Date: Nov 01, 2018
Magazine:
November/December 2018

The philosophy that drives menu decisions for Sun Basket, one of the top three meal kit firms in a crowded field, appears to be a perfect fit for produce suppliers.

Produce industry veteran Don Barnett, who is the company’s chief operating officer, recently told Western Grower &Shipper that from the very beginning Sun Basket’s point of differentiation has been its focus on creating healthy meals for its customers. He said the competition focuses on convenience while Sun Basket has centered on creating meals that are “healthy and delicious.”

At the beginning, what Barnett called Sun Basket 1.0, the company offered a handful of different menus that featured low sodium, no saturated fats and low calorie items. It is now well into Sun Basket 2.0 with 10 different menu classification, including paleo, vegetarian, pescetarian, Mediterranean and gluten free.

The company is growing at a very fast pace with customers all over the United States and three distribution centers to serve them. “We cover 98.6 percent of the zip codes in the country,” Barnett said.

He equates the company’s current produce buying size as that of a 150-store chain. They are not yet as big as the huge retailers in this country but Barnett has no doubt that the home-delivery meal kit industry will grow far beyond the tiny percentage it currently holds. Several years ago, the food marketing system, including foodservice and retail, was estimated at $1.5 trillion. Earlier this year, an online story on “Recode” estimated the current size of the American meal kit market at $5 billion.

Barnett believes meal kits companies are disrupting food marketing in much the way Amazon disrupted book sales and a plethora of companies altered the apparel and office supply sectors. Twenty years into the book disruption equation, about 50 percent of books are now sold on line. Online office supplies have a similar growth curve. Online apparel sales started to take off a decade ago and already have a 20 percent market share. The Sun Basket executive predicts that the meal kit business will approach 15-20 percent market share in the next 10 years. He noted that 15 percent of $1.5 trillion ($225 billion) is a lot of business.

Currently, Hello Chef and Blue Apron are one and two in the industry (neither responded to requests for an interview), followed by Sun Basket. Barnett says those two companies rely on the convenience factor to attract, acquire and keep customers. He believes Sun Basket’s approach is more sustainable and will win out in the long run.

“We are both a food company and a technology company,” he said. “You can’t be one or the other in this business, you have to be both.”

As a food company specializing in meal kits, Sun Basket has built the infrastructure, including a produce buying operation in San Jose as well as two local buying offices in the Midwest and East. He said it operates a supply chain process that is far more efficient—and hence less costly—than that utilized by retailers or foodservice operators. He explained that produce typically goes through five to seven hands from field to fork: grower to the shipper to the distributor to the retail or foodservice distribution center to the store or restaurant to the consumer. And there can be a wholesaler or two in the mix as well. “We go from the grower to our D.C. to the consumer. That’s more efficient and less costly,” he said, noting that the mark-up along the way, including the 40-50 percent at retail, is eliminated. “This is a much better profit model. We are still figuring it out but it does allow us to pay more to the grower.”

The technology company part of the organization has its own set of challenges to figure out, but Barnett indicates that is where the opportunity lies. “We are not selling to mega-customers; we are selling to individuals with a highly personalized product.”

As such, each customers gets a menu page that lines up with their individual buying habits. A vegetarian is going to see vegetarian meals, while a gluten-free customers is obviously going to be presented with meals that cater to that diet. It is this personalization and dive into the data that creates the value for Sun Basket. He noted that often a person who identifies as vegetarian will swap out vegetarian meals for those featuring fish. Sun Basket’s data captures this and offers that online shopper, fish dishes in the row right after the vegetarian dishes.

Barnett explained that each customer has a particular value to Sun Basket. The company has ascertained this value through its collection of data. In the e-commerce world, he said these calculations are golden.  Investors—via the stock market or the venture capitalist route—want to know how much it costs to get a customer and what that customer is worth. For example, if it costs $100 to acquire a customer and that customer spends $100 with you, that one-to-one ratio is not going to lead to big profits. But if that customers spends $200 or $300 creating a two to one or three to one ratio, black ink will appear on the bottom line.

Currently Sun Basket is operating between 6 to 1 and 12 to 1, which Barnett said is very good. The company is in a fast growth cycle (including about 100 ads on Facebook at all times), so that ratio has not yet created revenues above expenses but Barnett said the firm has sufficient venture capital money to get it through the growth period. “We could show a profit tomorrow if we adjusted our sights and shot for 30 percent growth rather than 75 percent growth, which is where we currently are.”

Using hypothetical numbers, Barnett explained why the data it is collecting and the target marketing it is doing is so valuable. One of the company’s menu is a “Chef’s Choice.” This is the menu that competes most directly with its competitors’ convenience play. It is not highly personalized but rather appeals to the price shopper who jumps from one meal kit company to the next. These people will stay with one company for a while then move to another. For the sake of example, this shopper might cost $100 to acquire and will be worth $500 in sales before moving on. For Sun Basket’s more personalized menus, a shopper is worth more. He said that person with a paleo diet might be worth $3,000 for that same $100 acquisition cost. “We also know that shoppers who get their meals delivered on Monday are worth more than shoppers who get a Wednesday delivery.”

He explained that the prime nights for eating meal kits are Monday through Thursday. A Monday delivery allows for full consumption of the delivery over a few days with the shopper remaining excited about the purchase and more likely to continue using the service. A Wednesday delivery has the meals competing with weekend plans, which could mean lower utilization, less excitement and less chance for a long term customer. A new customer who identifies as wanting paleo dishes and wants delivery on Monday is a very desired customer, he said.

Barnett said the average customer gets a delivery with three meals for two every other week. For each individual with an average of four eating occasions a day that means Sun Basket is talking care of six of their 120 eating occasions during the month. At the current time, those six are all dinners. Barnett said the company is exploring other avenues to interact with the shoppers including snacks, deserts and other main-meal eating occasions.

For a grower-shipper, Sun Basket is an interesting customer. Barnett, who has worked for several suppliers including Dole, New Star and organicgirl, said about 99 percent of the produce it buys is organic. The organic label is part of its healthy and nutritious play to consumers. It also creates potential customers all over the country who might not have regular access to organic food in their supermarket or regular dining establishments. As a plant-forward meal kit, Sun Basket’s home deliveries are more produce-centric than the competition. “Every day we are buying the staples like leafy greens, carrots and garlic,” he said.

But the company is also always looking for that unique item and is willing to pay for it. “We can charge a premium so we can pay a premium,” he said.

Sun Basket’s executive chef is Justine Kelly, who practiced her craft for many years as the corporate chef de cuisine at the acclaimed Slanted Door restaurant in San Francisco. Barnett said she is constantly creating innovative dishes using items such as celery root for example. The menus are created about eight weeks in advance with the opportunity to substitute items up to two weeks prior to delivery. And if Mother Nature strikes making a particular item unavailable, the website can always note that a specific dish is “sold out.”

As the company’s buying power is continuing to increase, Barnett said it is just now starting to work with growers on a pre-plant basis looking for specific crops to be grown for specific time periods. Currently, it is buying commodity packs and breaking them down for its own needs at its distribution centers. But Barnett said it is also just starting to work with grower-shippers on customized packs. The company is delivering to consumers five days out of seven so the D.C.’s are all operating on a full-time basis.

 

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