A fresh alternative: Marley Spoon

Fabian Siegel is the CEO of Marley Spoon. It was listed last year about six months ago at $1.42, and now it's under $0.50, so it hasn't been a great experience for those who invested in the business in the float. It's a German business that's still based in Berlin, and it's been operating for five years in Germany but the CEO, Fabian Siegel, lives in New York. I guess, you'd have to say that the business, while it’s still formally based in Berlin, has really moved to the US now.  It's got a business that is spread across Australia, United States, and Europe. What it does, is deliver fresh food to be cooked.

Instead of delivering precooked meals, you have to cook them. Basically, what he says, is they're competing against the fresh food aisles of the supermarket and they have fallen a bit short of their prospectus forecast, but not that much short, but they have, growing pretty quickly, and it's a very interesting space. Obviously, it's designed for people who have kids, and are too busy to do the cooking, or at least to do the shopping. They have to have time to do the cooking, because that's what you have to do with Marley Spoon, you have to cook, but, it saves you doing the shopping. 

Their margins, although they compete with supermarkets, as Fabian explains, are much bigger than supermarkets because they only source the food that's required to deliver to their customers. They don't have it sitting around on shelves, and then waste a whole lot. Look, it's a very interesting business. It hasn't been great so far, down as I said, it's just a bit under $0.50. But he reckons they're going to be around, and it's a fascinating business actually, really quite interesting. 

Here's Fabian Siegel, the CEO of Marley Spoon. 

Listen to the podcast or read the full transcript below:

Fabian, perhaps I could start by asking why you actually listed the company?  Why did you float the company last year, and specifically, why in Australia of all places?  I just wonder whether you had tried to get venture capital money, but wasn't able to, so therefore, you went to a float.  Or, was a public float your first option?

Yeah, good question.  Maybe, to give you some background.  I've been building consumer-facing transactional businesses for the last 19 years and one of my last companies also was a food related company called Delivery Hero, which is an online food ordering marketplace.  And after I left Delivery Hero, I became an investor so, many entrepreneurs think being an investee is the best job in the world.  I didn't like it so much, very lonely.  You're on your phone, pitching your money.  I realised about myself, I really love to build with people, and that's one reason why we started Marley Spoon.

We've been building Marley Spoon for the last five years and so we have venture capital in the company, but the team and myself, we're still the largest shareholder in the business.  Last year we were thinking, when we were raising money, we could've raised from PE on the one end side but normally when you do that, you lose more control normally. In a way, it goes from the more you dilute and stay private, the less actually influence on the future of the business you have, and we actually have a very long-term perspective on building the business so going public was very attractive to us.

Now, the question was, what's the right venue?  As Australia used to be a big part of our business, it still is today also, the most mature part of our business and also, there is a small and microcap market in Australia, we realised that's actually a good idea.  We were actually invited to test the market by Macquarie that found us, and we decided to list here.  And I think overall, it was a great experience to list the company, but since listing, obviously there were some hiccups or road bumps that are experiencing right now but it doesn't change the fact that we are able actually to run the business very independently.

We have an independent board that's very supportive.  We've got Deena Shiff, who's Chairing our board here in Australia.  I think the setup for us operationally is actually a good one.  Just, we're working on the capital markets valuing the business the same way we do it, and there’s still some work that’s left to do from our end, I think.

Yeah, so the listing price was $1.42, in Australian dollars and now, obviously, it's just under $0.50.  It hasn't been a great experience for those who came in at the float.  Can you explain to them perhaps, what's happened?  Why has the stock fallen by two thirds?

It's a good question.  First of all, I think there is very liquidity in the stock, that means very small trades generate large share price movements.  Now, 70% of the shares are still locked up by the initial investors and we assume, will be locked up, even beyond this summer but actually, for another year.  That's one aspect.  I think, the other aspect is that we have quite some large public market shareholders, that are very committed to the business.  We disclosed them on our website, so there's 12% held by a US fund, and then there's a big other shareholder, ISM here in Australia.

There's on the one side, not a lot of shares to trade.  But I think there's also another disconnect that we have to work on.  When you think about the valuation, the company currently is valued at something around 0.4 times 2018 revenue.  Given that we are a fast growth, I think very attractive e-commerce business, that’s very disruptive to supermarkets, we don't think the current valuation will present at least what we believe, the business should be valued at right now, or would be valued at.

Well, obviously that's the case, because you did it much higher in the float.  You'd have to look at it now and say you actually overvalued the company in the float, you’d have to say. The other thing is, of course, I note that you've fallen a bit short of prospectus forecast in the results that have come out, not everywhere, but just in a couple of points.

And maybe, that's probably the other.  I try to be always self-critical and try to understand where were the expectations we did not fulfil.  I think, when it comes to the overall business, the business grew rapidly as we had predicted.  We generated €92 million in revenue, 78% up year over year.  I think from that end; the business is growing nicely.  In fact, what we decided at the back end of last year, as we saw that you could acquire customers really effectively, we decided to spend more money on marketing and acquisitions.  This is also where we missed in the prospectus.  That was a conscious decision for us.

In fact, when you think about it, last year we acquired twice as many customers as in 2017, but the customer acquisition cost per customer stayed actually the same, at €66 year over year.  We basically were able to acquire more customers, twice as many, at the same acquisition cost, which on the one hand side, I think is a good performance.  It also shows that the market is quite sizable.

We saw that opportunity in the second half of last year, and we spoke to the market about it, we really wanted to use that, because it's the right business decision. But there was a reason why we did not actually fulfil the EBIT guidance that we gave in the prospectus and that is something maybe we could've explained better.  I still think it was the right choice for the business, overall as it sets us up to get to profitability, which is our goal.  We've guided this to get the company to profitability by 2020 and I think it was the right choice for the company to do.  But we probably have to get better in communicating that also to the markets, to be able to understand the rationale behind it.

I imagine something else that bothered investors, was the number of active customers actually stayed the same between quarter three and quarter four and that was because even though you got a small increase in Australia and Europe, your active customers in the US went down.  Can you tell us why that happened?

Yeah, I think the active customer number doesn't make much sense to look on the quarterly basis.  What you have is, you have in this business a very interesting dynamic.  We normally acquire most customers in the third quarter, and in the first quarter and what you see is then the revenue growth comes through in the following quarter.  So you could argue while customers stayed the same from Q3 to Q4, but revenue increased by 20% from Q3 to Q4.

Because, in Q4 we acquired, and that’s a choice, because before the Christmas period, normally that's not the best time to acquire customers.  We then tend to acquire less customers.  We have these big swings, and focusing acquisitions on Q1, and Q3 and because of that, you have these swings in gains in acquisitions so you probably would see a much bigger gain in customers in the first quarter, again compared to the fourth quarter.

I think the quarter over quarter active customer number is not the best measure to understand the dynamics of the business.  I think the revenue number is probably a better way to understand the growth dynamics.  Our business grew fast last year, and continues to grow also this year and that's true, actually, for all the regions, therefore I wouldn't over read the quarterly change in active customers.

Why do you get most of your customers in quarter one and quarter three?

Well, there's behaviour change so people are open to change their lives, they see back to school, which we have in the third quarter and a lot of them, we have New Year resolution.  People are open to make their life a little bit better and cook healthier and instead of going to supermarket Marley Spoon can actually make it much easier and more convenient for people to cook, so we see that these quarters lend themselves very well in getting customers on board. 

Can you tell us what your churn is?  I'm asking specifically because is your service something people tend to use forever, just do it, or do they come in and out of using it?

That's a good question.  We actually looked into the recurring revenue share of last year's revenue.  In fact, 91% of our revenue last year was done by recurring revenue.  The behaviour that you can imagine is, we have people that come into the product to trial it and not everybody will think that they would like to cook, is actually already in the habit of cooking.  Everybody agrees cooking is healthy.  You should do it more often.  But then you have customers that realise, "Wait a minute, I'm never at home." They're not our customers, they just think they would like to cook but they don't have this habit. 

Then we have a big group of customers that already have the habit of cooking, and they basically realise with Marley Spoon it's much more convenient to cook compared to supermarket.  As we acquire customers, the way you can imagine this, the first time trial, probably after the first month, you lose have of those customers that trial it because they don't already have the habit, they're basically not the right customer set.  But then the other half of customers, we actually ride on those customers that already have the habit of cooking and they realise that with Marley Spoon it's more convenient and they get more recipe choice and they don't go back to the supermarket. 

You have both of these audiences.  Now as a business, you always have to focus on, on average, you make money with every customer you acquire.  That's the dynamic that you have to follow, and we also showed that in our last year's numbers.  The nice thing about this business is, when you acquire a customer for 66 euros, you actually get on average this money back after six months.  It's a six month cash recovery period, and then you make a 3x return over the lifetime of the customer for every customer you acquire.  This includes also those customers that actually do not decide to stay because it's not really for them.  On aggregate, it's actually a very profitable way to grow the business but not everybody already has the habit of cooking.  I always say, "We don't change people's behaviour, but we can serve those that have already made cooking part of their life." This is, I think, the core value proposition, so yes you have people leaving the service, but that's not unlike any other consumer brand business.

In fact, there was a recent study last year that looked into how many percent of customers that trial a new brand in the supermarket will buy it another time.  In fact, only 40% on average would buy the same brand again, so this behaviour of trialling something is a quite common consumer behaviour we also see here at Marley Spoon, but in aggregate together we actually see this great unit economics that an average customer we acquire pays back actually after six months and then has this very favourable lifetime value to customer acquisition cross ratio of 3:1.

That's obviously the core metric of your business, isn't it?  Cost of acquisition versus average lifetime value.

I think that's a metric I would say is like the slide of truth if you look into a business, and also if you want to compare different businesses that are consumer facing transactional, that's exactly the way you have to think about it because in the end you're investing a dollar and you want to have a good return on that dollar.  A better return than a potential investor that provides you the capital could have on their end.  From that perspective, if a benchmark now Marley Spoon with other eCommerce businesses that are also publicly traded, I see that our unit economics are actually quite strong.  I think what also to note is, that we are not in a niche.  We don't have a high margin luxury business but we have a grocery business, in a way, to run, so we are able to generate high unit economics that are the end based on the high margins. 

In Australia for example, last year on average, for every box we shipped we’re generating 33% contribution margin.  Even though we compete with supermarkets Woolworths and Coles head on, on price.  Sometimes people wonder, "How is it possible?  How can you generate these high margins that drive the lifetime value when you are relatively small?" Last year the company generated 92 million euros of revenue, so you would argue compared to a supermarket we're still a very small subscale business.  The answer, why we can meet the competition on price and generate these high margins, is because unlike supermarkets who have a tremendous amount of waste when they have all these perishable items lying on supermarket shelves waiting for you to pick them up and then in the end up to 30% of those are thrown out, which is a cost in the end.  Marley Spoon works fundamentally different as we only source the ingredients that we actually need to send to the customer.  Our food waste today is already less than 1%, and this gives us this margin advantage, that allows us to compete with the supermarket and then in the end leads to these high lifetime values in the unit economics which I just mentioned.

You talk about contribution margin.  Is that the same as profit margin?  It's got a different name.  Is that what I understand to be profit margin?

Contribution margin is net sales minus cost of goods sold and fulfillment cost, so it's basically the box to your door and then on the P&L you have your G&A underneath and your marketing, so the other two lines to get to your profit line.

Right, so as you say, the contribution margin for Australia was 33%, but in the US it's 12%, big difference.  Also, your global contribution margin fell between first half 2018 and second half 2018 from 22 to 21%.  So although it increased from 17 to, I think, 21% overall over the year there was a decline.  Tell us a bit about what's going on with your margin.  Also partly focus on partly what's the difference between Australia and America?  Is it because the US is much more competitive?  

Good question.  The contribution margin increased from 17 to 18, from 6.5 to 21%.  We guided the market that in 2019 the contribution margin will continue to increase globally from 25 to mid 20s, so you will continue to see an increasing in the margin, and this will be resulting on the one hand side that Australia will incrementally increase, Europe will incrementally increase but as you pointed out, last year US still looked significantly lower.  What we're seeing is, you'll see the same, and you'll see a massive catch up in the US.  The answer has nothing to do with competition.  It's a more structural question.  What's sometimes counterintuitive, but because of ISRS bookkeeping, our fixed cost for our facilities, so the rent, the fixed cost for our line hauls when we send trucks for example from Sydney to Brisbane.  These fixed costs are part of our contribution margin.

In the US, we don't have two sites, we've got three sites.  In Australia we've got two sites.  We have more infrastructure, but the business used to be smaller in the US than in Australia.  It actually just overtook Australia in the second half, so what you have is, you have this mechanical effect that as US grows and it's the fastest growing region that we have, they’ll start to utilise its infrastructure better and there'll be a big mechanical catch up just from that perspective.  That's probably the majority of the story.  There's also another story which we disclosed to the market is that, as we increase our footprint, so we quadrupled our footprint on the east coast last year, and that went actually less smooth than we had hoped.  We moved from the Bronx to New Jersey and we had to rebuild our workforce from scratch, and that had an impact on productivity.  We see basically that flowing through also onto the contribution margin.  On the one hand side, you see some operational, temporary hiccups that we had as we grew the business and expanded it rapidly to also serve the growth. 

Then you've got the mechanical aspect, and I think both of these things together we see quite good development and that allowed us to guide the market, that for this year the global contribution margin will be probably between the mid and high 20s, and a continued development if you think over 17 to 18, 18 to 19, and this will be driven primarily from the US.

Is there much of a difference between the penetration that you are experiencing in your three markets?  Are people more inclined to use your service in any of those places?

I mean, when you think about the penetration, at the end of last year, Marley Spoon had 173,000 active customers across the three regions, however in theory, our network reaches already today 177 million households.  From a penetration perspective, we generated last year 92 million Euros in revenue, but our penetration is only 0.1%.  We're really just scratching the surface, so I would argue it's so early, and by the way that's also the reason why we could acquire more customers, twice as many in 18 compared to 17 at the same price per customer, because the market is huge and the channel switch from offline to online, which already has happened in fashion and electronics, in many other verticals, is just starting in groceries.  Therefore, we believe there will be massive growth coming.

The adoption rate really is at the very beginning.  There's one difference that we see, and that is the price that supermarkets charge, and that is different in Australia than in the US.  In Australia, you have a duopoly, and therefore there's not that much competition, and as we benchmark our Marley Spoon price towards that point, it is a bit easier for us to acquire higher margins.  Whereas in Europe, there's a lot of competition in the supermarket field, and because of this fierce competition, the food prices tend to be a bit lower, and that's why we also guided that Europe while in itself, also being largely profitable, it's actually from a margin perspective, it will always be a little bit behind Australia and the US.  That's because of the price points we're taking from supermarkets.

Can you tell us who you compete with?  Do you compete with others who do exactly the same thing only, or do you think you're also competing with those who deliver frozen food precooked, and other precooked meals?

No, so I think there's three areas here.  There is companies that make it easier for people to cook, and we're not the only one, there's also other companies in that space, and we basically compete with supermarkets.  Of course, there is also healthy competition amongst each other, but that's not really what's driving the growth.  The growth comes customer switching from the supermarket, from offline to online.  Now, we compete with the fresh aisle in the supermarket, but there's others that compete with the frozen aisle.  If you look at our customer demographic, our customers, the only thing they have in common, they live in urban, suburban, rural areas, their age is from 25 to 60, the only thing they have in common is they all live in a committed relationship, 86%, 40% have children.  Our customers cook already, and so they would go into the fresh aisle.

Now, singles or people that have unstructured lives, they often prefer things in the frozen aisle, and I think that's a different market.  We don't see our demographics overlapping that much, so we do not see ourselves competing with that kind of service.  There's also takeaway, and takeaway is interesting, and my last company was a takeaway business, so I know intimately the user behaviour in takeaway.  What you see in takeaway is that the big peak order days are normally Sundays, or holidays.  People are kind of tired and they just want to get a pizza, but you don't want to serve your family pizza five nights a week.  What we see at Marley Spoon is, while you can choose the date that you want to have your Marley Spoon box, most customers prefer it on Mondays or Sundays, at the beginning of the week.  What we see is, we compete for week night cooking on average, like the first five nights during the week, and then there's the restaurant and the takeaway industry, and they normally compete for the weekends.

The way our customers also order pizza here and there, so I see it as an adjacent behaviour, but the primary competitor, the roughly $240 that the Marley Spoon customer spends with Marley Spoon, that is money that used to go to Woolworths and Coles, and now they bring partially what they used to spend there to us, because we can help them with the week night cooking.

You say your current penetration is virtually nothing, 0.1% or something.  What does your long-term business plan, perhaps the one in your head, think that your penetration could end up being?

If you ask me, groceries is the largest vertical consumer spending.  There is space for multiple, I think, very large brands in that vertical.  It's a six and a half billion dollar category just in the US, the grocery.  It's also massive in Europe and Australia.  I think if in the end you get 1-2% market share, that's very successful.  I think shareholders, ourselves, we'd be very happy with at some point in time getting to that kind of penetration, and then we're talking about a business that's generating a billion Euros and more.  I think that is what we are going for.  It will take us some time, but I think the market is huge and there is space for multiple brands in groceries because it's massive. 

As a reference point, I sometimes think about US supermarket chains, for example Whole Foods was bought for $16 billion and they generated around $15 billion in revenue, but in the end they only had 1.8% market share.  That is sometimes a reality check for me to see how big this opportunity is, and again the channel switch from offline to online, which already had very strong impact on the offline retail sector of fashion, where shopping malls are closing down, or toys, where Toys 'R Us doesn't exist anymore, you have this massive impact on offline retailer.  Groceries is just starting, where 97% of groceries sales are still happening through the supermarket, but this will not be like that in the future.  Now, I do not know how fast and how big the channel switch will be, but I do believe it will be more than 3%, if I look at all the other verticals.  We believe there will be massive growth coming, and we're very well positioned with our service that we're providing to our customers today.

Wouldn't your greatest risk be that Amazon decides to just do it, having bought Whole Foods, decides to just start delivering fresh food to people in the form of meals?  Instead of just buying you, they decide to do it themselves and obliterate you.

Yeah, that's a good question.  First of all, Amazon can do everything and anything.  In fact, in my last business they also built Amazon Restaurant and competed with us.  They were not successful.  I think Amazon is a retail business, and like every retailer they think about source to stock, sales from stock, or inbound store, outbound.  This is how Amazon works, and they're probably the one retail business that will rule all others, with the ability to have millions of SKUs in their fulfilment centre and developing and sending those SKUs.  Also, having now the ambition to move that into groceries, because groceries gives you the frequency, it gives you the ability to build your own last mile, so while I do not know what Amazon's planning, I can imagine that groceries is very important for them.

However, we are not a retail business.  We are a manufacturer, we build a consumer brand.  Think about us more like a Proctor and Gamble or Unilever.  While Amazon can of course do exactly what we are doing because they have the money, I don't believe it's in their DNA to build a manufacturing business, because it operates very, very differently, new manufacturing 5S, manufacturing processes.  Again, while we know Amazon a little bit, we don't see that being in their core interest or their core focus at this point in time.  If they would decide to do it in the end, I think it will be still okay, because the grocery space is so big, it's fine if some families want to feed their children with Amazon, but then there will be other families that want Marley Spoon, or Dinnerly, on the budget brand that we have. 

Given that the space is so big, there will space for our brand to serve customers, and I would rather imagine that Amazon will be an infrastructure provider as they already now, offer the infrastructure unbundled, and we actually use part of that already today through AWS.  I would expect Amazon to be more an infrastructure provider and then compete with a UPS or a DHL, and therefore being part of the way we do our business.  I do not expect them to directly build a consumer brand in that space.  However, if they would do so, I think it's a very large space where there will be space for us to build a very profitable business in. 

Thank you very much, Fabian. 

Thank you very much for having me.

That was Fabian Siegel, the CEO of Marley Spoon.