark Tank deal and has annual revenue estimated in the tens of millions. And HelloFresh, which was founded in Berlin but operates a regional headquarters in New York, just raised $85 million at a valuation of $2.9 billion and has global revenue of about $40 million a month (Hel- loFresh refused to comment).

Food? Delivery? Talk of a bubble? People could be forgiven for mistaking Blue Apron, Plated and HelloFresh for Kozmo and Webvan, two delivery companies that were among the notorious flameouts of the first dot-com era. Or they could be the future of food.

Walking through Blue Apron’s distribution centre in New Jersey, Salzberg and Papas weave through packing boxes stacked ceiling high to the command centre, where a large screen shows the shipping schedules for packages destined for cities as far away as Chicago. Software predicts incoming demand and costs, and workers on custom assembly lines pack boxes with meat and vegetables that could land on dinner tables that day. iPads attached to each line track its pace and check for missing items.

The operation is a far cry from the chaos of Blue Apron’s early days, when the three founders packed boxes for their friends out of a small kitchen in Queens. In high school in middle-class New Jersey and in college at Harvard, Matt Salzberg told anyone who asked that he was going to be an entrepreneur. He would spend three years at Blackstone before joining a powerhouse 2010 class at Harvard Business School along with the founders of Bauble- Bar, Birchbox, LearnVest, RelayRides and more. Salzberg decided to join a venture capital firm after school to learn more about startups firsthand. In his interview at Bessemer Venture Partners, he told partner Bob Good- man he would leave eventually to start a company. “Somehow I got the job anyway,” Salzberg says.

One night at a happy hour for Boston-based Insight Squared, the creation of another classmate, Salzberg ran into Papas. A technical consultant in Boston, Papas had just given up on the idea of moving to New York and was planning to settle down with his girlfriend. But then, Salzberg and he connected on an idea: A Kickstarter-like crowdfund- ing platform for research scientists that they would call Petridish. Over emails and beer, Salzberg convinced Papas to move to New York and start the company. Salzberg walked away from Bessemer and raised $800,000 in seed funding.

It didn’t take them long to conclude that Petridish was not going to work. Still holding most of their capital, they began to fill a whiteboard with alternative ideas, including a ‘Warby Parker for strollers’. There are multiple accounts of what happened next:
According to the Blue Apron guys, Papas came in one day after spending hours first trying to buy the ingredients for Argentinean-style steaks and then learning how to cook them on a friend’s borrowed grill. “Wouldn’t it be awesome if someone delivered you the ingredients in the right amounts?” he asked Salzberg, who did some research. He found a company in Sweden, Linas Matkasse, that was selling meal kits. In fact, it had reached $60 million in revenue despite operating in a country with fewer than 10 million people. Salzberg and Papas decided this was the opportunity and started building a web business they called Part & Parsley.

A few blocks away, Josh Hix and Nick Taranto—Harvard Business School classmates with Salzberg— were also playing with startup ideas. And they, too, had spotted the Swedish meal kit company. They decided to launch their own site, DineIn Fresh, which would soon become Plated. Both Blue Apron and Plated went operational in the summer of 2012. Though none of the principals will comment, there has been chatter on Silicon Alley about who had the idea first.

Intriguingly, it’s possible that neither borrowed from the other— because they were both too busy borrowing from Berlin-based startup factory Rocket Internet. Long derid- ed for rolling out startups that appear to clone the ideas of others, Rocket had spotted Sweden’s meal kits first, launching its HelloFresh brand in European markets in late 2011. Both Blue Apron/Part & Parsley and Plated/DineIn Fresh debuted with websites that appear to have been inspired by HelloFresh’s UK site. “Discover the joy of cooking,” the top of the HelloFresh site said on June 4, according to a screenshot saved by Wayback Machine.
“Discover a better way to cook,” read DineIn Fresh on June 15, the first iteration of its site. “Discover incredible recipes,” chimed in Blue Apron’s site on November 10. In two instances, the DineIn Fresh site referred to itself as HelloFresh (both Blue Apron and Plated deny borrowing from HelloFresh).

One day last April, in Blue Apron’s unmarked test kitchen in Brooklyn—they keep neighbours happy by plying them with free food—Matt Wadiak is holding court on how to split a raw chicken, showing exactly where to put the blade so that the uncooked meat separates neatly from the bone. He makes up the recipe as he goes, including hen-of-the-woods mushrooms, the type of fun, seasonal ingredient he tries to inject into every Blue Apron meal. “We don’t cook weird stuff just because it’s weird,” he says. Instead, he says, he wants home cooks to learn new techniques and get comfortable with “different cultivars”.

Wadiak is Blue Apron’s secret weapon, its negotiator with farmers, its culinary guru and its wild card. A transfer student to the Culinary In- stitute of America who’d spent time cooking in Italy and working with a protégé of Alice Waters in Oakland, Wadiak had his hands full running a catering service and a wholesale truf- fles business when he met Salzberg and Papas in 2012. (He also still owns a Pilates studio, just for fun.)

When Salzberg asked him to join Part & Parsley full-time, Wadiak stipulated that the name had to go. This made no one happy. “We already had a website and a colour scheme, and it seemed a huge waste of time,” says Papas. But Wadiak insisted that the new name be based on the traditional garb worn by French chefs in training: Blue aprons.

That first year, Wadiak shopped at farmers’ markets and cooked every recipe in his own kitchen. (He ran afoul of his partners at one point by spending days looking for nettles.) Salzberg handled investors and field- ed all marketing and customer ser- vice calls, while Papas built software to track their incoming supplies, advertising success and customer retention. He was also the late-night IT guy. All three packed boxes in a small kitchen in Long Island City, New York, sending them mostly to friends.

From the beginning, Salzberg decided Blue Apron would handle its own distribution and staff its centres with employees, taking on early com- plications and costs to control quality. “It’s a hot trend in startups to put employees on contractor forms,” he says. “We took the position from day one that we didn’t want to do that.” The company did outsource delivery, building a matrix to determine the cheapest partner for each shipment.

When Salzberg landed a $3 million Series A investment round led by Bes- semer and First Round Capital, Blue Apron was ready to hire staff and try to ease some of the founders’ burden. Within six months, the company was serving nearly everywhere east of the Mississippi. The following year, it opened a San Francisco-area facility. A bigger facility in Jersey City and a rapidly growing headquarters in Manhattan’s SoHo neighbourhood came next. Eventually, a third facility in Dallas gave Blue Apron coverage of the entire country, all served by 2,600 salaried employees.

As a subscription business, Blue Apron knows a lot about its collective customers, including how many will cancel an order in any given week and what ingredients will be needed months down the road. That allows it to plan meals based on the expected availability and price of certain crops, as well as to win a better price with farmers, who’ll gladly charge less to lock in a bulk order for pork chops or broccoli. And with just the three central hubs, Blue Apron avoids the major overhead costs of food waste, maintaining grocery stores and cooking food locally.

Blue Apron says it acquires many of its customers through word of mouth. But it also must fight to keep those customers. Many subscription companies lose customers as early as one month into their subscriptions. Blue Apron says when customers leave, it’s generally because they find they don’t have enough time to cook three meals a week or because they tire of having their meals dictated by someone else. A change in household size can also make a difference—as can the packaging. “We ended up cancelling the service after three weeks mainly because the packaging seemed really wasteful,” reads a 2014 user review on LearnVest. An early customer who asked not to be named tells of ending up with a freezer full of tilapia because he didn’t like the fish and couldn’t select other options.

Blue Apron is attempting to tackle those issues. More meal options are coming in the next few months, Salzberg says, and customers who make a fuss can cancel delivery at the last minute. And while the company did make its packaging more eco-friendly, it has also instituted a box-return programme. And it’s adding new services, too. In September, it announced a programme to sell wine pairings for its meals. “If half of our customers subscribed to wine, we’d be the largest wine ecommerce player in the US,” Salzberg says. The company also introduced an app over the summer that is intended to create a community of Blue Apron cooks sharing photos and videos and commentary. Plated, meanwhile, has taken aggressive positions on everything from customisation to sustainability. It funded a startup in Boston to make 100 percent plant-based liners for its packages. And instead of regimenting dinner options, it offered individual meals and a wider selection from the beginning.

The company has had to move facilities 24 times in just three years because it couldn’t properly forecast its own growth. In hindsight, co-CEO Taranto says the startup may have paid too much heed to customer demands for variety. “We, in the early years, tended to skew more towards being customer-centric than being focussed on doing what was best for scalability,” he says. But Plated got a big boost when it appeared on an episode of Shark Tank (the popular TV show on which founders pitch their businesses to high-profile investors) that was taped in 2013 and aired in the spring of 2014. Billionaire Mark Cuban agreed on camera to take roughly a 6 percent share of the business for just $500,000, and the broadcast crashed Plated’s website. In the following month, the company took in more revenue than it had in all of its previous months combined. But by the time the show aired, the deal with Cuban had fallen apart; eventually fellow Shark Kevin O’Leary stepped in. “My investment thesis,” says O’Leary, “is that if this company does not end up the leader, it will be acquired by a larger competitor for its subscribers.”

Plated, which once projected 2015 revenue of $100 million, is much smaller than Blue Apron, and the gap is growing. “The goal is not to be the biggest but the best,” says Taranto. His co-founder, Hix, adds, “This isn’t about Plated vs Blue Apron. It’s about Plated vs Whole Foods and a huge food market.”

At Blue Apron, the founders take a less charitable view. “If we didn’t exist, they’d have an impressive story,” says Papas. Adds Salzberg, “We’ve always been the market leader.”

Whether either company will continue to grow and ultimately turn a profit—“It could take a long time,” says Darren Seifer, an analyst with NPD—may depend on how much it costs to acquire customers and whether those customers believe they are getting a good value. So far, Plated has been charging about $12 per meal and Blue Apron about $10. While many have speculated about how good a deal this is for consumers, the real question may be whether Blue Apron can make money at that price. It claims that its overwhelming buying power does in fact allow it to sell its boxes for more than the cost of its ingredients. But if you include the cost of marketing, the meal kit companies likely lose money for at least a few weeks on each user before breaking even. And outsiders aren’t so sure that Blue Apron, Plated and the rest can keep those costs from ballooning. Meal kit businesses could face price challenges from VC-backed meal delivery startups, says Battery Ventures executive-in-residence Jonathan Sills. And aggressive marketing through channels like Facebook could lose its lustre as the sites compete for the same customers. “No one quite knows how this will all play out,” says Sills.

The last time around, Kozmo and Webvan struggled to sustain their growth. Ultimately, they both burnt through millions of dollars of investment capital around the turn of the millennium by chasing market share with murderous discounts for services that weren’t ultimately in demand. “The problem with the most promising companies in today’s market,” says Paul Madera, managing director of Meritech Capital, “is that they are priced for perfect execution on their business plans over the next five years—and then they go public at very favourable valuations. And that means there is no room for the setbacks and adjustments that 99 percent of companies face.”

The execs at Blue Apron and Plated dispute those concerns, arguing that they have better reach and better retention than some might guess. “If I could show you our books,” says Salzberg, “it’d be pretty obvious.” Actually, Blue Apron could show its books—it chose not to. In fairness, Fidelity saw them recently and chose to invest.

Salzberg says that if outside capital were to dry up, the company would be just fine. He says it has enough cash so that it need never raise money again—unless it wants to. He also says he chose Fidelity to lead the latest funding round because it takes a long-term approach.

Blue Apron says it is watching its financials closely and betting that it has built a brand that others will find impossible to match, from the one-on-one relationships Wadiak has cultivated with farmers to the emphasis on detail, right down to the flower garnishes.

“No one’s invented antimatter here,” says Goodman at Bessemer. “This is a box, and they put some food in it. So it’s all in the execution. And they’ve made the right choices since the beginning.”

(This story appears in the 27 November, 2015 issue of Forbes India. To visit our Archives, click here.)

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  • Dr.a.jagadeesh

    Great. Dr.A.Jagadeesh Nellore(AP)

    on Dec 5, 2015