The World’s Most Ruthless Food Startup: The Inside Story of How HelloFresh Clawed Its Way to the Top
HelloFresh blew past 100 competitors to become the No. 1 meal-kit company on the planet. The German startup is winning–but not by playing nice.
Dominik Richter (left) and Thomas Griesel built a $2.3 billion public company funded by hundreds of millions of dollars, but critics say the economics of meal kits aren't sustainable. CREDIT: Doug Chayka
Dominik Richter is not a chef, a gourmand, or a food snob. It's a Tuesday in March, and the 32-year-old in a hoodie has chosen to lunch at a kale-and-juice joint that could easily make you think you're in Los Angeles, except it's in Berlin. But rather than opine over the lactose-free yogurt dressing on the Super Green Detox salad, Richter is stabbing his pumpkin seeds and lettuce as if to establish dominance over the leafy prey.
It's tough to discern whether Richter, the co-founder and CEO of HelloFresh--known for delivering the ingredients for Instagram-perfect home-cooked meals like Argentinian-Style Cod With Almond Herb Chimichurri and Chicken Thighs in Kimchi Sauce With Asian Pear Slaw, and now the No. 1 meal-kit company on the planet--actually derives any gustatory pleasure from food. "We're in the business of creating meal solutions for different meal occasions," he explains, perhaps thinking I'd never before heard of the concept called dinner.
Richter doesn't seem to much care for the social aspect of food, either. He's not a fan of work coffees or breakfast meetings or this lunch, for instance. He prefers to put his head down and work. "Leading by example," he says with a German-accented lilt, explaining how he's managed to become the king of a brutally competitive industry that at its peak had more than 100 contenders. "Being the one that is very structured, very motivated, very hands-on, doing everything that needs to get done."
It was likely all these qualities that originally caught the attention of Oliver Samwer back in 2011. The German internet mogul was always prowling for future CEOs. He had a type--MBAs from elite European business schools who had done a few years at investment banks or consulting firms, often with a serious athletic streak--and collected them. Richter checked all three boxes: business school at the prestigious London School of Economics and WHU-Otto Beisheim School of Management in Vallendar, Germany (Samwer's alma mater); a year at Goldman Sachs; a stint as a semiprofessional soccer player in Austria. As one of Samwer's former executives puts it: "You could have chosen a hundred other guys--same look, same profile."
Around the time Samwer decided to activate Richter on his latest venture--then under the name Jade 1314--the almost-billionaire was feeling restless. During the prior four years, he and his brothers had amassed a fortune by copycatting overseas startups, building and selling European versions of eBay, YouTube, Groupon, Facebook, and more. Rocket Internet, their four-year-old flagship company, was a veritable clone incubator, having staffed and funded more than two dozen startups. (See below.) Yet even as his net worth swelled, Samwer was no longer content to just plunder market share from the innovators. He wanted to own entire categories.
"The time for blitzkrieg must be chosen wisely," he wrote in an email to managers of Home24, one of his clone companies that sold furniture online. "Each country tells me with blood when it is time. I am ready--anytime!" E-commerce was a winner-take-all game, Samwer believed, and time was running out. Dominant players were the only survivors; losers were forgotten. Rocket entrepreneurs must be willing to "die to win." "If i see that you are wasting my money, that you are not german detail oriented, that you are not fast, that you are not aggressive, that you are not data driven ... then i get angry and do like in russia" (sic), he wrote, referencing his decision to strip Home24 managers there of their pay and equity. (After the email went public, Samwer apologized "to anyone who might have been offended" by its language or tone.)
A new category Samwer wanted to test--and dominate--was meal kits. A Swedish startup called Linas Matkasse sold preportioned groceries with corresponding recipe cards that arrived weekly through the mail. In Sweden, the concept had proved extremely popular, and the company was on track to generate $45 million in revenue in its fourth year in business. Once Richter was on board with the Linas Matkasse copycat, he assembled his team, recruiting Thomas Griesel and Jessica Nilsson to be co-founders. It was the trio's job to find out if meal kits would take off in the rest of the world--and, if so, to seize that before anyone else did.
Jade 1314--eventually named HelloFresh--launched from Berlin in October 2011. The meal-kit venture was a small bet for Rocket. But for Richter, it was an opportunity to fulfill a vision of himself he'd nurtured since college: He wanted to be a startup founder. Over the years, he'd made attempts--there was his idea for an Airbnb-type site geared to university students, and the plan for a campus-based food-delivery service. More recently, he and Griesel, also an MBA and a champion miler and steeplechase runner, had been pitching a daily fantasy-sports betting site for professional soccer. But they'd been unable to persuade investors to buy into their dreams.
Now Richter had a backer, and better yet, a potentially massive opportunity. If meal kits turned out to be more than a Scandinavian anomaly, they'd be able to disrupt one of the biggest industries in the world: the grocery supply chain.
Richter and the Swedes weren't alone in this ambition for long. HelloFresh's two most formidable competitors, Blue Apron and Plated, emerged within months of its launch, and soon the industry had grown into a full-blown battle royale. Over the next six years, venture capitalists dumped more than $1 billion into funding over 100 competing startups that offered some variation of the following: For between $60 and $180 a week, consumers could receive at their doorstep a deconstructed meal in a cardboard box--premeasured groceries, step-by-step recipe instructions, and the almost-realized fantasy of a home-cooked meal.
But then, as quickly as the category mushroomed, it began to fall apart. "There aren't a lot of people looking at funding meal-kit companies anymore," says Ellie Wheeler, a partner at Greycroft and an investor in Plated, which sold to Albertsons for an estimated $200 million in September. "It's a tough ride to still be invested in one of those." VCs are now abandoning the category, also-rans are getting snapped up, and Blue Apron, the one-time leader, now limps along, sales declining, its stock down 70 percent from its 2017 initial public offering.
Staff used drugs and drank alcohol in the open, according to three employees who witnessed these activities or found empty bottles and drug paraphernalia.
Yet soaring high above this fray, seemingly unscathed, is HelloFresh. The German upstart posted global sales growth of more than 50 percent last year and expects sales to increase another 30 percent in coming months, as it pushes past $1.3 billion in global annual revenue. This year, after lagging far behind Blue Apron in the U.S. for most of its entire history, HelloFresh caught up and overtook it, making it the No. 1 meal-kit company in America as well as the rest of the world. The company went public in November 2017 in Germany, and as of presstime, is worth more than $2.3 billion.
So how has HelloFresh managed to defy the fate of its competitors? Richter explains the startup's strategy as he would one of its recipes: His team finds the target customer, busy families (by examining data); fine-tunes the efficiency of the marketing efforts (by collecting lots of data); improves the quality of the recipes (using insights drawn from, yep, more data); expands the range of the offerings to cater to even more customer segments (thanks to even more insights and even more data).
CREDIT: Doug Chayka
But in reality, HelloFresh's history is far more complicated than his just-add-data-and-stir formula. It involves hundreds of millions of venture capital dollars, aggressive marketing tactics, health department complaints, threats of violence, hard drugs, dumb money, and, at its center, founders who have been so relentlessly focused on growth, they've barely stopped to consider what happens when they actually win.
"Master multitasker? Heat up a second pan in Steps 4 and 5 to cook multiple ingredients at the same time and shave off a few minutes."
--From "Korean Beef Bibimbap With Zucchini, Mushrooms, and Carrots," HelloFresh recipe WK 44 NJ-12
Inside the defunct wholesale bakery in Berlin that now houses HelloFresh's headquarters, the decor is hardly subtle in reminding you that, yes, this is a fresh-food company. Farmers' market-style, green-and-white striped awnings shelter rows of computer monitors. Farmhouse tables are a folksy contrast to the industrial concrete floors, while stacks of empty cardboard HelloFresh boxes--looking like they might at any minute be loaded up with mahi-mahi and shipped off--double as makeshift walls throughout the open office. The co-founders' office is set apart from all this charm. Lofted in the back, inside a sparse, glass-walled conference room, are Richter and Griesel, silently pecking at their laptops, in mission control.
"You'd go up the stairs and there was a glass container, with Dominik and Thomas sitting in there, not talking to their employees, making sure no one is socially interacting with them," recalls Simon Schmincke. In September 2012, the months-old startup was plotting its U.S. takeover. Schmincke--one of Rocket's many entrepreneurs-in-residence, which the company made available for rent to its startups--was hired to become HelloFresh's new U.S. CEO. Before flying stateside, Schmincke had embedded himself at HelloFresh's headquarters to soak up intelligence, but was surprised to discover he'd have little contact with the co-founders. "After two weeks, I'd seen Dominik maybe 30 or 60 minutes total," says Schmincke. "I was like, 'Dude! You're flying me to the U.S. I'm running your company. Should we maybe have coffee?' "
Up until then, Richter and Griesel, the company's COO, were doing what they had been recruited to do: act as "execution machines," as former employees have described them. They had managed to hatch HelloFresh at stunning speed, shipping its first box within three months, and shortly thereafter sending advance teams to Paris, London, Amsterdam, and Sydney to launch, simultaneously. By the summer of 2012, as word got out of the coming launch of Blue Apron and Plated in the U.S., the founders decided they needed to open an office in New York City, too--and sent Schmincke.
Following the Rocket playbook, the advance teams were typically made up of other young generalists, often former bankers and consultants, or Rocket's own entrepreneurs-in-residence. To gin up enthusiastic press, these outposts sometimes cast a photogenic local employee as a co-founder. In the U.K., Patrick Drake, an English friend of Richter's, appeared on a BBC broadcast as HelloFresh's co-founder and "head chef." (Drake had previously been a lawyer at Goldman Sachs and never worked full time in a kitchen or restaurant.) When the service arrived in Pittsburgh, the Post-Gazette reported that Marushka Bland, a young mergers and acquisitions lawyer who had gone to culinary school, "helped co-found HelloFresh." In reality, she'd been hired as an intern, although by then she had the title chief brand officer. "They had a pretty relaxed view of what founder meant," says Bland, who left the company in May 2013, after being in that post for three months.
These far-flung teams all ran on tight budgets at breakneck speed. The U.S. team, already months behind the others, scrambled to catch up. Every Tuesday, they woke before dawn to drive a rental car to the New Jersey warehouse and pack meals for the weekly shipment. By the end of the summer, they were delivering food to New York City, and then the Tri-State area, and then to the whole Eastern Seaboard the following year. It was hard and unglamorous work. Later, one intern sued, likening his internship to little more than manual labor for a $1,000 stipend per month, far less than minimum wage. (The case was settled out of court for an undisclosed sum.)
This was Rocket's culture, say former employees. When I ask ex-U.S. CEO Schmincke about the lawsuit by the intern--who started shortly after Schmincke left--he starts flipping through pictures on his phone. "If he's complaining about work conditions, I'll show you the Rocket office in Southeast Asia that we were running," he says. He slid the device across the table, revealing a photo of a sweaty, crowded workroom. "That's 320 people in a 60-people room. And, yes, I was working there too."
Employees within the Rocket system were swapped out like tires on a Formula 1 racecar. Nine months into the job, Schmincke himself ran into a visa issue; he was dismissed as CEO of U.S. HelloFresh and replaced by a British Rocket executive who had recently joined from UBS.
Meanwhile, in Germany, Richter and Griesel oversaw the local sales effort. (Nilsson, their third co-founder, left in 2014.) Believing their best potential customers were busy white-collar professionals, the teams packed bags with prepared HelloFresh food and headed for office buildings, talking their way past security. Once they got upstairs, they'd find a break room, unpack their wares, and start pitching.
"I was polishing the numbers for them, so I know what we were doing. From an ethical point of view, we were on the edge."
Richter and Griesel pushed their staff to beat the previous week's result, and then beat it again. They had to prove there was demand for meal kits--that HelloFresh was primed for the kind of wildfire growth venture capitalists loved.
"We were burning the cash. Everything that was in our pockets, we were burning," says Vincent Thuilot, who helped start the French unit of HelloFresh. When HelloFresh France struggled and was shut down later in the year (unionized truckers increased shipping costs, and many of the customers quit during August, when much of the nation goes on vacation), Thuilot was named HelloFresh's head of business intelligence.
It was during that time, he says, he got the sense Richter and Griesel didn't want to share bad news with Samwer or other investors for fear they might be cut off. "I was polishing the numbers for them, so I know what we were doing," says Thuilot. "From an ethical point of view, it was very--we were on the edge. Anything that was not looking good, we were not communicating it. If we talked about the number of issues we had with boxes"--like those arriving with spoiled food--"I don't think they would have invested much further." Other times, they'd cherry-pick figures to share, according to Thuilot, who didn't deal directly with investors. "It's not that we were manipulating or tampering with the data. It was just 'This week was bad--so I'll take the average of the last 12 months.' " (Richter says this is a mischaracterization, by an ex-employee, of how the company reported to investors. "We have always been transparent and consistent with investors with respect to surfacing issues and sharing our financials," he says.)
By the end of 2012, the global operation of HelloFresh had posted considerable progress--signing up enough customers to generate some $3 million in revenue. However, it was nowhere near the $5 million to $10 million Samwer liked to see from his first-year companies, says Jonas Larsson, Rocket's former CFO. "I didn't think HelloFresh was going to survive for a while," he says. "Even Oli [Samwer] thought: We're done; we're not going to support it."
"This Spanish-style powdered red pepper is proof that where there's smoke, there's flavor."
--From "Smoky Stuffed Mushrooms With Tomato Quinoa and Cheesey Breadcrumbs," HelloFresh recipe WK 12 NJ-10
By 2014, Richter and Griesel were trapped between their investors' ambitious expectations and the meager economics of meal kits. Shipping fresh groceries was expensive, requiring refrigerated warehouses, hundreds of laborers to pack boxes, and insulated containers. From 2012 until 2014, the company's cost of goods and fulfillment expenses made up 81 percent of annual revenue, leaving little behind to cover overhead or other costs.
Then there was the price tag for finding customers. The spawning of the meal-kit category was fueled, in large part, by VCs rushing to bring subscriptions to all kinds of product categories. It began with software, but soon there were shoes (ShoeDazzle), cosmetics (Birchbox), dog toys (BarkBox)--the list went on. Investors liked subscriptions because they appeared predictive: They could input certain assumptions--customer acquisition costs, margins, the number of subscribers who would likely quit over time--and then model their return on investment. Within this framework, all marketing expenses, from social media ads to direct mail to salespeople stalking people on street corners, were the price of buying customers. And in its first three years of business, HelloFresh went on a customer shopping spree--$2.3 million, and then $5.9 million, and then $30 million on marketing--more than a third of its revenue each year.
Now the company was running out of cash, and its three biggest investors, including Rocket, were unwilling to pony up more money. In 2014, HelloFresh's next two largest investors, Holtzbrinck and Kinnevik, bailed on the company, trading and selling their shares. Richter and Griesel decided to go for broke, pouring their remaining funds into growth marketing. Then, with months of runway remaining, they flew to America to woo new investors.
Enlisting ex-contestants from The Bachelor, like Ashley Iaconetti, to push HelloFresh on Instagram is one of the less aggressive marketing tactics the startup uses to lure new customers–and keep them from quitting. CREDIT: Instagram
Enlisting ex-contestants from The Bachelor, like Ashley Iaconetti, to push HelloFresh on Instagram is one of the less aggressive marketing tactics the startup uses to lure new customersand keep them from quitting.
In conversation, Richter can sometimes sound like he learned to speak English by listening to corporate earnings announcements. He's vague about specifics but fluent in financial models and jargon, which hardly worked against him when pitching American investors, to whom he presented HelloFresh as nothing short of transformational. HelloFresh, he told them, cut out distributors, wholesalers, and nearly all food waste in the multitrillion-dollar global grocery supply chain. Sure, there were steep upfront marketing costs, but the cash flow from subscribers would eventually flood back in.
In June 2014, New York City-based Insight Venture Partners led a $34 million round, according to company filings, that valued HelloFresh at $178 million, several times its previous valuation. The firm was wowed by HelloFresh's customer growth, its data-obsessed, workaholic founders, and the company's global footprint, says Jeffrey Lieberman, the general partner at Insight who shepherded the deal and is now HelloFresh's chairman. "It's really hard to scale a business like this," Lieberman says. "And to scale across six to seven countries? It speaks to the leadership Dominik and Thomas have."
With the new valuation, Rocket's Samwer suddenly had renewed interest in HelloFresh. (Samwer declined to talk to Inc.) In February 2015, less than a year after the Insight Venture investment, Rocket led a $124 million round, valuing HelloFresh at over $700 million. After he'd let Rocket's holdings dwindle, Samwer once again owned more than 50 percent of HelloFresh.
But Blue Apron still dominated the U.S. with about 70 percent of the market, and HelloFresh was fighting over distant second place with Plated. In March, Samwer sent Rocket's new COO, a former McKinsey consultant named Adrian Frenzel, along with Griesel, with plans to fix HelloFresh.
"Keep the panko breadcrumbs moving in the pan as you toast them in Step 3 and lower the heat if you see or smell any burning--they can start to singe if left alone."
--From "Spinach Artichoke Pasta Bake With Toasted Panko and Parmesan," HelloFresh recipe WK 15 NJ-9
Flush with venture capital, HelloFresh's U.S. ops team hustled to go national. By early 2015, they had leased fulfillment centers in Texas and California, enabling the company to ship meals anywhere in the lower 48 states within two days. They had also leased a 35,500-square-foot raw warehouse in Linden, New Jersey. It was their first time setting up and operating a warehouse all on their own.
For the team of operations managers, this was an exciting step. The managers were running a tight-knit group: Many were in their 20s, had graduated from elite colleges like Princeton and Northwestern, and were working their first jobs building a business from scratch. "It was ungodly amounts of work, but we were motivated by a vision that we were going to write the playbook for how you ship these crazy meal kits," says one of the managers.
After they signed the Linden lease, the team set up the new operation over the 2014 Christmas holiday. The next two months were grueling--installing equipment and assembly lines, and hiring a new staff, all while shipping thousands of meal kits every week.
In March, Griesel and Frenzel arrived from Berlin to tour the warehouse and assess the team's progress. "We were happy, thinking they're going to be excited--because we've done it all so fast," says another manager.
But that wasn't how the Germans responded. Instead, Frenzel launched into all the things wrong about the facility, down to the unswept dust in a corner of the warehouse floor. (Frenzel declined to comment.) The U.S. ops team was nonplussed. "Any person could walk in here and find 50 things wrong," says the second manager. "There's a new staff. We're growing like crazy."
Frenzel made it clear he intended to perform a full audit of their operations. Then he'd make recommendations on how they could match the efficiency of the warehouses in Germany. "It was a takeover in a sense," says the first manager. "All of a sudden, it felt like we had a new rule book, and that was the driving force."
Along with their demanding new types of reports, Frenzel and Griesel's blunt style rankled the workers. "Let's say somebody unloads a container by hand," says the second manager. "That's a lot of work. And you'd have the Germans standing there, literally with their arms folded, watching. Then, when anyone finished, they'd say"--the manager affects a German accent--" 'Do another one.' They treated them like animals."
Meanwhile, Richter was setting ever higher sales targets. Over the next few months, the number of orders coming through Linden doubled. The warehouse perpetually needed more workers, but Richter and Griesel, concerned about costs, refused to increase hourly pay. Instead, HelloFresh hired staffing firms just to keep the 150 minimum-wage temps it needed on the line every day. "It was the bottom of the barrel," one of the warehouse managers says of the staff, which included some who had been incarcerated or had drug problems.
By early June 2015, five of the American ops managers, including the chief operating officer, had quit. "It was hard to see the vision anymore," the first manager says.
Frenzel stepped in and took over the COO's duties full time. He hired a new warehouse manager, a former Navy supply officer who shared his top-down approach. He also put a recent hire from Berlin, a former management consultant, in charge of procurement. Morale plummeted. Order at the facility began to unravel, creating a sense of lawlessness. "It was a free-for-all," says one former employee.
"People would come to work late and high, or go into the bathroom and hide their beer in the ceiling, and drink in the bathroom," says the former employee. In the summer of 2015, staff used drugs and drank alcohol in the open, according to three employees who witnessed these activities or found empty bottles and drug paraphernalia on the premises.
The customer service department developed its own reckless atmosphere. Post-work drinks at the bar down the street were frequent. Early in the summer, maintenance staff discovered women's undergarments in the office one morning, according to one former manager. Then explicit cellphone photos of a supervisor and an employee engaging in sexual activities in the office after hours began circulating, according to three former managers. Richter and Griesel were notified, according to two of these former managers, and it resulted in the firing of both people. (HelloFresh's response: This is false.)
When a daytime supervisor, Kareem St. Louis, tried to fire an employee for disciplinary problems, the employee threatened to damage St. Louis's car. Worried about his safety, St. Louis called 911. Over the next few months, other managers had their tires slashed, were followed home, and got threatening texts saying "we know where you live." In July, one went to the local police. "After notifying senior management, they've done nothing to help or change the situation," the report noted. That spring and summer, police were called in six times in response to reports of harassment, disputes, and assaults. (At roughly the same time, competitor Blue Apron was experiencing similar incidents at its Richmond, California, warehouse, as reported by BuzzFeed in 2016.)
Conditions continued to worsen. After the warehouse's two bathrooms were vandalized, management padlocked the doors, and the warehouse staff was told to use outdoor Porta-Pottys, according to a Linden health inspector's report. This, along with a report of bedbugs in the office area, led to a complaint to the local health department, which sent the inspector to the facility. In August, a health department official met with Frenzel and Griesel and ordered them to rectify the bathroom situation.
A customer in the Netherlands wrote a profanity-laced Medium post railing against the hyper-aggressive tactics of the startup, comparing it to some combination of stalker ex-boyfriend, religious proselytizer, and mobster.
Richter and Griesel shared none of this with their investors--despite the fact they were in the middle of raising another round of venture capital at their biggest valuation yet. The crux of their pitch: the company's ambitious plans to take over the U.S. market.
"They sounded unusually confident" about the state of operations in the U.S., says James Anderson, fund manager of the Scottish Mortgage Investment Trust at Baillie Gifford, who heard the pitch and eventually led the September 2015 funding round. "I'd never found Dominik anything other than open and honest, ready to admit when there were problems."
Richter says if Baillie Gifford--or other investors--had wanted to know about the warehouse debacles, it should have asked about them. "Reactively, we're always kind of like 100 percent transparent," he says. "If anybody wants to do a deep dive in any part of the company, we've been super transparent with that."
But the Baillie Gifford investors didn't think to ask. (A spokesperson for Insight partner and now-HelloFresh chairman Lieberman, meanwhile, said he was unaware of any of these incidents until contacted by Inc.)
In September, two months after the repeated health department complaints and Linden police reports, HelloFresh successfully closed an $85 million round, led by Baillie Gifford, which valued HelloFresh at $2.9 billion, more than four times its valuation just seven months earlier.
One month later, HelloFresh's board took a further step, approving a plan to buy back shares from Richter, Griesel, and other early employees in a deal that collectively netted the two founders over $10 million. The founders, who together own more than six million shares and hold nearly eight million call options, were already on to the next phase of their plan: an IPO.
"Thin twirls of the green vegetable are almost too pretty to eat."
--From "Caramelized Shallot Risotto With Lemony Zucchini Ribbons," HelloFresh recipe WK 11 NJ-8
If you live in a major city, chances are at some point you've been hounded, cornered, or harassed on the street by what one former Dutch HelloFresh customer dubbed "foodjehovas" (translation: food Jehovahs). If you think the company is aggressive in signing you up, wait till you hear customers' stories of trying to quit. In January 2016, the customer in the Netherlands who had tried and failed to get HelloFresh to stop contacting him after canceling the service wrote a profanity-laced Medium post railing against the hyper-aggressive tactics of the startup, comparing HelloFresh to some combination of stalker ex-boyfriend, religious proselytizer, and mobster. "Fuck you, HelloFresh," the post, which went viral, began. "You push us around, disrespect our boundaries and you take our lunch money."
HelloFresh, in its assertive way, was attempting to address what has emerged as a fundamental problem with the meal-kit business: People quit. Why? Perhaps the novelty wears off, or there's guilt about all the wasteful packaging, or simply because they are too lazy to cook a gourmet meal every night. Whatever the reasons, it turns out the majority of customers ditch their HelloFresh subscriptions after receiving only a few boxes. The idea that these subscriptions would generate enough cash to cover the sizable marketing cost was wishful financial modeling. "It required a leap of faith," says Ellie Wheeler of Greycroft.
But now, as HelloFresh and Blue Apron pass their sixth birthdays, they know what the quit rates (also known as churn rates) really are. While neither company discloses figures, third parties including Dan McCarthy, an Emory assistant professor of marketing, and Second Measure, a research firm that analyzes pools of credit card data, have examined the companies' data. Their findings, which largely match up, paint a grim picture: Nearly half of subscribers of both services cancel within a month. Just 20 percent stay on as long as six months. By the end of the year, meal-kit companies are lucky if they've retained 15 percent of their original subscriber base, and the numbers dwindle from there. What's more, HelloFresh lags Blue Apron and other competitors in retention, often by several percentage points. The value of a subscriber is likely to be much lower than anyone thought.
Richter says this analysis is false on multiple levels, but won't disclose retention figures or churn rates. "Retention is one of the strongest points of our business model. We've always been very, very happy with retention rates," he says. When Inc. asked to connect with HelloFresh's longest-standing customers, the best the company could provide was a woman who had been featured in a company TV ad, and another who'd been with the service for five months.
Critics worry these high churn rates may prove fatal. "At some point, they'd go through millions of people who had tried the services who had churned out, and what would they be left with?" says Nikhil Basu Trivedi, a partner at Shasta Ventures who considered investing in Plated, Green Chef, and Sun Basket but ultimately passed. "There are a number of ways these businesses can be profitable, but at the end of the day it's a tradeoff between growth and profitability, right? You can't make the math work for both."
"Without marketing, the business is dead," says Eugene Auh of Oakchun Advisors, referring to the constant need to replenish the ranks of quitting customers with fresh subscribers. In 2016, Auh was hired to analyze the meal-kit business for a conglomerate interested in potential acquisitions. Auh eventually told his client to steer clear of the industry. Revenue growth comes "at an astounding cost," he says.
In 2015, HelloFresh shelved its IPO plans less than a month after announcing them. According to press reports at the time, investors couldn't stomach the company's burn rate given its distant prospects of profit. "Absolutely no one I spoke to had any appetite for this deal," Neil Campling, technology analyst for Aviate Global, told the Financial Times after the HelloFresh IPO was abruptly postponed on November 9. (Richter disputes this characterization, saying HelloFresh had many interested investors, but wanted to wait until the general climate of the tech market improved.)
In the past few years, the company has made upgrades to its operations. Richter finally began hiring executives with experience, like Tobias Hartmann, its new U.S. CEO, who previously ran eBay Enterprise and Innotrac. The New Jersey warehouse--now in Newark--has raised wages to over $13 an hour. And the company's margin (excluding marketing) has increased from 17 to 23 percent. On November 1, 2017, HelloFresh had a successful IPO on the Frankfurt stock exchange, raising more than $330 million at a valuation of $1.9 billion. Since then, shares have increased and sales have continued to rise.
Still, HelloFresh has a ways to go when it comes to improving the climate in its New Jersey operation. Two former employees, a night shift security guard and a custodian, said they witnessed evidence of hard drug use, including heroin and crack, at the end of 2016. "You'd see people getting high in the locker room," says the security guard. "It was a party." In January 2018, police were called to the Newark warehouse after an employee uploaded a photo to social media of himself holding a .40-caliber Beretta with the caption "I will pop a n***a at work LOL." Police found the gun in his HelloFresh locker.
Meanwhile, even as HelloFresh has made great strides in improving customer satisfaction--it's added customizable menus, delivery day options, vegetarian meal plans--overall retention rates haven't budged, acknowledge Griesel and Richter. People may be happier, but they quit just as often.
The company's investors argue that HelloFresh's financials will improve as the category matures. Earlier this year, following fulfillment troubles and other problems, Blue Apron cut back its marketing spending 35 percent as sales fell 20 percent, leaving the door open for HelloFresh. To surge past the incumbent, HelloFresh is still spending aggressively on marketing in the U.S. Meanwhile, the industry is consolidating: In 2017, supermarket chain Albertsons acquired Plated. In March, HelloFresh bought Green Chef, a Denver-based meal-kit company that specializes in organic food. In May, supermarket giant Kroger announced that it planned to buy Home Chef, another meal-kit company.
HelloFresh is also starting to move its business beyond subscriptions. There are many new code names flying around the office these days--"Ginger," "Caviar," "Happy Hour." In May, the company began testing selling meal kits in nearly 600 U.S. Stop & Shops and Giant Food supermarkets. It's also experimenting with prepared-food vending machines in Europe.
And HelloFresh has made Samwer's dreams come true in at least two respects: It's now the No. 1 company in its category in every country where it operates. And HelloFresh is valued at almost twice its annual revenue--a multiple that is more than twice that of Blue Apron or Home Chef, and approximately six times that of Green Chef, the company it acquired.
By the end of 2017, Rocket's stake in the company was worth nearly $980 million, a gain from its overall investment. (In April, the company sold $184 million worth of that stake.) As of HelloFresh's IPO, the co-founders' own shares have a current value of more than $195 million, based on HelloFresh's share price at presstime. Thirty-eight current and former members of management, co-founders, and other holders together own options worth over $58 million. Baillie Gifford's stake, meanwhile, is down 23 percent. And, of course, HelloFresh itself has yet to turn a profit.
Back at the Berlin café, as Richter and I finish our salads, I ask him how the company plans to become profitable by the end of the year--he's promised as much to the public markets.
He locks eyes with me and gets an edge in his voice. "We have a lot of experience with starting markets and then basically driving them to profitability over time," he says. The company has never publicly detailed any profitable operation, either globally or in individual markets.
"We're in over 10 markets right now, and a bunch of markets are already profitable," he says, but won't specify which ones. "Basically, over the course of the year, almost all of the markets will have turned profitable. Hence, we will also be profitable." As he talks, he keeps holding my eyes until I blink and look away. But he doesn't elaborate further.
Richter has the tunnel vision of an athlete, who--like his original benefactor--is willing to accept only one outcome: winning. His early investors doubted HelloFresh had a future, so Richter found new ones--and then got the original to invest millions of dollars more. Now, Richter, sitting with a reporter at lunch, is setting down the truth of his company the way he sees it, regardless of how the crude math works. During his time as an entrepreneur, the world has submitted to his will, and he will do everything in his power to ensure it continues to do so.
At 2 o'clock sharp, he excuses himself. "I actually have another appointment," he says. A few minutes later, back at the office, I walk by and notice he's upstairs, sitting alone in his glass box, typing intently on his laptop.
Trials of a Clone Factory
If anyone's managed to figure out how to exploit a formula for e-commerce, it's the Samwer brothers--Oliver, Marc, and Alexander. As chronicled by Inc. in June 2012, the Germany-based trio built Rocket Internet, which has copycatted dozens of overseas startups, from Amazon to Uber. Today, the estimated $4 billion empireflaunts a portfolio of more than 100 companies spanning six continents--but since launching HelloFresh in 2011, it's been a rocky ride. --Jemima McEvoy
2012: The Copycatter Gets Copycatted
With a portfolio of some 30 successful startups, Rocket's copycat strategy in emerging markets is paying off. Rocket develops HelloFresh, which it started at the end of 2011, and invests in African-based online marketplace Jumia. It also accumulates more than $1 billion from J.P.Morgan and Swedish investment company Kinnevik. Two of Rocket's four managing directors, who had left during the past year, start a Rocket competitor, called Project A.
2013: Only the Strong Survive
Rocket's portfolio boasts 75 companies in over 50 countries--spanning from fashion to laundry to freight transport--projecting a combined revenue of $3 billion, and 200 to 250 companies by 2018. Rocket also starts shuttering its weaker early-stage ventures. Home24, an online furniture store positioned as an Ikea disrupter, lays off all of its employees in Southeast Asia.
2014: A Shaky IPO
The company raises $2.1 billion in an IPO, appealing to investors who want in on Latin America, Africa, India, and Southeast Asia. But within minutes of going public, Rocket's shares tumble by 14 percent, and they continue to fall amid concerns over losses and Rocket's practice of overvaluing investments. Rocket announces plans to double down on its food and grocery businesses.
2016: Falling Out of Fashion
Rocket's revenue drops by 60 percent, from $139 million to $55 million. One of its biggest portfolio companies, Global Fashion Group--an online storefront for fashion sites--suffers huge losses and sees its value slashed. Shareholders lose confidence in Rocket's strategy as its portfolio companies continue to flounder, but the company maintains its will to make three of its startups profitable by the end of 2017.
2017: Back to Earth
Several of Rocket's portfolio companies have folded, and its most successful companies are still accumulating losses. Longtime Rocket investor Kinnevik sells its stake, and Rocket's shares and revenue fall. HelloFresh and Delivery Hero go public, but both are still unprofitable. Rocket reiterates its intention to "invest in lower-risk business models" and break even.
2018: Chasing the Next Shiny Object
Rocket's portfolio is half the size it had projected for 2018, and the company is still operating at a loss. Now, Rocket says, it's redirecting its $3 billion war chest to fintech and A.I.