Publication details

Livewire Markets

November 20, 2020

An underappreciated company thinking 'inside the box'


Nick Griffin, Munro Partners

The 2020 SOHN Hearts and Minds Investment Leaders Conference was a little different to previous years. Hosted via Zoom, rather than taking place at the Sydney Opera House, the virtual conference provided us an opportunity to present on the German-listed meal kit delivery service, HelloFresh.

The COVID-19 pandemic legitimised HelloFresh as a way of ordering groceries as consumers are consciously avoiding traditional supermarkets. This change in shopping has shifted the company from a ‘novelty to a solution’ and we believe the shift in behavior is here to stay, therefore opening the door to further opportunity for HelloFresh.


My name's Nick Griffin, and today we're going to be talking about fresh habits. And so, the key thing we want you to think about today is, how long does it actually take you to form a new habit? According to studies, it can take anywhere from 18 to 254 days for a person to form a new habit, and an average of 66 days for that behaviour to become automatic. And the reason why we're asking you to think about this is because we want you to think about the new habits that you've formed over 2020. And while COVID-19 has obviously been devastating for businesses and livelihoods around the world today, it has of course created these new winners, and these new winners have been formed by the habits that you generated through 2020. And on this slide, we're just showing you a few examples. But the one we want to talk about today and the one we think is probably the most underappreciated is HelloFresh.

HelloFresh is a subscription-based recurring meal plan. Many people would know the company because it operates here in Australia, but it's actually listed in Germany, and has a market cap of less than $10 billion today. At this point, you probably sitting there thinking that these guys have been trapped in their kitchen too long. Surely they're not about to pitch subscription boxes of vegetables as one of their better ideas for 2021. But what we're hoping to show you is, we actually think this company could be the next big winner in e-commerce. And it's really because of the habits that you've formed during COVID that's allowed this to happen.

The message today is fairly simple, groceries is the largest total addressable market in the world, and it's now moving online.

Food boxes are just another way of ordering groceries online, and the best position and most underappreciated is actually HelloFresh. And so, the first thing to tackle is, how has HelloFresh shifted through the pandemic? This was probably how you knew HelloFresh pre-crisis, it effectively came to you usually via some student at a train station or on the street, trying to accost you with a free sample, trying to get you to try the product or for your friend to try the product. You may give it a go, you may have given up. But then along came COVID, and COVID effectively turned the supermarket or your normal way of shopping for groceries into a war zone. Not only was it hard to get into, but even once you got there, you often found yourself fighting for supplies.

And that essentially turned HelloFresh from a novelty idea effectively to a solution, fresh ingredients delivered to your door every single week. And not only did it become a solution, it was a solution that was mimicked by many other companies around the world. What we're showing you here is a number of logos around the planet, but probably even your corner restaurant shifted to food boxes through the pandemic to allow you to get access to what they were doing. And what this did is, it effectively legitimised the product. It legitimised HelloFresh, as quite simply, a way of ordering your groceries online. And what that's done is, it's opened up a huge opportunity for them. That opportunity is grocery sales. So, groceries is the largest total addressable market in the world. It's over a trillion dollars in spending in the US last year and it was $10 trillion globally. Yet in 2019, just 3% of all US groceries were sold online, far less than other verticals where online penetration has got significantly higher over the last few years.

What effectively happened during COVID, is we saw this forced acceleration in e-commerce. E-commerce sales in the US added five percentage points per share in just the one year. And most of that share gains actually came from online groceries that effectively tripled their share in just one year, from 3% of total sales to 10% in one year. And what we think it's done is, it's effectively broken the glass ceiling on buying your groceries online. In the same way it took you a long time to get used to buying clothes online, it's taken you a long time to get used to buying groceries online. And now that's just happened really, really quickly because you've been forced to do it. This creates a great opportunity for HelloFresh. And what we're showing you here is the sales of all these companies around the world or various different companies around the world.

And on the left here, you can see HelloFresh is actually the largest meal box provider on the planet, 4 billion US dollars in sales, actually 10 times the size of its nearest competitor. But that's actually tiny when you compare it to grocery sales. These are the grocery sales of many supermarkets around the planet, in markets where HelloFresh operates. And even amongst the digital peers, it's important to stress, the digital peers are all effectively going for your takeaway wallet. HelloFresh is the only one going for your grocery wallet. And so, it effectively has all this opportunity to itself. And we see it incredibly well-positioned. The reason why is because HelloFresh has actually been spent the last 10 years building an amazing infrastructure footprint around the world. We've actually seen this movie before, it was done by Amazon previously. And what you do is, you effectively build these facilities here in the US and here in Europe and here in Australasia, and they've slowly over a decade, built a leading position in 14 markets globally.

And importantly, when you think about these facilities, it's important to think what they do. Once you have the infrastructure footprint, you can ultimately provide a better service to clients that allows repeat customers and also allows them to recommend to other customers. And so, what you get is this acceleration in market share, and HelloFresh has now effectively destroyed most of their competitors in the US, it has more than a 50% market share. And in fact, it has more than a 50% market share in most economies, most of the 14 markets that operates in the world today. And it really is because of it's infrastructure footprint. Now that this is done, you have this amazing optionality to the upside. And so, the important thing to understand is while the core products should continue to grow, it's important to understand what happens once you get used to having a food box delivered to your house once a week. What happens once that habit is formed?

What else could you actually put in that box? And the answer is, a lot of things. You can move to other meals, be it breakfast and lunch, or move to diet products. You can better monetize your customers because you know more about them, you know more about their data. You can use those learning's into new geographies. You could even create new brands around different meal, whether it's vegetarian or whether it's paleo, et cetera. And lastly, and most importantly, you can actually start adding essential services. So, you can add things like milk, pet food, toiletries, even toilet paper. And so, it really is this unconstrained upside that comes from effectively having this Trojan horse of getting used to having a food box delivered to your house once a week. And the last thing just to flag about HelloFresh is, it is a sustainability champion. Clearly having food delivered to them and then straight to you lowers your CO2 footprint. It also significantly reduces food waste, and they also obviously work very hard in sourcing their food products responsibly. And so, they have a lot of a big role to play here in how we actually consume our food going forward.

So, really the crux of this now is putting together in the numbers. And it's really these two charts that really encapsulate the bet we're going for here. On the left, we're showing you the active customers of HelloFresh over the last 10 years. And what you can see is that they have effectively grown from virtually nothing to 5 million customers today. Now, consensus expects this to level out next year because COVID will go away and lots of the new customers they've acquired will effectively stop using the product. And sure, that will happen for some customers. But what we actually think will happen is, those new customers will create better network effects, they'll increase their wallet size, and they'll recommend it to friends.

On top of that, that creates the flywheel of growth, which you can then move into new countries. And so, we expect customer growth actually to continue to grow along this path, to roughly 11 million customers by 2015. And importantly, on the right here, we don't actually need too much to go right here. At the today, HelloFresh has just penetrated 1.7% of the potential households that could sell to geographies. And even by 2025, it'll still be at less than 5% penetrated. And so, really we just don't need a lot to go right here to get this investment idea to work. Putting that into numbers, we expect the sales that have actually doubled this year to continue to grow to more than double again over the next five years. And on top of that, we expect EBITDA, which is roughly 500 million to quadruple over that timeframe.

Today, as I said earlier, the company actually only trades on 16 and a half times EBITDA, or less than 30 times earnings. And if you compare that to the trade desk that we came up with last year, and this is a value idea for us. From that point of view, the multiple is low because people think these gains are going to go away. But we would argue that habits are formed now, and if anything, they're going to accelerate. Even if the company stays on the same multiple and follows this earnings trajectory, we can actually really easily get this company to triple over the months and years ahead. And if anything, we may have actually undercooked it.

So finally, just to conclude, groceries is the largest total addressable market in the world. And it's now, because of COVID, because of the habits you've formed, finally moving online. Food boxes are just another way of ordering groceries online. We don't expect them to take all the share, they just need to participate in part of this shift. And the best positioned and most underappreciated is HelloFresh. Thanks very much for listening.

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