Foodservice Equipment & Supplies

APR 2018

Foodservice Equipment & Supplies magazines is an industry resource connecting foodservice operators, equipment and supplies manufacturers and dealers, and facility design consultants.

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92 • FOODSERVICE EQUIPMENT & SUPPLIES • APRIL 2018 market spotlight Although Potbelly currently uses this concept as a supplement to current locations, Birkinshaw sees growth in the delivery component. It's difficult to dismiss the benefits of kitchen-only restau- rants, which include less overhead and the potential to draw customers from a wider area. However, the segment is still relatively new, which means some growing pains. "There's no doubt the market is undergoing an early life crisis, as it has been very challenging with high customer acquisition costs and financial performance that has not met expectations," says Bob Goldin, co-founder and partner at Pentallect, a Chicago-based food industry consulting firm. "Still, we're optimistic about the growth of kitchen-only businesses, as it makes a lot of sense for those heavily oriented toward deliv- ery [to go this route]." Though delivery comprises just 3 percent of restaurant 'visits', accord- ing to Port Washington, N.Y.-based NPD Group, it continues to grow at double-digit rates. "This is due to third-party providers," says Bonnie Riggs, director and industry ana- lyst at NPD Group. "The need for meal convenience started with Baby Boomer women entering the labor force, then it waned a bit, but now it's back up with Millennial moms and convenient mobile apps that can be used for ordering food." Meal Kit Potential Like kitchen-only restaurants, the meal kit market continues to show great potential. "Customized meal kits are about a $2 billion market now and will grow to $6 billion in the next five years," says Goldin. One of the leaders in the space is Germany-based HelloFresh, which launched in 2012 and provides recipes and ingredients by mail. It works with a network of hundreds of suppliers in categories that include produce, poultry, beef, sea- food, dairy, grocery and packaging. The company also works directly with growers and packs and ships its product from distribution centers in New Jersey, Texas and California. The majority of the ingredients, such as sauces, spice blends, pasta and protein, are HelloFresh private label items. Because HelloFresh sources mainly pre-prepped ingredients, the company does not use a kitchen. "Our unique business model and proprietary technology platform makes HelloFresh fundamentally different than any grocer or retail platform," says Uwe Voss, COO of HelloFresh U.S. "We use algorithms that enable us to constantly learn and improve. This feedback loop allows us to learn from new data and helps our culinary team create more menu options and globally inspired recipes tailored for our customers." The company adapts its product offerings based on customer feedback, while also taking into account seasonality, sourcing conditions and customer taste profiles. "The industry overall is very underpenetrated and ripe for future opportunities to grow and expand," says Voss. "On the operations side, we see a trend toward greater sustainability. Moreover, our business model significantly eliminates food waste, and any excess ingredients we have are donated to food banks on a weekly basis within the communities where our distribution centers are located." The success of meal kit companies like HelloFresh and Blue Apron have helped raise the profile of the meal kit category in recent years. "The meal kit concept is morphing rapidly and getting a lot of traction," says Barry Friends, a foodservice distribution executive and consultant at Pentallect. "There are many business models [in this segment] and some will consolidate." Companies will become more local- ized, Friends predicts, allowing meal kit shipping from closer proximities. This will not only result in quicker deliver- ies, but also lower costs and potentially improved quality. "Time and logistics are key," says Friends. "Our proprietary research shows people love these programs, and there is a genuine market for meal kits, even though there is a fair amount of work involved with prepara- tion at home." Many predict supermarkets will become more of a major player in the meal kit market, which will change the dynamic and grow the category. "Our perspective on the market is driven by the success of major meal kit players, but each is slightly different in terms of marketing and distribution," says Technomic's Thoresen. The Roadblocks Experts agree that consumer-direct operations deal with a host of challenges. For delivery-only or ghost restaurants, the cost of labor is one of the biggest issues. "The cost of hourly wages for delivery workers has more than doubled since 2013," says Peter Schatzberg of Green Summit, a New-York based kitchen-only concept. "Increases in minimum wage and delivery minimum wage became a hurdle for us the last couple of years we were in business." To overcome this issue, chains are partnering with third- party delivery services, such as Grubhub and DoorDash, to justify the costs and sidestep labor issues. However, this comes with its own set of risks that can impede food quality and, in the process, sully the restaurant's brand. "The virtual restaurant side of the business is where we've seen really big companies, like Sprig and Maple, go out of busi- ness," says Thoresen. "The struggles were mainly with growth Food quality and brand integrity are key factors in the consumer direct segment.

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