In the few years after they became a hit, the estimated $5 billion market for meal kits is already seen hitting the skids. Originally expected to be wildly popular among millennials, market observers now think the fortunes of meal kit companies are turning cold.
Consumers appear to be interested in at least trying meal kits, but the challenge remains in retaining those finicky eaters – especially in a world where eating options abound. A 2017 study by Second Measure, a credit transaction firm, showed that quarterly sales for larger brands like Blue Apron, HelloFresh and others have been on the wane since late 2016, in line with averages for the industry. Blue Apron did not respond to CNBC's request for comment.
"Meal kits are reminiscent of the late 90's dotcom boom for everything, and how the market became very saturated. We will see meal kit services and retailers tightening their relationship," said Darren Seifer, a food and beverage analyst at NPD group, an American market research company.
Analysts think that while meal kits are viable, they will have to overcome a few important obstacles before seeing profit stability and an established consumer need, according to the findings of a new report by Nielsen, entitled The Meal Kit Opportunity.
"Today, meal kits over-index for U.S. households that identify their cooking style as "gourmet cooks," the report noted. However, opportunities exist with young families and singles that enjoy cooking and trying new recipes, which make up roughly 44 percent of U.S. households.
"These households are often strapped for time and could be enticed to purchase with further customization", Nielsen wrote.
Recently, CNBC canvassed experts — as well as one meal kit company — and asked about what the sector needs to do in order to survive in the long term. Below are a few key takeaways from those conversations.
Solve the millennial question
Some data conducted on meal kit usage claim that millennials are the generation that subscribe to meal kits the most. However, Nielsen figures paint a different picture.
"…Just 11 percent of 18-34-year-olds claim to have purchased from a meal kit provider in the last six months. Comparatively, Gen X consumers (aged 35-54) account for 51 percent of total meal-kit-provider spending," the study noted.
Ed Boyes, the CEO of meal kit service HelloFresh, told CNBC recently that "Our sweet spot would be a busy, young, family or couple who really wants to find a great solution to having delicious, freshly cooked meals week in and week out. We are looking for customers who are in a more settled routine," he added.
While millennials are willing to try new things, the product or service still has to be perfect the first time around in order for these companies to retain their customers according to Jeff Fromm, a millennial marketing expert.
On average, eating prepared meal kits doesn't come cheap – and that may be a problem for cash-conscious consumers who find it easier, and cheaper, to eat on the go. These services offer initial discounts to consumers, which helps to bring them in.
However, many choose to unsubscribe soon after, and it's a real problem for fledgling brands.
"The price for meal kits averages out to $10 per serving, which can come out to $70 for three meals. Fifty-six percent of consumers say it is not affordable, although they are still buying them," said Meagan Nelson, associate director of Nielsen's fresh growth & strategy.
The figures are stark: Roughly 50 percent of Blue Apron customers use the initial discount for the first month before unsubscribing, according to Daniel McCarthy, assistant professor of Marketing at Emory University. For HelloFresh, the vast majority bolt after six months.
"There are healthy profits in businesses such as Dollar Shave Club and Stitch Fix because their product proposition and customer value proposition have nothing to do with discovery. They have extremely good retention because their core is a good product." said McCarthy.
Ramp up the experience factor
In regards to HelloFresh's growth, Boyes told CNBC that over the years, the company has "collected millions of data based on what consumers like that allows us to make hundreds of minor tweaks to our product portfolio."
That strategy makes HelloFresh's meal kits "…receptive [to] what customers want to eat," he added. Going forward, Boyes said the company would focus on enhancing the customer experience, continuing to find new distribution channels and personalizing the menu based on individual preferences and dietary restrictions.
Boyes' final point aligned with what independent experts say meal kits must do to become a real alternative to grocery shopping. Kit services will need to provide new experiences, which may prove pivotal in convincing customers to stick with their food plans.