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Chef'd bets on brick-and-mortar for success in meal kits

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Kyle Ransford, left, co-founded Chef'd in 2014. Sean Butler, right, came to the company with experience at plant-based meal-kit maker Purple Carrot.

Source: Chef'd

*California-based Chef'd works with food manufacturers to promote and sell meal kits.

*The company's sales at physical stores will match online sales for the first time in 2018, according to CEO and co-founder Kyle Ransford.

*Chef'd is working on a new "buy" button feature that would appear next to recipes Internet users share online and allow consumers to buy all the ingredients for a recipe in one click.

El Segundo, Calif.-based Chef'd began selling meal kits online in 2014. In 2017, the company began distributing its kits through supermarkets, building a network of retail distributors including Costco Wholesale Corp. and regional grocer Tops Markets LLC. The company has raised about $40.5 million since 2015, according to S&P Capital IQ, and offers kits with preportioned ingredients, including fresh produce. It works with major food manufacturers, such as Campbell Soup Co. and Smithfield Foods Inc., to market and distribute the kits. CEO and co-founder Kyle Ransford said during a presentation at Shoptalk 2018 in Las Vegas that he expects the company's sales at physical stores to match or top its online sales for the first time in 2018. By contrast, Blue Apron confirmed on March 15 that it plans to make its first foray into brick-and-mortar retail by the end of 2018. Along with Senior Vice President Sean Butler, who is in charge of the Chef'd presence at physical retailers, Ransford sat down for an interview at Shoptalk 2018 with S&P Global Market Intelligence. The following is an edited transcript of the conversation.

S&P: When you talk to retailers, is there one point that resonates particularly well with them about why they should have your products in their stores?

Sean Butler: Meal kits grew by 30% [in 2017, according to Nielsen data] and they'll grow significantly more than that in 2018. You have a trend in all parts of traditional retail grocery where the grocery, the frozen, the ambient portion of the store is declining and food service is taking that market share and other meal solutions are taking that market share. This is an opportunity to provide a fresh, not-frozen product, which meets the demands of an emerging set of consumers, and [not lose grocery stores customers] to Grubhub or restaurants or other on-demand food delivery services that are not partnered with grocery stores.

For the product, we've got twice the shelf life of competitors, we have the best consumer insights of anybody in the marketplace because the e-commerce side of the business is nonsubscription, so there's reorders. You'll see demographically and geographically what meals are hot where, when and [whether people are] buying them and testing them or rebuying them. We can see loyalty data by [product] across the country, and we've got the best distribution network in partnership with Smithfield Foods ... who has a fully refrigerated supply chain. These meal kits are making their way to stores through their refrigerated vehicles and mature third-party relationships. From a marketing perspective, most meal-kit companies are digital-first companies, and so their competencies lie there. Through a partnership with Smithfield, through a partnership with Coca-Cola Co., we are leveraging some outstanding, mature and innovative shopper marketing partners to deliver on that part of the shopper journey and connect it very well to the e-commerce part of the journey.

You mentioned shelf life. With your plan to expand your presence in physical stores this year, how have you made these kits last longer on store shelves?

Sean Butler: We launched a first-generation retail product on a small scale in July 2017. It was a cardboard box with some holes in it, and you get seven or eights days of shelf life for that recipe in-store, which is very challenging because you've got to move from the inbound supply chain to the production processes, then merchandising them on store shelves, then [moving] them on to consumers' fridges. It's a lot that has to take place in a very short period of time before they cook the meal and it's consumed at home.

In November, we launched a second-generation package. We get 16 days of shelf life for every recipe, and we do that through managing the rate of atmospheric transmission between the ambient atmosphere and each [box] through laser-perforated membranes, and then sachets calibrated with some different elements to achieve the appropriate balance of oxygen, ethylene, carbon dioxide, nitrogen and so on in each [box]. We're the only ones who are achieving that in-store, and we're not denaturing the products through pasteurization or high-pressure processing. We launched in November [2017] and today are in more than 100 stores coming out of three manufacturing and distribution facilities throughout the United States. We'll be in about 1,500 stores by the end of May, so we're on an annualized run rate just in the retail channel of about $20 million, and that should be well over $100 million in the retail channel by the end of the year.

You have talked previously about how Chef'd has not spent a lot of money on marketing, especially compared to Blue Apron. What balance have you struck between acquiring new customers and building out the infrastructure for actually filling orders?

Sean Butler: Firstly, Chef'd is very fortunate that HelloFresh SE, Blue Apron and other leaders in the space have driven awareness of the category, both in e-commerce and generally through their marketing efforts. We have been designed from the very beginning as a nonsubscription model, and to achieve that, you have some really fundamental differences on the back end.

We manage more than 5,000 ingredient SKUs [stock-keeping units] on the e-commerce side of the business to make more than 1,000 recipes available for same-day ship across the country. That creates a dramatically different model than Blue Apron or HelloFresh, which are running, and very well, supply chains to weekly catering operations, basically.

Having that infrastructure, where we have more than a thousand recipes and growing means that we're able to merchandise in different digital and physical locations. We never have thought as a company that a shopper wants to choose between hundreds or thousands of choices in any product or any category at one time. The reason we have so many recipes that we're meeting specific shoppers where they are. For example ... shoppers can buy Hershey Co. dessert kits on Hershey's website. A hundred percent of the commerce is transacted by Hershey's on their website through [an online] integration. They transmit the fulfillment information to Chef'd, and then that comes from one of our e-commerce facilities. Same with Coca-Cola or other less-traditional [manufacturer] partners ranging from celebrity chefs and so on.

In the near future, Chef'd will become on the internet a "buy" button next to meals, no matter where they are. At scale, that means the buy button next to user-generated content, so in order to achieve that, we have to expand that already large [product] library of 5,000 [products] to some degree more than that, so then a user who is on Pinterest or a similar platform can say, "This is Sean's spaghetti and meatball recipe."... I put two cloves of garlic whereas you might put a drop of egg or something in yours. So I can create that recipe and then put a buy button next to it the same way all recipes or other content aggregators could do the same.

Blue Apron has gone public, and others, like Plated, have been acquired. Is either an acquisition, specifically being the target of an acquisition, or going public possibilities you think about the future of Chef'd?

Kyle Ransford: We don't spend a lot of time on [those options] today. We set off on this mission to provide mass customized solutions to the public. I'm really focused on getting there, I told everyone we are going to get there, they looked at me like I was crazy. We're more focused on getting there, whether public, private or part of someone else. I think all those things can evolve, but we're mostly just focused on getting there [rather] than this, that and the rest. We didn't really build it to sell it. Being public has a lot of challenges, which Blue Apron would be happy to explain, so we don't necessarily think [going] public is the winning outcome. Public is actually a real challenge. ... I've run a public company before. Twenty percent of your time is spent with stuff running a public company, and in any business, if you take away 20% of your workday to do something that's not adding to the product you're producing, it's really challenging.

We're [more] excited about getting all these pieces together and actually getting to the place of mass customization. We truly believe we can lower the price of food by 50%, and so I'm focused on getting there. That democratizes food, it allows a lot more people to be eating the stuff they want to be eating, hopefully, a little bit healthier.