Hello Fresh Report PDF

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Final report, taken under prof judy tan...

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MGMT2015 International Business

G2 Professor Judy Tan

Company: Hello Fresh Home Market: United States Suggested Host Market: South Korea

Prepared by: Group 4 Chua Siew Yin

01364585

Deline Quek

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Johannes Chong

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Johnathan Lim

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Ng Xin Yi

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Soo Wen Ning

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Winnie Lim

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Yu Yiling

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Submission Date: 6th April 2021 1

Content Page Background of HelloFresh Business Model

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Financial Analysis

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Management Analysis

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Value Chain Analysis

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Internationalisation Success and Learnings

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Resource Based View: VRIO-T Framework

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US Market Analysis

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US Market Growth and Trends

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Competitor Analysis

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Diamond Model

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Porter’s 5 Forces

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Motivations for further Internationalisation

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Market Seeking Motives

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Resource Seeking

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Proposed Internationalisation Strategy

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Integration-Responsiveness Grid

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AAA

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CAGE Framework

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Market Selection

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International Market Analysis

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Market Selection Criterias

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Industry Analysis on Selected Markets

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Analysis on Japan

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Porter’s Diamond Model

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Porter’s 5 Forces

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Competitor Analysis Analysis on Korea

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Porter’s Diamond Model

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Porter’s 5 Forces

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Competitor Analysis

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Selected Market

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Proposed Entry Plan

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Mode of Entry

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Value Chain Analysis

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Contratual Considerations

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Timing of Entry

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First-mover Advantage

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Action Plan

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Product Decision Process

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Product

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Pricing

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Communication

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Key Performance Metrics

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Organisational Considerations

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Organisation Structure

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International HRM

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Conclusion

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References

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Background of HelloFresh 1.1.

Business Model

HelloFresh was founded in Germany, 2011 as a subscription based meal plan service enabling consumers to enjoy home cooked meals without hassle. Their target market are 30 to 50 year old working professionals valuing convenience. HelloFresh’s value proposition is providing convenient and value-for-money meal-kits personalised from 23 recipe options catered to their dietary needs and household sizes. HelloFresh focuses on providing fresh, healthy foods and further diversified into organic meals through the acquisition of Green Chef in 2018. 1.1.1.

Financial Analysis

A) Earnings Assessment Since inception, HelloFresh has a proven track record of consistent revenue growth, with 410% compounded annual growth rate from 2012 to 2015, 56% CAGR from 2015 to 2019 and 116.6% year-on-year (yoy) in 2020. Despite the strong growth in revenue, HelloFresh’s net profit was in the red till 2020 due to high expenses driven by procurement (34% of revenue), fulfilment (38% of revenue), and marketing expenses (12.5% of revenue). Firstly, HelloFresh is very dependent on local suppliers for fresh ingredients. With high order volumes and favourable supplier terms, procurement expenses decreased over the years. Fulfilment expense is driven by production costs in HelloFresh’s fulfilment centers. COVID-19 has generated pronounced fulfilment expenses due to health and safety measures. Lastly, marketing expenses to revenue has improved significantly due to continued attractive customer acquisition costs achieved across its marketing channels. Internationalising into new geographies will likely drive up HelloFresh’s procurement and fulfilment expenses due to the need to localise its menu and services. Thus, asset-seeking motives should be considered when expanding overseas in order to gain access to local ingredients to create local recipes as well as knowledge on operating its fulfilment centres in the local market. B) Capital Assessment HelloFresh has maintained a strong capital structure and liquidity position. HelloFresh is in a lowerrisk position due to the minimal amount of debt they take up over the years. In 2018 and 2019, HelloFresh took on debt in order to finance its equipment in the US. In 2020, there was an increase in debt levels due to the need to fund its growth strategy, including capacity expansion and general working capital purposes. HelloFresh maintained a manageable debt-to-equity ratio of 23.1% and aims to not exceed the maximum leverage of 1.5x. The company is continuously strengthening its

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liquidity position with substantial amounts of cash and highly liquid funds, amounting to €729 million. HelloFresh also has a positive current ratio, indicating their ability to cover short-term obligations with short-term current assets. Therefore, it is safe to conclude that HelloFresh is well positioned to expand into foreign markets without needing to take on sizable amounts of debt. Furthermore, HelloFresh can pursue market-seeking motives to fully utilise excess cash on hand.

1.1.2.

Management Analysis

HelloFresh is led by highly capable leaders (CEOs Dominik Richter and Thomas Griesel, CFO Christian Gartner and CCO Edward Boyes) with rich experiences and educational backgrounds. Dominik Ritcher with his repertoire of experiences in startups and entrepreneurship and Thomas Griesel’s consulting experience drives HelloFresh’s growth from the bottom up. Additionally, Christian Gartner has had 19 years of banking experience, aiding his role as CFO. Edward Boyes has been with HelloFresh for the past 9 years and has grown with the company since the inception of HelloFresh UK in 2012 where he has used his years of experience overseeing the company to assist in his role as CCO. Under their leadership, HelloFresh has penetrated many countries successfully with their supply chain management capabilities (HelloFresh, n.d.; Helm, 2018).

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1.1.3.

Value Chain Analysis

Source: (HelloFresh, n.d.) HelloFresh has a unique value chain that practices bespoke manufacturing due to customisation menus and heavy usage of data and technology. Moreover, their supply chain minimises its cost in each stage of the supply chain and its commitment towards sustainability by reducing food wastage, reducing their carbon footprint by 25% and responsible ingredient sourcing (HelloFresh, n.d.). 1.1.3.1.

Suppliers

HelloFresh sources from largely environmentally-friendly local suppliers to improve their brand image. By connecting consumers directly with suppliers, HelloFresh reduces costs for consumers and increases their local responsiveness to the market, ensuring fresh ingredients suitable for the local market. Moreover, their proprietary integrated procurement platform allows for sourcing of ingredients in specific quantities, preventing wastage and is integral to their bespoke manufacturing. 1.1.3.2.

Data and Technology

HelloFresh uses a proprietary algorithm to forecast demand and predict changes in customer preferences, allowing HelloFresh to coordinate its supply chain and ensuring fresh ingredients and meeting consumer demand. Furthermore, data collected drives the craft of new recipe offerings to appeal to the customers’ changing tastes. Technology has also been integrated into its marketing and sales part of the business. HelloFresh has its own Direct to Customer growth engine, driven by costumed MarTech tools to optimise its responses to customer behaviours. 1.1.3.3.

Logistics

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The company engages 3PLs for deliveries from suppliers and to customers. Its strong partnership with 3PLs have enabled them to optimize the supply chain, achieving a centralized and lean supply chain. Additionally, a suite of proprietary technology tools allows HelloFresh to optimise cost for the scheduling of deliveries. This creates a seamless supply chain, enabling effective delivery of fresh ingredients to customers at the most convenient time. 1.2.

Internationalisation Success and Learnings

HelloFresh has expanded into 15 countries across 3 continents, with the United States (US) contributing 56.65% to their total net revenue. Profitability increases with higher maturity in each market penetrations, as proven from HelloFresh generating significant earnings from countries they have entered for more than 7 years (such as Australia and United Kingdom) and breaking even in markets of 4 to 6 years (such as Canada). HelloFresh is the incumbent market leader in the US, capturing 56.6% of the market share. Internationally, HelloFresh has enjoyed a 103.5% and 122% increase in revenue and number of active customers from 2019 to 2020 respectively. Key learnings include their leverage on access to local consumers. This enables HelloFresh, a data driven platform to collect quantitative data of their consumers. Firstly, data collected will power the algorithm to spur product innovation to fit the constantly evolving tastes of consumers. Next, it can drive the automation of business processes (eg. Marketing) to lower expenses, optimising profitability overtime. Lastly, data can forecast future demand to adapt to market demands. 1.3.

Resource Based View: VRIO-T Framework

Using the VRIO-T framework, we analysed HelloFresh’s resources and capabilities.

Through our analysis, HelloFresh’s ownership advantages include their data driven product

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innovation and strong marketing capabilities playing a vital role in maintaining their competitive advantage over their competitors. 2.

US Market Analysis 2.1.

US Market Growth and Trends

Though HelloFresh is founded in Germany, HelloFresh’s dominant market is the US market where 56.65% of revenue is earned. Moreover, HelloFresh holds 56.5% of the meal-kit delivery services industry market share in the US (Wunsch, 2021). The pandemic has caused lockdowns in many countries, including the US which has changed consumer behaviour as more resorted to deliveries and cooking at home. Thus, resulting in a sharp increase in demand for meal-kits. A survey conducted on 1,005 Americans has shown that 54% of respondents cooked more, 50% learnt more about cooking and 73% enjoyed it more. Additionally, it is likely for this trend to continue with 51% stating they would continue cooking at home post pandemic (Shoup, 2020). While the number of orders and revenue of HelloFresh in the US has been increasing yoy, their growth rates are slowing down. Orders growth rates dropped from 108.4% in 2016 to 2017 to 38.80% in 2018 to 2019. Similarly, revenue growth rates dropped from 90.1% in 2016 to 2017 to 39.7% in 2018 to 2019. 2.2.

Competitor Analysis

HelloFresh has three main competitors in its home market; Home Chef, Blue Apron and Sun Basket. Currently, all of them use a subscription based business model, similar to HelloFresh and their channel to reach consumers is through their website.

*price is rounded to the nearest dollar

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2.3.

Diamond Model

A) Firm Strategy, Structure & Rivalry Strong Domestic rivalry is present in the US with hundreds of meal-kit delivery services, totalling 391 in 2020 (IBISWorld, 2020). Experiencing a slow growth, the industry is very competitive and continues to intensify with more competitors. HelloFresh’s strongest competitor is Home Chef, with the second highest market share of 18% in the US market. Home Chef’s prices start from $6.99 per serving (Home Chef, 2021) which is slightly cheaper than Hello Fresh ($7.49). Additionally, other competitors mentioned in 2.2 also have similar value-added services such as options for customers to skip deliveries. These competitors put HelloFresh under the constant pressure to innovate and differentiate themselves to retain customer loyalty and maintain their position as the market leader in the US. B) Factor Conditions The US has an abundant 896 million acres of farmland for agriculture as of 2020 (Shahbandeh, 2021). Moreover, multiple climates across the US can enable cultivation of different foods making it well-suited for HelloFresh which depends heavily on a variety of fresh ingredients for meal-kits production. Local sourcing also drives HelloFresh’s sustainability goals. There is also sufficient capital in the US as seen from HelloFresh’s Series D to series F funding, which raised approximately $240M for their operations from 2014 to 2015 (Craft.co, 2021). This creates an environment that supports entrepreneurs as companies can be continuously funded. The availability of capital also ensures that HelloFresh is able to continue their operations despite only turning profits in 2019 (Progressive Grocer, 2019). C) Demand Conditions HelloFresh offerings cost around $215 per month, making them affordable to US customers as they have a high median salary of $51,168 per year (Doyle, 2021). In addition, the US population is also health conscious, with 43% indicating that they will always look for healthy food while shopping (Buchholz, 2019). This aligns with the fresh and healthy ingredients of HelloFresh’s meal-kits. Moreover, over 41% of American adults stated that they did not have enough time to complete activities they intended to complete in 2017 (Elflein, 2018). This suggests that they are facing time constraints in their daily lives. Thus, the convenience that HelloFresh can bring to them with regards to meal preparations value-adds to their lives by solving their pain point and they will be willing to adopt HelloFresh as part of their daily routines.

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D) Related & Supporting Industries HelloFresh is well supported by a network of suppliers for their fresh ingredients. This ranges from America’s largest pork producer, Prairie Fresh, to family-owned businesses like “Villari”. Another important supporting industry is the logistics industry. UPS, FedEx and other regional couriers are the appointed delivery services for HelloFresh in the US. They have the ability to ensure that the HelloFresh boxes are delivered promptly after to make sure the boxes are delivered while still fresh. Both the well-developed agriculture and logistics industry supports HelloFresh’s operations to offer superior products and services. 2.4.

Porter’s 5 Forces

A) Bargaining Power of Buyers (Very High) Meal-kit companies cater to a niche customer segment and this grants them relatively higher bargaining power to substitutes such as supermarkets as there are fewer options available for customers. However, bargaining power of buyers is still high. There are no switching costs across the industry as customers can simply cancel their meal plans, or switch providers, at any time. Readily available information online also facilitates switching by customers. This creates a challenge for incumbents to create loyal customers with very high bargaining power. B) Bargaining Power of Suppliers (Moderate High) Freshness of ingredients is an important factor for meal-kit companies, so companies tend to keep close ties with suppliers for the best food supplies. This is done mostly through direct sourcing contracts. Although there are many suppliers for food, the cost of switching suppliers is moderately high as it is difficult to find a trustworthy supplier and discussions and contract formation might take a long time. Meal-kit deliveries are outsourced to dominant 3PLs for last-mile delivery including FedEx, UPS and UDS. Meal-kit companies are highly reliant on 3PLs to ensure timely deliveries as food items are perishable and freshness is a crucial industry standard. When meal-kits are not delivered on time or contain spoilage, customers attribute this poor service to meal-kit brands instead of endorsed 3PLs. Customers also value additional services like expedited deliveries but this is not something within the meal-kit companies control. In addition, these 3PLs are giants in their industry and the meal-kit industry is only a fraction of their business which gives them greater bargaining power. Hence, the concluding suppliers’ power is moderately high. C) Threat of New Entrants (Low)

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The US meal-kit industry is still evolving and there is little regulation around it as meal-kits are still awaiting guidance from the US Food and Drug Administration for proper labelling and required publishing on nutritional information (G. & Fournier, 2019). More lenient regulations accompanied with low switching costs as mentioned above will lower entry barriers. However, new meal-kit companies are faced with high capital requirements (setting own physical distribution center for repacking and storage). New meal-kit companies also need to spend a long time setting up their own complex ecosystem of suppliers, procurement and 3PLs. More than half of the industry market share is also dominated by a few large incumbents, HelloFresh, Blue Apron, Home Chef (Wunsch, 2020) who can produce high credible threat of retaliation and discourage new entrants. The immense cost of setting operations in this industry has overshadowed other factors like minimal regulation and low switching costs, therefore, the threat of new entrants is low. D) Threat of Substitutes (Very High) There are many substitutes to the meal-kit industry which serves the fundamental need of hunger satiation: takeaway foods, dining-in, heating up easy-to-cook processed food, food delivery. However, with the rise of Covid-19, there is an increased consumer interest in home cooking and it may become the new normal in the future (Shoup, 2020). The pandemic has also surged the demand for food delivery services by 4% (Lock, 2020) which makes them a stronger substitute against meal-kits. Dining-in is a weak substitute because of Covid-19 restrictions and also the total cost is more expensive due to the culture of tipping in the US. Even when customers want homecooked meals, they may choose to buy ingredients from the supermarket where they can personally select and be assured of the ingredient quality or opt for grocery delivery services. In addition, supermarkets are growing segments (IBISWorld, 2020), especially for big players like Walmart who have the capability and potential to forward integrate into the industry. In addition to negligible switching costs across substitutes, the wide variety and strength of substitutes increases very high threats. E) Rivalry among existing Competitors (Moderate High) US' meal-kit industry is facing an overall slow growth rate despite the surge in home cooking during the pandemic. This suggests strong rivalry between existing competitors vying for market share. The trend of home cooking will persist post-pandemic but this is insufficient for HelloFresh to channel all resources and focus only on the US market which is facing saturation. The exit barriers are high for the meal-kit industry as incumbents are locked into their own strategic commitments consisting of

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supplier contracts and high fixed cost ste...