Analyst: Kroger needs a deal for meal kits

Industry sources digesting the news that Albertsons would acquire the meal kit delivery company Plated see the combination as another example of the digital-physical convergance that’s rapidly becoming table stakes in the future of food retailing — and something of hot trend in and of itself.

The deal announced late Wednesday follows the explosive combinations of Amazon and Whole Foods Markets, completed earlier this year, and Wal-Mart Stores’ acquisition of Jet.com a year ago, each of which signaled a new urgency to tackle online grocery, which remains a small but fast-growing prize — and between them may have lit the fuse for others to take a position. In each case, the buyer was seeking to benefit not only from taking out a cross-channel competitor but to broaden their capabilities to capture shoppers for whom food shopping now comes in a variety channels.

The Albertsons-Plated deal also appeared to strike another blow to those perceived as falling behind in the omnichannel merger party — namely, Kroger, which saw its stock dip to 52-week lows Thursday after a Barclays analyst gently took it to task for a gradual approach to the meal kit business, arguing the company might be better served to respond with its own acquisition. Ironically, Kroger on Thursday announced the rollout of its proprietary Prep Pared meal kit offering to 25 Ralphs stores in California.

“Kroger has taken a fairly slow, homegrown approach to meal kits, developing this capability internally. Although it has been working on meal kits for years, it still does not have a direct-to-home option and kits are sold in only a handful of stores,” Barclays Karen Short said in a note.

Short argued Kroger could, for example, make a run at Blue Apron, the largest player in the meal kit category, which is encountering its own stock woes following an underwhelming public offering of stock this summer. Blue Apron’s sales are approaching $900 million but high customer acquisition costs present financial challenges. It is currently trading at about half its opening price.

“Food retail is becoming increasingly competitive and fluid, partially a result of new competitors entering the space and consumers changing their consumption patterns. Just as the food industry is evolving, Kroger will also need to evolve and find new ways of generating growth and deepening its relationship with customers,” Short added. “Given the stepped-up level of competition from both traditional and non-traditional competitors, thinking ‘outside-the-box’ (similar to Walmart’s acquisition of Jet.com) will be increasingly essential for it to thrive in a rapidly changing landscape, and we see a meal kit service company acquisition potentially generating a high [return] in the long run.”

Other observers contacted by SN Thursday said they see the Albertsons-Plated deal as a residue of the Amazon-Whole Foods and further evidence that food companies need to position themselves to win online.

“What we saw back in June with the Amazon and Whole Foods, we knew would help expedite growth of e-commerce grocery. It solidified the fact that people recognize that e-commerce grocery is a large opportunity, and going to be filled with partnerships,” said Michael McDevitt, CEO of Baltimore-based meal kit company, Terra's Kitchen. “If e-commerce can go from around 2% of the business where it is now to 10%, that’s a $70 billion shift. All of the major players that benefit from retail grocery now are really going to have to have a plan and strategy to get a piece of that.”

Plated’s estimated sales — between $200 million and $300 million, according to sources — are a “drop in the bucket for Albertsons,” McDevitt added, “but I think it’s going to lift the awareness of the meal kit space. And Albertsons bringing in the outside expertise makes sense. When you have Amazon chasing you, you need to act fast, so it makes a lot of sense.”