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Why Giant Companies Can’t Seem to Get Enough of Meal Kit Startups

Nestle this week led a $77 million round in an e-commerce meal company, Freshly. It’s the latest indication that customers are increasingly interested in purchasing their food online.

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BY Zoe Henry - 23 Jun 2017

PHOTO CREDIT: Getty Images

You might associate Nestle with candy bars and hot cocoa, but in recent months, the Swiss food giant has made an effort to reach more health-conscious consumers. Now, it's looking to the on-demand meal sector to boost sales.

This week, Nestle announced that it led a $77 million funding round in Freshly, a New York City startup that sells fresh, chef-prepared meals via subscription. Customers simply order their meals online, and the ready-made food gets delivered to their doorstep. Just heat it and eat it. Although Nestle would not comment on how much it invested, it did say that its food division president, Jeff Hamilton, would be joining the startup's board of directors.

"Acquiring a position in Freshly not only gives us access to this growth market, but it also brings reciprocal benefits for both companies," said Nestle's U.S. CEO, Paul Grimwood, in a statement on Tuesday. "Nestle will gain visibility into Freshly's advanced analytics and its highly effective distribution network and Freshly will benefit from our R&D, nutrition and sourcing expertise."

The news comes as a growing number of traditional grocers see promise in direct-to-consumer business models. Last month, Unilever invested in Sun Basket, the San Francisco-based organic meals startup, while Campbell Soup recently took a stake in food startup Chef'd, which partners with media companies such as the New York Times and Vice to launch meal kits. And just last week, the grocery chain Whole Foods agreed to be acquired by Amazon for $13.7 billion.

Of course, the vast majority of grocery shopping continues to occur in physical spaces, inasmuch as consumers want to be able to touch, taste and smell products such as fruits, meats and vegetables. "Grocery is a unique animal," noted Brendan Witcher, an analyst with Forrester, in a previous interview with Inc. "It's not necessarily buying a lamp or a shirt or an iPhone." Consider that fewer than 10 percent of shoppers say they have purchased non-perishable groceries online, while only two percent have bought fresh food online, according to A.T. Kearney research.

Even so, companies like Nestle see ample potential in the Freshlys of the world. In it the multinational conglomerate has found a logistics partner that will help expand to new markets--vital, particularly as younger customers are increasingly interested in eating healthy. Nestle recently announced its lowest global sales growth for 2016, and last week said that it was mulling the sale of its candy business, which makes classics such as Butterfingers and Raisinettes.

At Freshly, customers can pick from options such as a Southwest Veggie Bowl, say, or Roasted Red Pepper Chicken. Recent data from Nielsen shows that more than quarter (29 percent) of Millennials would be willing to pay a premium for healthy foods, while roughly a third (33 percent) report that healthy foods are "very important to them." That compares with only 23 percent of Baby Boomers who would be willing to pay a premium, and just 26 percent of Gen Xers.

Meanwhile, Nestle says it plans to help the startup set up an additional East Coast kitchen and distribution center in 2018, for instance. (Currently, Freshly serves 28 states nationwide.) This should also help Freshly to trim its sourcing and distribution costs, which tend to cramp young, unprofitable companies.

It's a win, win for both companies--that is, if the larger one doesn't just gobble up the smaller one and put it out of business.