David George-Cosh

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Goodfood Market Corp. is placing a big bet that it will be a key player in the burgeoning online grocery space as interest in its meal kit business wanes amid an improving COVID-19 environment. 

The Montreal-based company plans to open and operate more than two dozen micro-fulfilment centres over the next two years, nestled in high-density areas that will deliver grocery orders to customers within a tight 30-minute span. The strategic shift comes as fewer people appear to be willing to purchase meal kits amid easing COVID lockdowns and increased vaccine adoption that sees more people curtail their home cooking to eat out at restaurants again.

"As we look forward into 2022 and beyond, the next big leg of growth and adoption from offline grocery shopping into the online world we believe is going to be centred around accelerating the speed and flexibility of delivery," said Jonathan Ferrari, chief executive officer of Goodfood, in an interview Tuesday.

The online grocery business, also known as "instant grocery delivery," has taken off in the United Kingdom and the United States, but has yet to gain full traction in Canada — mirroring a similar progression of how meal kits were slow to take off across the country. While still in the early days, Desjardins Securities believes that on-demand delivery for grocery products will account for as much as $7 billion by 2025.

The space is beginning to get crowded, with early adopters Loblaws Inc. expanding its grocery delivery service with Instacart Inc., and Empire Co. also finding success with its Voilà business. However, Goodfood is hoping the same people that subscribe to its meal-kit plans will also be keen to order extra groceries as well.

"We think Goodfood is really in an excellent position to build a replacement to bricks-and-mortar grocery shopping," Ferrari told analysts during a conference call Tuesday. "Over time, we believe we'll see 50 per cent of our customers' weekly grocery shopping shift online to Goodfoods' on-demand offering."

Even getting a small slice of that $7-billion pie will be worth it for Goodfood. The company expects to see $1 billion of online grocery products sold through its micro-fulfilment centres by 2023 while requiring about $40 million of capital to build out. Already, the company has 13,000 active customers after eight weeks of launching two centres in Toronto and Montreal with an annualized sales run rate of $21 million before incentives.

Ferrari said in the interview the economics behind the online grocery model is "very profitable" with most people buying about $65 to $70 worth of products at a time which can drive delivery costs down to about $4 per customer, depending how many deliveries can be made per hour.

"Between the large basket size and the delivery costs that we've been proving out, not only can we capture this amazing customer demand, but the unit economics behind the model are going to be very profitable," he said.

Analysts remain cautious about the company's plans. Raymond James Analyst Michael Glen wrote in a report to clients on Tuesday that the company is essentially starting at the beginning of a new strategy that will see a significant amount of cash burn over the next two years totalling more than $150 million to finance.

"We continue to have a number of questions and need more information on the roll-out before assessing potential value creation," said Glen, who maintained a "market perform" rating on the company's stock while lowering his 12-month target price to $4 per share from $6.50.

"Overall, we do have escalating concerns regarding the competitive intensity, product offering (i.e. branded vs private label), customer acquisition cost and longer-term retention rates."

Goodfood's plans in the online grocery business come after the company reported disappointing first-quarter results on Tuesday. The company said revenue fell two per cent sequentially to $78 million in its fiscal first quarter, while reporting a net loss of $22 million. Both missed analyst expectations of $80 million in revenue and a $15.6 million loss, according to Bloomberg data.