The Business Of

Fast Food | Huel | Outlook

Morning All!

The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of Huel. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about Huel this week.

• How Do They Make Money - Huel now generate an annual revenue of £144m (2022). Not bad at all considering revenues were £3m in 2016!

• What Are Their Margins - according to this article, Huel spent £18 million on Facebook Ads in 2019. More than what Microsoft spent on Facebook Ads!

• How Do They Survive Without Profits - Idris Elba is not only a Hueligan… but now an investor in Huel! I might not look like him, but at least I eat like him!

Now, I have an absolute cracker of a newsletter for everyone today. It’s been one of my favourite ones to write yet. Because it really compares the journey of another consumer-facing startup, Blue Apron. And looks at the key trap Huel needs to avoid. And yes, we’ll answer whether 1.72 orders per customer is good or not! But first…

Career Talk - Equity Research

That’s right! It’s the next edition of our Career Talk newsletters. And this week we’re diving into Equity Research with my friend Annick Baumann. After graduating from Tilburg University in 2018, Annick became an Equity Research Associate @ Jefferies, covering the TMT sector. 6 years on, Annick is now a Senior Associate, has relocated to the New York office and is loving life!

I’ll be chatting to Annick about:

• how she got into her role at Jefferies,

• how a sell-side associate divides their time between research and modelling,

• what advice she’d give students in their stock pitches for interviews, and,

• whether she’s tried out Huel yet after all my pestering at Jefferies!

It really is a cracking conversation for anyone interested in equities, so not one to miss! I’ll be sending that out this afternoon – so not straight after this email as usual. But without further ado, let’s dive back into Huel!

To Be (Public) Or Not To Be (Public)?

So, yesterday we saw that Huel is looking to go from being a private company to a public company. And the way to do that is via an IPO. But a big question is - why do Huel want to go public in the first place?

And it’s a great question. I mean, it all seems like such a headache! The company could just stick to the UK. Grow at a decent pace. Become profitable. Not have to worry about lots of reporting. And the founders could live a very comfortable life. There’s lots of pros to staying a private company!

However, the reason why Huel is looking to go public. (And the reason why many companies go public). Is because Huel’s investors need an ‘exit’. Now, the ‘exit’ is a topic we’ll come back to in another newsletter in more detail. But basically, when investors invest in a private company. They’re looking for an exit. A way to make some cash from their investment. And the two most common ways an exit happens is when the company gets bought out by another company. Or when it goes for an IPO. The article linked here helps explain the 2 exit options super clearly!

Last thing before we get to the main event. Yesterday, we looked at the founder of Huel, Julian Hearn. The guy owns ~45% of Huel. A company that’s valued at $560m. That means his shares are currently worth ~$252 million! But they’re worth that only on paper right now! Because can he sell his shares and take that money… no! He can only do that when Huel’s shares trade publicly. But whilst IPO seems like the end goal for Huel, it isn’t! There’s still a couple of things that can stop them being a mega-success. And we’re going to dive into probably the most important issue now!

Acquiring Customers Is One Thing… Keeping Them Is Another!

Okay, so let’s get to the main event. What’s the main factor that’s standing in the way of Huel becoming a mega-success? Answer: Customer retention. But what really is customer retention and why is it so important? Well, let’s illustrate with an example!

So, we’re going to move into the meal-kit industry and analyse the US company, Blue Apron. And for those of you who haven’t heard of Blue Apron. Think Hello Fresh… they’re basically the same thing!

Okay, so what happened to Blue Apron? Well, the company started brilliantly. Customers were flocking to their meal kits. Revenues were growing. And the company spent lots on marketing to further increase brand awareness and acquire more customers. Blue Apron’s customer count grew 164% from 1.4m in 2015 to 3.6m in 2017. And in 2017, the company IPOd at a valuation of ~$2 billion.

But things didn’t stay rosy for long. And in fact things started to turn sour. Very, very sour. The customer count dropped 63% from 3.6m in 2017 to 1.3m in 2022. Revenues fell rapidly over the same period from $881m to $458m. Marketing spend was kept high in a desperate attempt to bring in more customers and Blue Apron’s losses ballooned. And now, 6 years after the company gloriously IPOd, the stock isn’t worth $2 billion. It’s worth ~$40 million. Investors who invested at the IPO price have lost ~99% of their money… ouch!

So, what on Earth happened? Well, customer retention happened. More precisely, a lack of it! Because whilst Blue Apron were spending lots of money on marketing and growing their customer count initially. This strategy was masking one important factor. A lot of Blue Apron’s customers were buying once… and then never buying again! The percentage of returning customers was awful!

And the chart below illustrates this for us. It shows us that during the 2015-2017 period, for every 100 first-time buyers of Blue Apron’s meal kits. Only 20 of them were still customers 12 months later. Even worse, only 12 out of those 100 first-time buyers were still customers 24 months later! Compare this with Netflix where ~70% of subscribers were still subscribers 12 months later!

Now, why is poor customer retention such an issue for companies? Well, because whilst acquiring customers through marketing brings a growth in customers to begin with. Eventually, acquiring customers through marketing begins to slow down. And then you’re hoping that the customers you’ve already acquired and who’ve tried your product… continue to buy your product!

Without customers returning to by your product, there’s no chance your company is going to be a mega-success! Would Airbnb be Airbnb if their customers booked once and then never used the platform again? Would Netflix be a success if their customers subscribed and then cancelled their subscriptions a month later? Would Amazon be a success if customer shopped once and then never returned? The answer to all these questions is clearly no!

Okay, We Get It… But Then What About Huel?!

Alright, let’s bring it back to Huel. What’s Huel’s customer retention like? Well, as we saw in Tuesday’s newsletter, in 2022, the average number of orders per customer was ~1.72. And using this figure, we’ll go through a little experiment to estimate Huel’s customer retention rate…

The first thing we’ll look at is – how often would Huel want an ‘ideal’ customer to make an order? Well, fortunately – as a fairly ideal customer myself – I have a bit of insight into this! Every time you order from Huel you get 2 bags.1 bag usually lasts about a month. And so 2 bags = 2 months. This means an ideal customer would be ordering about every 2 months. Meaning that after their first purchase, an ideal customer would order 6 more times over the next year!

Now, let’s say that we have 10 first-time customers of Huel. After 1 year, 2 of them are ideal and order 6 times. 2 of them order 3 more times. And then we have 6 customers who never order again. So, that adds up to 18 orders from 10 customers. Meaning 1.8 orders/customer - which is similar to the real number of 1.72! Now, what’s the retention rate here? Well, only 2 of the original 10 were still ordering Huel after 1 year so that means a retention of 20%. Don’t worry if this is a bit complicated. It’s the meaning behind the numbers, not the numbers alone, that matter!

So, what does this mean? Well, it means that whilst Huel’s customer count is increasing – we saw it’s up from 576k in 2020 to 914k in 2022. It feels like customer retention isn’t yet at a level Huel would want it. Because if only 20% of your customers are still returning after a year, it means 80% of them aren’t! And as we saw with Blue Apron, that’s a dangerous position to be in. This YouTube video from Y Combinator is one of my favourites on the topic of customer retention!

So, how can Huel increase their customer retention? Well, one strategy that companies employ is a loyalty program. You know who I think are great at this… Nando’s! I feel like I always have some sort of reward and I always keep coming back. Of course, the delicious food contributes too! But what do the rewards do? It makes me super loyal. It makes me wanting to go back!

This newsletters getting on the long side so I won’t get into any more strategies. But here’s a strong article which gives you a few more ideas!

Alright team, let’s close now! And sum up everything we’ve seen today. We’ve seen the pitfalls of Blue Apron - a company that lacked strong customer retention. We’ve seen the customer retention curve for Netflix – a company that has very sticky customers. And my hope for Huel is that they’ll go towards the Netflix path. And have great, loyal, returning customers. Fingers crossed!

9th Jun 2023

Nigel Jacob CFA