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Why I’m steering clear of Marley Spoon AG shares

Meal kit delivery service Marley Spoon AG (ASX: MMM) has suffered a disappointing start to life on the ASX.

Since it opened at $1.25 at the beginning of June, Marley Spoon’s share price has been on a steady downward trajectory – valued at just $1 when the market closed on Friday. Shareholders who invested in the initial float at an issue price of $1.42 would be especially disappointed in its performance. 

There were reasons to be excited about Marley Spoon. It markets itself as a fresh, healthy food option with the convenience of home delivery. Each week, subscribers to Marley Spoon receive a box containing a set of recipes and the correct amount of ingredients required to make them.

The idea behind the service is that it cuts down on food wastage and is a more convenient alternative to visiting the supermarket.  

Marley Spoon was founded in Germany, but has been operating in Australia since June 2015. It is hoping to cash in on a growing movement towards healthy eating which has helped provide a recent financial boost to companies like Freedom Foods Group Ltd (ASX: FNP) and fruit and vegetable producer Costa Group Holdings Ltd (ASX: CGC).

The price of shares in Freedom Foods is up around 20% this calendar year, while Costa Group shares are up over 15%. 

However, the Australian food delivery market is already crowded. Marley Spoon is not merely competing with the traditional supermarket chains, but delivery services like Ubereats and Deliveroo, not to mention its more established international rival HelloFresh.

HelloFresh is the largest meal kit delivery service in the US and, in a similar way to Uber with ridesharing, has entered into the public lexicon as a word to describe this type of meal kit delivery service. With a competitor that is ubiquitous, it means others in the industry will always have to struggle twice as hard in the fight for market share. 

Just this month Foodora, a food delivery service in the vein of Ubereats and Deliveroo, announced it was ceasing its Australian operations after being squeezed out by its rivals. Marley Spoon itself suffered a similar fate in the UK, shutting down operations in 2016 less than two years after it launched there. At the time the company said it was choosing to focus on higher returning markets such as Australia.    

According to the company’s prospectus, Australia made up 37% of Marley Spoon’s total revenues for the quarter ended 31 March 2018. It forecasts total global revenues for the calendar year 2018 to be €93 million, with gross profit of €38.4 million.

Due to higher operating costs, including soaring marketing and fulfilment expenses (which includes shipping costs), Marley Spoon forecasts a statutory net loss for the 2018 calendar year of €32.3 million, an increase of 13% over the €28.5 million loss reported for calendar year 2017.  

Foolish takeaway

I would advise investors to steer clear of this one – at least until Marley Spoon has released some meaningful financial results to the ASX. At the moment it just doesn’t seem worth the risk, and so far its share price performance has demonstrated barely lukewarm interest from the market.  

The food delivery industry in Australia is crowded, and the collapse of Foodora might not be the end of the bloodletting. And if you’re looking to invest in health foods, there are plenty of other companies on the ASX that have already proven they can deliver profit to shareholders – I would encourage Motley Fool readers to focus on them.  

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Motley Fool contributor Rhys Brock owns shares of COSTA GRP FPO and Freedom Foods Group Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended Freedom Foods Group Limited. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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