I have just completed a deep dive on Hellofresh (ETR:HFG) and will be purchasing shares. Marley Spoon is a direct competitor of Hellofresh, as a result I thought I would put my thoughts here as to why I am buying Hellofresh rather than Marley Spoon.

Why Hellofresh over Marley Spoon or others in the space?

• Hellofresh is the major player in the space and is actually profitable and has positive cash flows. In just ten years, HFG has gone from a start-up in Germany to delivering 1 billion meals worldwide in CY21 with $8.8 bn (AUD) worth of revenue. IMHO Hellofresh now has the scale that it is the winner that takes all from the network effects and size compared to smaller competitors.
• From my research Hellofresh is one of those businesses that has worked out the "secret formula" of business. Over COVID they scaled massively and not from a small base. CY19 revenue = EUR 1.8 bn to CY21 = EUR 6 bn. To scale like that during a pandemic you must have a highly effective and efficient business model and processes. I might add the CY20 and CY21 were the first years the business become profitable and significantly operating cash flow positive, so it wasn't just a case of pump the money in and see the revenues increase.
• Hellofresh knows how to land and expand. Currently based in around 19 countries. Hellofresh's size means it has learnt all the lessons and growing pains already compared to smaller competitors.
• Hellofresh plans to spend EUR 500 mil this year in capex on tech and expanding capacity for EUR 10 bn of revenue. MMM revenue in CY21 was less than HFG capex for this year. How can you compete when your largest competitor is able to grow so much faster than you can?
• Marley Spoon is a dinner meal kit business only currently. Hellofresh has expanded into ready to eat (Youfoodz and Factor) and launched in some geographies "Hellofresh Market" that provides breakfast and lunch options. Another advantage over competitors for Hellofresh. Especially considering part of the business model of HFG and MMM is convivence.
• Hellofresh management is all about optimising the business through technology. Decisions are made on data. The profitability of the business is showing this is working.
• Customer reviews of both brands are about equal.
• MMM is currently a cash burner and unprofitable. Growth rates were less than HFG during COVID on a much lower base which should make it easier to grow at a faster rate.
• Blue Apron a USA based competitor. Listed at around US$145 a share in 2017. Current share price is US$5.25. Total losses (retained earnings) = US$666 mil and according to TIKR around US$750 mil of paid in capital. Money was thrown at this business for years and it couldn't crack the market. Last year revenues were under US$500mil and the company is still burning cash. Just shows the differences in outcome between two businesses in the same space...

Hellofresh is currently priced at a PE of around 30x. Not expensive for a company increasing revenues at a CAGR of 50%+ for at least 5 years (100% in 2020). Why take a punt on MMM comparatively? In my view any risks to the Marley Spoon model are the same as Hellofresh, unless you feel Hellofresh isn't the winner. Therefore, the risk reward of purchasing Hellofresh shares over Marley Spoon is heavily skewed to Hellofresh in my view.

Marley Spoon financially is actually a pretty easy company to analyse. There are 3 key metrics that drive the business:

• Active Subscribers - These are not active customers. The difference is that subscribers have an active subscription (i.e., ordered or skipped a delivery) and not include one-time trial customers. 
• The number of orders - How many meals kits is delivered to customers. Higher the number the greater the utility of the service. 
• Orders per subscriber - Which is the result of dividing the number of orders by Active subscribers. It measures customer loyalty and whether existing customers are buying more on average. 

Also, I found the average (€ per order) for each region is surprisingly consistent for the past 3 years.  

• Australia ~ €46 per order
• Europe ~ €40 per order
• USA ~ €45 per order

Playing around the variables using those metrics above can allow you to forecast topline revenue growth.

For the bottom line, the financial metric to keep in mind is the contribution margin. Not their operating contribution margin (OCM). Marley Spoon report OCM to show that if they did not spend on marketing vouchers or pay rent for manufacturing centres, the contribution margin would be higher. This is absurd in my perspective, like why would you make the investment in the first place? I feel the rent, in particular, is a necessary cost to run the business. I will use CM, literally every business use CM when presenting the strategy. 

There are 3 brands in Marley Spoon Group: Martha Stewart (which is an interesting partnership up for revision on 31 December 2022. In exchange for these branding rights, Marley Spoon pays royalties, based on a percentage of ‘Martha & Marley Spoon’ sales to Martha Stewart). Martha Stewart is paid a decent royalty and it has soo far paid off for both parties with US sales growing rapidly. I wonder what the revised royalty percentage fee is? The other 2 brands are Marley Spoon and Dinnerly. Dinnerly has been popular in Germany but we do not know the penetration as of today. 

The online meal delivery market is massive and post-covid, I am not expecting habits would change. Instead, more people will start cooking instead of buying fast food all the time. Customer acquisition is key during the pandemic, and they need to win more. The active subscribers started to plateau and are now looking at 25-30% revenue growth in 2021.  

Hello Fresh is the market leader and I will need to do more on them. My sister is using Hello Fresh in Europe, and she enjoys the meal kits. Recently, she decided to stop using the meal kits and start making her own recipes. She told me that the recipes were getting repetitive and now confident to have a go herself. Ironically, users gaining the confidence to cook for themselves could result in churn. Hence lifetime customer does not = forever. 

The sector is extremely interesting from a financial analyst perspective. All competitors are fighting for customer acquisition and retaining their existing customers. 

Here are some of the links for you to do more research I just covered the tip of the iceberg :) 

Prospectus -https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1089433/MMM_Prospectus

Updated Martha Stewart agreement- https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1092559/MMM_Agreement_Extended_with_Martha_Stewart_Living_Omnimedia 

Latest quarterly report-  https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1277026/MMM_Market_Update_Q4_2020_Presentation

A 30% drop in share price for management selling a stake for $56M institutional capital raise.

This could be one of the biggest bargains I have seen on a company growing triple digits in revenue. I am not sure what I am missing here?  

Hopefully, Marley Spoon can improve my standing on the competition :D