A Member of Pat McKeough’s Inner Circle recently requested his advice on a stock operating in a growing segment of the food business.
Goodfood Market Corp. is a meal-kit company offering fresh ingredients and recipes for easy-to-prepare home meals. Based in Montreal, the company has increased its subscriber base with its marketing efforts, added menu options and expansion to Western Canada. Goodfood estimates that it has as much as 40% of the meal-kit market in Canada. Still, it faces growing competition as larger firms enter the market, says Pat, and heavy expenses for marketing and delivery could make it difficult for this stock to achieve profitability.
Q: Good morning. May I get your opinion on Goodfood Market Corp., and the growing home-delivered-meals business in Canada? Thank you.
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A: GOODFOOD MARKET CORP. (symbol FOOD on Toronto; www.makegoodfood.ca) is a Canadian meal kit company. It aims to deliver fresh ingredients that make it easy for subscribers to prepare meals at home every week.
The company began trading on the Toronto exchange in June 2017 at $2.50 a share.
Subscribers select their favorite recipes online from a variety of Goodfood’s original dishes. The company then prepares a personalized box of fresh ingredients and delivers it to the subscriber’s doorstep with easy step-by-step instructions.
Headquartered in Montreal, Canada, Goodfood had 89,000 active subscribers as of August 31, 2018, up 187.1% from 31,000 a year earlier. The increase in subscribers was mainly attributable to the company’s marketing efforts, as well as new menu options and its Western Canada expansion.
In the three months ended May 31, 2018, revenue rose 245.7%, to $22.2 million from $6.4 million. Excluding one-time items, the company lost $1.6 million, or $0.03 a share in the latest quarter, compared to a loss of $860,830, or $0.03. The higher loss was mostly due to an increased marketing budget to support continued subscriber growth.
Penny stocks: One of Canada’s biggest grocery chains adds a meal kit provider
Meal kit providers face a number of challenges. While at an average of $10 per person their meals are cheaper than the average $17 cost of eating out, they are still a lot more expensive than the $4 cost per person of grocery shopping to eat in.
And while Goodfood currently estimates that it has 30% to 40% of the market, the Canadian market will likely follow the U.S. in attracting lots of competition. Already Goodfood has competitors within Canada, including grocery chain Metro Inc., which in August 2017 bought a majority stake in meal-kit provider MissFresh for an undisclosed amount. Other competitors now in place include Chef’s Plate, founded in 2014, Germany’s HelloFresh, and so on.
To stay ahead of the competition, Goodfood is now expanding its Montreal processing facility. It will add an additional 72,000 square feet, for a total of 155,000 when completed. The company will need to keep spending heavily on marketing to win new customers and hold onto existing ones. Meanwhile, delivery is a huge expense and even with an expanded processing facility it will be difficult to service all customer orders cost-effectively. All of this will make it hard for the company to reach break-even, let alone attain a significant level of profitability.
Inner Circle recommendation: We don’t recommend shares of Goodfood.
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