Investment Report: Prep To Your Door

Sep 10, 2021 19 min read

It was two weeks ago when I first heard of Prep To Your Door.

I was screening startups on Republic, and the company immediately caught my attention when I read that they are raising at a $5M cap with $1.5M in ARR, growing +100% YoY.

Well, you can bet I had to know more.

So I kept reading their pitch, and the first thing I found out was that these two founders have bootstrapped the company since February 2018.

And if that wasn't enough, they grew to $1.5M+ in ARR and a team of 40 people with next to nothing in marketing and sales.

They have successfully run operations in Austin and are looking for funding to expand to Houston, DFW, & San Antonio.

Their mission is sustainability, not only from a business model perspective (they adopt a closed-loop, zero-waste, delivery service) but also financially (by taking a look at their financial statements, you can see that they are very conscious in how they spend their money.)

All looks good, right?

Well, you know how the saying goes—all that glitters is not gold.

Let me explain.

While one of the most exciting market trends of this decade, meal delivery services have a HUGE problem.

The following graph is worth a thousand words:

Chart: Blue Apron stock price

Valued at $1.89B in their IPO in 2017, Blue Apron is now worth less than $100M.

The reason is simple. Customers' retention is so bad that about 72% of customers will churn by the time they are six months old.

(The following graph is from a detailed analysis by Daniel McCarthy, Assistant Professor of Marketing at Emory University.)

Chart: Blue Apron customers' retention by number of months since acquisition

"Maybe their product sucks," you might think.

Well, it looks like other meal-kit delivery companies are not doing so well either:

Chart: Meal-kit delivery companies customer retention

So what's the problem with meal kits? But most importantly, does that problem apply to ready meals too? Will Prep To Your Door be any different? Is the business sustainable for the long term? Are their KPIs any good?

This will be the main focus of this analysis, which will eventually lead to a simple conclusion. Will we invest or not?

Let's get deeper into it.

The Product

Prep To Your Door offers a zero-waste meal subscription delivery system that prepares and delivers organic plant-based meals to a customers’ door.

Prep To Your Door Product

Customers may purchase weekly subscriptions for 5, 10, 15, or 20 meals or try a one-time order, and then choose either a customized weekly rotating menu or allow PTYD to choose for them.

All food is plant-based, organic, locally sourced, preservative-free, and gluten-free. Furthermore, it is prepared in-house by a team of chefs, sourcing locally as much as possible.

(According to the team, their local CPG partners are vetted for the following criteria: zero-waste packaging—reusable or compostable—organic, and plant-based, real food ingredients.)

Once the ready-to-eat food is delivered, the insulated bag, mason jars, and lids used to pack the meal are picked up each time there is a new delivery, thereby eliminating waste and helping to protect the environment.

Customers can also buy plant-based grocery items such as nut milk, juices, yogurts, cheeses, cookies, and others.

How good is it? A deeper look at the metrics

If we look at Blue Apron and HelloFresh's Yelp reviews, they reflect their retention rates—just 2/5 for Blue Apron and 1.5/5 for HelloFresh.

On the other hand, Prep To Your Door's reviews on Yelp (5/5), Facebook (4.8), and Google (5/5) shows a completely different story:

I couldn't find a single negative review for PTYD. (Just one on Facebook saying it is a little bit pricey, but that's fine.)

This is particularly interesting when combined with the data shared by the founder in their pitch.

According to the team, PTYD's average customer retention through 2020 is 61%, and their primary customer acquisition channels have been through unpaid, organic marketing:

  1. Word of mouth: 36.5%
  2. Google: 29.6%
  3. Other (press, social media, etc.): 33.9%

In addition, they have a CAC of $79 and an average LTV of $719, which leads to an LTV to CAC ratio of 9:1 (of course, this is prior to any material dollars spent on paid advertising.)

These data show strong customer retention and loyalty for Prep To Your Door. Nevertheless, I needed an additional piece of data to better compare them with their peers. So I asked the founder for customers' retention rates by the number of months since acquisition.

He informed me that they have a retention rate of 72%, 52%, and 34% after three, six, and twelve months respectively. After twelve months, they see an asymptote on the retention curve at about 34%.

As a comparison, Blue Apron's customer retention rates shared above are %34, %28, and %23 for the same periods.

The founder also added the following:

Whereas HF/BA emphasized aggressive acquisition tactics and spend to accelerate growth, we are a retention focused company. The long term health of a business like ours is dependent on pushing that retention asymptote higher and higher. To be certain, I don't know that Blue Apron has one and their curve may drop to zero.

As you can see, PTYD's retention rate after three months is more than double that of Blue Apron, almost double after six months but only 50% higher after twelve months.

Having 72% and 52% retention rates after three and six months respectively means a way higher LTV.

Nevertheless, I was expecting a higher retention rate after 12 months. After all, there wasn't a single negative review on all the platforms, and all their customers seem to enjoy the service.

So I reached out to the founder to know whether they are gathering feedback from churned customers. Below is his response:

I interview churned customers regularly, and we have cancellation data that is reviewed weekly as well. Common reasons are price, variety of options, and website experience. With this fundraise, we are investing in improving our UI/UX as well as expanding our menu options, in response to this customer feedback.

That makes sense.

Although customers enjoy the service, a lack of options or a high price means that they will churn anyway when they get used to it.

An additional reason might be a customer starting using the service in a particularly busy period of their life (to have ready meals always available) and then churning when they get back to normal.

Nevertheless, if the reason is a lack of variety of options or the service being a little bit pricey, or getting back to a less busy period of their life, they are still enjoying the service and recommend it to friends (which is reflected in PTYD's word of mouth growth.)

Once the company has scaled operations and can afford lower prices, it might offer lower prices to its customers.

And with scale and deeper pockets also comes a more variable menu and a better user experience.

But with $1.5M in ARR and 77k items sold in 2020, if customers weren't enjoying the service, I bet we would see at least a negative review somewhere.

On the contrary, customers love the product and spread the word.

But let's get even deeper into it.

Why is this happening? Will this be the case for the long term? Why might PTYD succeed where dozens of other meal-kit delivery companies failed?

The real reason meal-kit delivery companies failed

To be completely honest, I've never been a fan of Blue Apron or meal-kit delivery companies in general.

While others were cheering on them and investing in their IPO, I was asking a really simple but critical question:

Why do they exist at all? What problem do they solve? What's their real target market? Who are their customers?

While new products might be cool in the initial novelty phase, the market usually soon realizes that they are, in reality, just fad-products.

Solving a real and significant problem for a well-defined market category is the critical factor for the long-term success of any venture.

Now, if we take a look at Blue Apron's product, it is something like this:

Blue Apron Meal-Kit

Average products that you can buy at your local store and that you can even get delivered to your door anyway.

So what's the problem they are solving?

Saving you 10 minutes to choose a recipe and make the order yourself? Would you seriously overpay those average products just so as not to spend 10 minutes to think of a recipe?

You still have to cook them, and you still have plastic and packaging all over the place.

They are not solving any real problem.

In addition, who on earth are they targeting?

Busy professionals? No, they don't have the time to cook those ingredients anyway.

Diet-conscious people? No, those are normal recipes.

Vegan people? No.

Environmentally conscious people? No, lot of plastic and packaging there.

Average people? No, they can't overpay those average products.

As you can see, Blue Apron and most other delivery companies miss the most critical foundations for a business's success. And that's why they failed.

Before analyzing other competitors, let's see if PTYD is any different. Let's see if PTYD has what it takes to be a successful business.

Analyzing PTYD's target market & buyer persona

While operating in the same meal delivery market, Prep To Your Door has taken a completely different approach from Blue Apron and its peers.

You know how the saying goes, if you're targeting everyone, you're targeting no one. And that's how you end up with miserable results.

The team at PTYD knows that. And that's why they decided to target a very specific niche.

Their target customers are 35-55 years old, college-educated women building a career, raising a family, or both. They are too busy to cook for every meal and seek fresh, healthy food options and zero waste.

Infographic - Prep To Your Door Buyer Persona

As you can see, this category consists of busy professionals that have two very significant problems:

  1. Eating Quality Food. If you don't care (yet) about the quality of the food you eat, this isn't a big problem for you. However, the moment you start thinking about how eating quality food can improve the quality of your life, you instantly have a significant problem. Keeping up with a diet of local, plant-based, organic (slow) food is not easy. Being one of those people myself, I know how big of a problem it is. And sometimes I find myself eating something I shouldn't, not really because I like it, but because I didn't have the time for anything else. So I can assure you, for this particular category of consumers, eating quality food is a significant problem.
  2. Do Something For The Environment. It is very likely that if you fall into the above category, you are also an environment-conscious consumer. According to a study from the University of California, the three main motives for adopting a plant-based diet are health, the environment, and animal rights. And a major problem for environment-conscious consumers is the feeling of not doing enough for the environment. That's why Prep To Your Door closed-loop model is a significant differentiating factor in this category.

As you can see, it's no coincidence that Prep To Your Door shows great metrics for customer retention. They know their target persona, and they have organized their entire business to meet their needs.

And that's why PTYD might succeed where most meal-kit delivery companies failed.

With that being said, we now need to analyze whether other players are adopting the same strategy.

A deeper look at the competitive landscape

The meal-delivery market is a very competitive one. With next to no barriers to entry, it's no surprise to see many different players. Furthermore, meal-delivery companies also compete with standard restaurants using a delivery service. I've summarized my findings in the following table, which is further discussed below:

Prep To Your Door's Competitive Landscape

If we consider the market as a whole, yes, there are many different players. Nevertheless, it appears to me that no one can currently compete with Prep To Your Door when niching down to their target buyer persona.

As discussed above, plant-based diets are often chosen not only by health-conscious people but also by environment-conscious consumers. That's what makes PTYD different from any other players.

Their closed-loop, zero-waste model is a solid competitive advantage in this niche since this category of consumers is really sensible to the matter.

And as already mentioned, their focus on a particular category might make them succeed versus other players trying and failing to target the whole market.

Furthermore, this model can raise a solid economic moat around the business since adopting a closed-loop model is not easy both from a logistic perspective and financially. On the contrary, PTYD has built proprietary systems and processes to establish a sustainable circular model (we will look at PTYD's margins in a moment.)

To conclude this section, while this is a crowded and fragmented market, I believe PTYD has what it takes to differentiate and lead in its target niche.

Can PTYD build a sustainable economic moat?

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