How do you solve a problem like meal kits?

On Friday, HelloFresh Group CEO Dominik Richter allowed himself to get a little nostalgic for the good old days of the pandemic.

“While navigating the business through Covid did not feel anything like a walk in the park,” the meal kit brand boss told analysts and investors on a conference call, “with the benefit of hindsight we greatly benefited from a lot of free traffic, word of mouth, a fairly relaxed labour market and an outsized percentage of meals consumed at home… enlarging the opportunity we were going after.”

But those days are long gone. We’re even over the ‘new normal’ by now. And as such, the mid-term targets HelloFresh set back then have been revised.

“Given the very different operating environment compared to the time when the company had first set its mid-term targets,” HelloFresh said, management determined it was unlikely to hit its bullish revenue and adjusted EBITDA targets by 2025. As CFO Christian Gaertner put it: “It’s not realistic any more.”

The target scrapping combined with profit guidance way below expectations saw an immediate nosedive in the company’s share value of more than 40%. It’s only clawed back a few percentage points since.

Soft consumer demand for food boxes

“We were wrong in our assumptions that we would be able to maintain our margins at some of the peak pandemic levels,” Richter said.

Back in 2021, the company claimed it had 7.3 million active users globally in the first three months of year, up 74.2% from a year earlier. At last count it has 7.07 million customers – but retaining them is getting a whole lot more expensive. While those customers are ordering more frequently and more, “getting new customers is getting harder” Richter admitted.

Ultimately, there is “soft consumer demand” he suggested.

HelloFresh’s woes signal a struggle in the wider meal kit sector. Losses ballooned to almost £160m in 2022 at Gousto as costs soared and rapid growth reversed for the first time in the recipe kit supplier’s 11-year history, according to accounts published in September last year. Mindful Chef – which was acquired by Nestlé in 2020 – in accounts filed in September for the year ending December 2022 showed operating losses had increased by £5.1m to £7.7m as gross profit margins slipped 5.6 percentage points to 25.1%.

Customers can still switch between providers chasing introductory offers. As of today, HelloFresh UK is offering 60% off a first box, and 20% off for two months; Mindful Chef offers 25% off a user’s first four orders; and Gousto 60% off a first box and 25% off on all boxes for two months. Discounts for lapsed customers get even more generous.

The solution for meal kit brands

Such offers are hardly sustainable and not becoming of businesses now around a decade old. HelloFresh knows it, saying on Friday it was focusing on offering “product incentives” over discounts to lower marketing spend.

For some analysts, the solution for meal kit brands involves “shrinking to greatness”, targeting the core customer and cutting unprofitable growth.

“They [HelloFresh] overearned during the pandemic and are still seeing that unwind,” said Bernstein in a note last month. “Ultimately, the product is too expensive, the proposition is not differentiated enough, the growth is low quality and driven by discounts, and management have the wrong strategy (one which goes after growth and is margin dilutive).”

“We struggle to think of scaled D2C subscription businesses, employing a similar model to HelloFresh, that are successful and sustainable. We would argue that the big problem is the business model – undifferentiated offers, high cost relative to traditional channels, and high churn do not create sustainable businesses,” the Bernstein analysts add.

HelloFresh, like its rivals, should focus on its core, affluent, loyal and happy customers, of which there are fewer, but are worth more. Smaller, more specialist and anything but the pandemic-frenzy-fuelled ambition of being what Bernstein calls the “Amazon of meal kits”.