LAWYER CLIENT
Yvonne Chi
Linden, New Jersey. It was their first time setting up and operating a warehouse all on their own.
For the team of operations managers, this was an exciting step. The managers were running a tight-knit group: Many were in their 20s, had graduated from elite colleges like Princeton and Northwestern, and were working their first jobs building a business from scratch. “It was ungodly amounts of work, but we were motivated by a vision that we were going to write the playbook for how you ship these crazy meal kits,” says one of the managers.
After they signed the Linden lease, the team set up the new operation over the 2014 Christmas holiday. The next two months were grueling—installing equipment and assembly lines, and hiring a new staff, all while shipping thousands of meal kits every week.
In March, Griesel and Frenzel arrived from Berlin to tour the warehouse and assess the team’s progress. “We were happy, thinking they’re going to be excited—because we’ve done it all so fast,” says another manager.
But that wasn’t how the Germans responded. Instead, Frenzel launched into all the things wrong about the facility, down to the unswept dust in a corner of the warehouse floor. (Frenzel declined to comment.) The U.S. ops team was nonplussed. “Any person could walk in here and find 50 things wrong,” says the second manager. “There’s a new staff. We’re growing like crazy.”
Frenzel made it clear he intended to perform a full audit of their operations. Then he’d make recommendations on how they could match the efficiency of the warehouses in Germany. “It was a takeover in a sense,” says the first manager. “All of a sudden, it felt like we had a new rule book, and that was the driving force.”
Along with their demanding new types of reports, Frenzel and Griesel’s blunt style rankled the workers. “Let’s say somebody unloads a container by hand,” says the second manager. “That’s a lot of work. And you’d have the Germans standing there, literally with their arms folded, watching. Then, when anyone finished, they’d say”—affecting a German accent—“ ‘Do another one.’ They treated them like animals.”
Meanwhile, Richter was setting ever higher sales targets. Over the next few months, the number of orders coming through Linden doubled. The warehouse perpetually needed more workers, but Richter and Griesel, concerned about costs, refused to increase hourly pay. Instead, HelloFresh hired staffing firms just to keep the 150 minimum-wage temps it needed on the line every day. “It was the bottom of the barrel,” one of the warehouse managers says of the staff, which included some who had been incarcerated or had drug problems.
By early June 2015, five of the American ops managers, including the chief operating officer, had quit. “It was hard to see the vision anymore,” the first manager says.
Frenzel stepped in and took over the COO’s duties full time. He hired a new warehouse manager, a former Navy supply officer who shared his top- down approach. He also put a recent hire from Berlin, a former management consultant, in charge of procurement. Morale plummeted. Order at the facility began to unravel, creating a sense of lawlessness. “It was a free-for-all,” says one former employee.
“People would come to work late and high, or go into the bathroom and hide their beer in the ceiling, and drink in the bathroom,” says the former employee. In the summer of 2015, staff used drugs and drank alcohol in the open, according to three employees who witnessed these activities or found empty bottles and drug paraphernalia on the premises.
The customer service department developed its own reckless atmosphere. Post-work drinks at the bar down the street were frequent. Early in the summer, maintenance staff discovered women’s undergarments in the office one morning, according to one former manager. Then explicit cellphone photos of a supervisor and an employee engaging in sexual activities in the office after hours began circulating, according to three former managers. Richter and Griesel were notified, according to two of these former managers, and it resulted in the firing of both people. (HelloFresh’s response: This is false.)
When a daytime supervisor, Kareem St. Louis, tried to fire an employee for disciplinary problems, the employee threatened to damage St. Louis’s car. Worried about his safety, St. Louis called 911. Over the next few months, other managers had their tires slashed, were followed home, and got threatening texts saying “we know where you live.” In July, one went to the local police. “After notifying senior management, they’ve done nothing to help or change the situation,” the report noted. That spring and summer, police were called in six times in response to reports of harassment, disputes, and assaults. (At roughly the same time, competitor Blue Apron was experiencing similar incidents at its Richmond, California, warehouse, as reported by BuzzFeed in 2016.)
Conditions continued to worsen. After the warehouse’s two bathrooms were vandalized, management padlocked the doors, and the warehouse staff was told to use outdoor Porta-Pottys, according to a Linden health inspector’s report. This, along with a report of bedbugs in the office area, led to a complaint to the local health department, which sent the inspector to the facility. In August, a health department official met with Frenzel and Griesel and ordered them to rectify the bathroom situation.
Richter and Griesel shared none of this with their investors— despite the fact they were in the middle of raising another round of venture capital at their biggest valuation yet. The crux of their pitch: the company’s ambitious plans to take over the U.S. market.
“They sounded unusually confident” about the state of operations in the U.S., says James Anderson, fund manager of the Scottish Mortgage Investment Trust at Baillie Gifford, who heard the pitch and eventually led the September 2015 funding
A customer in the Netherlands wrote a profanity-laced Medium post railing against the hyper-aggressive tactics of the startup, comparing it to some combination of stalker ex-boyfriend, religious proselytizer, and mobster.
round. “I’d never found Dominik anything other than open and honest, ready to admit when there were problems.”
Richter says if Baillie Gifford—or other investors—had wanted to know about the warehouse debacles, it should have asked about them. “Reactively, we’re always kind of like 100 percent transparent,” he says. “If anybody wants to do a deep dive in any part of the company, we’ve been super transparent with that.”
But the Baillie Gifford investors didn’t think to ask. (A spokesperson for Insight partner and now-HelloFresh chairman Lieberman, meanwhile, said he was unaware of any of these incidents until contacted by Inc.)
In September, two months after the repeated health department complaints and Linden police reports, HelloFresh successfully closed an $85 million round, led by Baillie Gifford, which valued HelloFresh at $2.9 billion, more than four times its valuation just seven months earlier.
One month later, HelloFresh’s board took a further step, approving a plan to buy back shares from Richter, Griesel, and other early employees in a deal that collectively netted the two founders over $10 million. The founders, who together own more than six million shares and hold nearly eight million call options, were already on to the next phase of their plan: an IPO. “Thin twirls of the green vegetable are almost too pretty to eat.” —From “Caramelized Shallot Risotto With Lemony Zucchini Ribbons,” HelloFresh recipe WK 11 NJ-8
If you live in a major city, chances are at some point you’ve been hounded, cornered, or harassed on the street by what one former Dutch HelloFresh customer dubbed “foodjehovas” (translation: food Jehovahs). If you think the company is aggressive in signing you up, wait till you hear customers’ stories of trying to quit. In January 2016, the customer in the Netherlands who had tried and failed to get HelloFresh to stop contacting him after canceling the service wrote a profanitylaced Medium post railing against the hyper-aggressive tactics of the startup, comparing HelloFresh to some combination of stalker ex-boyfriend, religious proselytizer, and mobster. “Fuck you, HelloFresh,” the post, which went viral, began. “You push us around, disrespect our boundaries and you take our lunch money.”
HelloFresh, in its assertive way, was attempting to address what has emerged as a fundamental problem with the meal-kit business: People quit. Why? Perhaps the novelty wears off, or there’s guilt about all the wasteful packaging, or simply because they are too lazy to cook a gourmet meal every night. Whatever the reasons, it turns out the majority of customers ditch their HelloFresh subscriptions after receiving only a few boxes. The idea that these subscriptions would generate enough cash to cover the sizable marketing cost was wishful financial modeling. “It required a leap of faith,” says Ellie Wheeler of Greycroft.
But now, as HelloFresh and Blue Apron pass their sixth birthdays, they know what the quit rates (also known as churn rates) really are. While neither company discloses figures, third parties including Dan McCarthy, an Emory assistant professor of marketing, and Second Measure, a research firm that analyzes pools of credit card data, have examined the companies’ data. Their findings, which largely match up, paint a grim picture: Nearly half of subscribers of both services cancel within a month. Just 20 percent stay on as long as six months. By the end of the year, meal-kit companies are lucky if they’ve retained 15 percent of their original subscriber base, and the numbers dwindle from there. What’s more, HelloFresh lags Blue Apron and other competitors in retention, often by several percentage points. The value of a subscriber is likely to be much lower than anyone thought.
Richter says this analysis is false on multiple levels, but won’t disclose retention figures or churn rates. “Retention is one of the strongest points of our business model. We’ve always been very, very happy with retention rates,” he says. When Inc. asked to connect with HelloFresh’s longest-standing customers, the best the company could provide was a woman who had been featured in a company TV ad, and another who’d been with the service for five months.
Critics worry these high churn rates may prove fatal. “At some point, they’d go through millions of people who had tried the services who had churned out, and what would they be left with?” says Nikhil Basu Trivedi, a partner at Shasta Ventures who considered investing in Plated, Green Chef, and Sun Basket but ultimately passed. “There are a number of ways these businesses can be profitable, but at the end of the day it’s a tradeoff between growth and profitability, right? You can’t make the math work for both.”
“Without marketing, the business is dead,” says Eugene Auh of Oakchun Advisors, referring to the constant need to replenish the ranks of quitting customers with fresh subscribers. In 2016, Auh was hired to analyze the meal-kit business for a conglomerate interested in potential acquisitions. Auh eventually told his client to steer clear of the industry. Revenue growth comes “at an astounding cost,” he says.
In 2015, HelloFresh shelved its IPO plans less than a month
after announcing them. According to press reports at the time, investors couldn’t stomach the company’s burn rate given its distant prospects of profit. “Absolutely no one I spoke to had any appetite for this deal,” Neil Campling, technology analyst for Aviate Global, told the Financial Times after the HelloFresh IPO was abruptly postponed on November 9. (Richter disputes this characterization, saying HelloFresh had many interested investors, but wanted to wait until the general climate of the tech market improved.)
In the past few years, the company has made upgrades to its operations. Richter finally began hiring executives with experience, like Tobias Hartmann, its new U.S. CEO, who previously ran eBay Enterprise and Innotrac. The New Jersey warehouse—now in Newark—has raised wages to over $13 an hour. And the company’s margin (excluding marketing) has increased from 17 to 23 percent. On November 1, 2017, HelloFresh had a successful IPO on the Frankfurt stock exchange, raising more than $330 million at a valuation of $1.9 billion. Since then, shares have increased and sales have continued to rise.
Still, HelloFresh has a ways to go when it comes to improving the climate in its New Jersey operation. Two former employees, a night shift security guard and a custodian, said they witnessed evidence of hard drug use, including heroin and crack, at the end of 2016. “You’d see people getting high in the locker room,” says the security guard. “It was a party.” In January 2018, police were called to the Newark warehouse after an employee uploaded a photo to social media of himself holding a .40-caliber Beretta with the caption “I will pop a n***a at work LOL.” Police found the gun in his HelloFresh locker.
Meanwhile, even as HelloFresh has made great strides in improving customer satisfaction—it’s added customizable menus, delivery day options, vegetarian meal plans—overall retention rates haven’t budged, acknowledge Griesel and Richter. People may be happier, but they quit just as often.
The company’s investors argue that HelloFresh’s financials will improve as the category matures. Earlier this year, following fulfillment troubles and other problems, Blue Apron cut back its marketing spending 35 percent as sales fell 20 percent, leaving the door open for HelloFresh. To surge past the incumbent, HelloFresh is still spending aggressively on marketing in the U.S. Meanwhile, the industry is consolidating: In 2017, supermarket chain Albertsons acquired Plated. In March, HelloFresh bought Green Chef, a Denver-based meal-kit company that specializes in organic food. In May, supermarket giant Kroger announced that it planned to buy Home Chef, another meal-kit company.
HelloFresh is also starting to move its business beyond subscriptions. There are many new code names flying around the office these days—“Ginger,” “Caviar,” “Happy Hour.” In May, the company began testing selling meal kits in nearly 600 U.S. Stop & Shops and Giant Food supermarkets. It’s also experimenting with prepared-food vending machines in Europe.
And HelloFresh has made Samwer’s dreams come true in at least two respects: It’s now the No. 1 company in its category in every country where it operates. And HelloFresh is valued at almost twice its annual revenue—a multiple that is more than twice that of Blue Apron or Home Chef, and approximately six times that of Green Chef, the company it acquired.
By the end of 2017, Rocket’s stake in the company was worth nearly $980 million, a gain from its overall investment. (In April, the company sold $184 million worth of that stake.) As of HelloFresh’s IPO, the co-founders’ own shares have a current value of more than $195 million, based on HelloFresh’s share price at presstime. Thirty-eight current and former members of management, co-founders, and other holders together own options worth over $58 million. Baillie Gifford’s stake, meanwhile, is down 23 percent. And, of course, HelloFresh itself has yet to turn a profit.
Back at the Berlin café, as Richter and I finish our salads, I ask him how the company plans to become profitable by the end of the year—he’s promised as much to the public markets. He locks eyes with me and gets an edge in his voice. “We have a lot of experience with starting markets and then basically driving them to profitability over time,” he says. The company has never publicly detailed any profitable operation, either globally or in individual markets.
“We’re in over 10 markets right now, and a bunch of markets are already profitable,” he says, but won’t specify which ones. “Basically, over the course of the year, almost all of the markets will have turned profitable. Hence, we will also be profitable.” As he talks, he keeps holding my eyes until I blink and look away. But he doesn’t elaborate further.
Richter has the tunnel vision of an athlete, who—like his original benefactor—is willing to accept only one outcome: winning. His early investors doubted HelloFresh had a future, so Richter found new ones—and then got the original to invest millions of dollars more. Now, Richter, sitting with a reporter at lunch, is setting down the truth of his company the way he sees it, regardless of how the crude math works. During his time as an entrepreneur, the world has submitted to his will, and he will do everything in his power to ensure it continues to do so.
At 2 o’clock sharp, he excuses himself. “I actually have another appointment,” he says. A few minutes later, back at the office, I walk by and notice he’s upstairs, sitting alone in his glass box, typing intently on his laptop.