Why Whole Foods Could Dominate the Meal Kit Industry

By Markets Fool.com

An intriguing subject came up onWhole Foods Market's(NASDAQ: WFM) recent earnings call.

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An analyst asked if Whole Foods had any interest in getting into the meal kit business. Co-CEO Walter Robb responded: "Huge interest in this."

As e-commerce has spread into more areas of retail, the meal kit industry has exploded in recent years. Start-ups like Blue Apron, which was valued at $2 billion in its latest funding round, are encroaching on Whole Foods' core market along with farmers markets, community-supported agriculture, and other new ways of getting dinner on your table. Blue Apron is on track to make close to $1 billion in revenue this year and is growing fast.There's plenty of competition, though, as a number of start-ups like Plated and Hello Fresh enter this booming space. EvenAmazon.com recentlypartnered withTyson Foodsto get in on the trend.

Blue Apron is generally regarded as the leader of the niche market. Image source: Blue Apron.

Whole Foods did not divulge any specific plans on its recent call, but it's clear the company intends to jump into the space. On the call, Ken Meyer, EVP of Operations said that Tien Ho, the company's new culinary leader, has made one of his focuses what the company calls "meal solutions." On the call, Meyer said:

We're going to continue that with what we're doing around looking at the option of meal solutions and the ways in which we want to do that. We're not going to announce anything today. But, we will say that we are committed to this category. We think we have a good strategy for it. It will be revealed.

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There are several reasons Whole Foods could dominate this fast-growing business.

1. This is Whole Foods' customer base

In a Fast Companyarticle, Plated Co-CEO Nick Taranto described his typical customer as "primarily living in and around major metro areas. They are largely college-educated, dual-income families with no kids."He went on to explain that his target demographic is the "evolved eater," which is someone who "cares deeply about the quality of their food and has enough disposable income to invest in eating well."

Arguably, no organization has done more to create this kind of consumer than Whole Foods, which pioneered the national organic market and has recently seen sales ebb as it faces competition from traditional grocers likeKroger,Costco, andWal-Mart.Similar to the meal kit companies, Whole Foods targets adults 18-39 who are interested in a healthy lifestyle. They tend to be college graduates, live in urban areas, and be fairly wealthy.

Meal kits have also proven especially popular in cities like New York and San Francisco, where young people don't always have cars, and grocery shopping can be hassle. These are also valuable markets for Whole Foods, and on the recent call, Co-CEO John Mackey said flagship stores recently opened in Brooklyn and the Bay Area are "kicking butt."

2. Its partnership with Instacart will make delivery easy

Typically, meal kits are delivered on a set schedule that a customer makes ahead of time, but Whole Foods' partnership with Instacart gives it an advantage in delivery as it can get food to your door in as fast as one hour from certain locations.

Such delivery eliminates the need to plan out a schedule ahead of time, and that means Whole Foods can avoid the hassle of delivering to homes when no one is there to receive the box.

Its network of stores also means that Whole Foods can provide meal kits both to customers who come in the store and those who prefer delivery. At the right price point, an in-store meal kit could prove just as popular as a delivered one.

3. Whole Foods is changing with the times

The organic grocer has reported four straight quarters of declining comparable sales, but the company hasn't been sitting still. It opened its first 365 store in May, just a year after it first hatched the idea, and it plans to open 10 more next year. This isn't a company that moves slowly when it spots a new opportunity.

It's also been including restaurants in its new 365-format stores, capitalizing on millennials' penchants for eating out.

The company is well aware of the changing competitive landscape. After its prices were undercut by Kroger and others, it borrowed from Trader Joe's with its new 365 chain, eliminating specialized labor and unnecessary design costs to create a different version of its full-line market.

Similarly, launching a meal kit business seems like a needed response to the rise of Blue Apron and others. Blue Apron was rumored to be considering an IPO worth $3 billion earlier this year, which makes the four-year old company worth nearly a third of Whole Foods.

Investors are placing a lot of value on this fast-growing industry, and Whole Foods is desperate for growth after four straight quarters of sliding comps. The company has the brand, the store network, the Instacart partnership, the team led by Tien Ho, and the need to execute. No other company would bring such a pedigree to the industry. I'd expect an announcement on a meal kit service by the end of the year.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.