The Rise of Food Tech Start-Ups and the Legal Issues They Face

By: Catherine O'Neill

A new trend in the food industry has the potential to transform the trillion dollar U.S. food economy with its novel approach to dinner preparation. This fad is the meal-kit start up industry, a space with over 150 brands competing in a $1.5 billion market of consumers eager to make healthy meals with pre-prepared, farm-fresh ingredients. Many brands in the industry, such as Blue Apron and HelloFresh, operate by allowing consumers to choose several meals per week from pre-set menus. Those meals are then shipped to the consumer in kits which have all the ingredients necessary to make the recipes.

Companies in this industry are attractive to investors because they have little overhead, aside from the costs of operating food distribution centers, and only bear shipping costs to the consumer. In fact, meal-kit start-ups have raised a reported $650 million in venture-backed capital in recent years while earning revenues of $500 million in 2015 alone. The industry’s revenues are expected to increase tenfold in the next five years. The tremendous amount of growth in this sector is impressive, but it has not come without growing pains. Few meal-kit start-ups are cash-flow positive, which reflects the reality that only those in the industry who are able to produce meals on a massive scale are able to survive the competition. The start-ups also offer deep discounts to entice consumers to try the products, while spending nearly $100 in marketing expenditures per consumer in hopes of educating consumers about the meal-kits.

One company in particular, Blue Apron, has emerged from the competition and is so successful that it is considering an initial public offering for next year. The company is purportedly projecting $1 billion in revenue over the coming twelve months, and would be valued at $3 billion if it were to go public. These estimates follow Blue Apron’s most recent valuation of $2 billion after receiving $135 million in investments in 2015. The industry leader has over 4,000 employees at three fulfillment centers and is growing rapidly. But Blue Apron, like others in the industry with venture-backed financing, has run into legal trouble keeping up with the pace of demand and the pressure to scale rapidly. The company in particular has had health and safety violations, violent incidents at its fulfillment centers, and poor working conditions reported by employees. On top of that, Blue Apron’s co-founder is a chef and has had no experience running warehouses before, adding to the chaos.

The governmental agency that oversees working conditions for meal-kit start-up employees is the Occupational Safety and Health Administration (OSHA). The Administration aims to ensure healthful workplaces by setting and enforcing standards for employers, while also providing training and education for employers. To that end, OSHA has created guidelines that food manufacturing facilities should implement for their workers which center around the prevention of work-related musculoskeletal disorders. The disorders often come from employees working in repeated and sustained postures while performing highly repetitive tasks, which is common in the meal-kit industry because of the chopping of food that occurs in fulfillment centers. Buzzfeed recently investigated the fulfillment centers of Blue Apron and found that the company in the past year alone had nine violations with California’s Division of Occupational Safety and Health for unsafe conditions that put workers at risk for both fractured bones and chemical burns. On top of that, earlier last year, Blue Apron was given another $13,050 penalty for an employee forklift accident.

In addition to OSHA regulations, the meal-kit industry also has to abide by USDA guidelines and Department of Labor employee working hour regulations. The USDA imposes a rule that proper storage temperatures for food commodities must be set at forty degrees Fahrenheit, so meal-kit fulfillment centers and workspaces must all be kept at that temperature. At Blue Apron, employees wear jackets, hats, thermals, and neck warmers at all times because of the cold temperatures. With regards to working hours, Blue Apron relies on employees to work over twelve hour days, hiring temporary workers when business is in high demand. Meal-kit companies like Blue Apron are clearly trying to piece together all of the regulations surrounding food items and employee safety conditions, but since the industry is so new and product is in such high demand, it seems as though they are cutting corners to deliver for consumers.

Now is the time for meal-kit companies to succeed in the marketplace, if they are able to abide by all federal regulations governing worker safety and food products. The idea is exciting to consumers,  especially millennials, who want healthy, farm-sourced recipes right at their doorstep. However, the companies must act fast to meet demand because other industry giants, including the grocery industry, will soon be moving into the meal-kit space. Whole Foods Market and Amazon are both planning on launching meal-kit lines later this year, while Giant Food Stores already rolled out its own service last December.

Although more and more companies are moving into the meal-kit space, it is still unclear of whether the industry is actually profitable. Recent studies have shown that only ten percent of those who subscribe to meal-kit companies are still with the companies after six months. The risks of the business, although low compared to other industries, include packaging, shipping, delivery of fresh food, ingredient costs, and a weighing of high and low costs to attract consumers away from supermarkets. These risks are on top of the hardships of educating consumers about the product, marketing so that consumers will buy from one company and stay with that company, and market differentiation when there is so much competition in the industry.

The meal-kit niche of the American food economy is a rapidly expanding area filled with regulations and business risks. It remains to be seen what the future of the industry is, given that increasing competition is entering the marketplace and that no company is confirmed to be profitable at this point. But, the industry is revolutionizing how consumers buy food and will have an impact on consumers in the coming years if it continues growing at the pace it currently is growing at now.