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Why I’m starting to change my mind about Marley Spoon AG (ASX:MMM)

About a month ago, I wrote an article telling our Foolish readers the reasons why I was steering clear of meal kit delivery service Marley Spoon AG (ASX: MMM). At that time, the company’s performance since listing on the ASX had been disappointing – it was almost 30% off its June issue price of $1.42 and it didn’t seem to be showing too many signs of making a recovery.

My concerns were that the Australian food delivery sector was already overcrowded, Marley Spoon hadn’t yet released any meaningful financial results to the Australian market, and competition from its more established rival in the global meal kit delivery space, HelloFresh, was too strong.

Since writing that article, a couple of things have happened. Firstly, Marley Spoon released its 1H18 results. Secondly, I was able to sit down with company founder and CEO, Fabian Seigel, and hear his thoughts on Marley Spoon’s Australian prospects.

So the big question is, have either of these events changed my mind about Marley Spoon?

1H18 Results

First, to the financials. Over the six months to 30 June 2018, Marley Spoon exhibited strong top line growth. Total revenues for the period were €39.5 million, which was a hefty uplift of 99% against 1H17 (excluding foreign exchange impacts), and global active customer numbers increased by 112% to 125,000.

However, the company recorded a net loss of $19.4 million for the period, up from the $13.2 million loss reported in 1H17, despite growing its contribution margin from 13% to 22%. Contribution margin is gross profit less fulfilment expenses as a percentage of total revenues.

This shows that Marley Spoon is still investing heavily in marketing activities to attract new customers. Although if you believe the company forecasts this is all money well spent: through selling its meal kit services, Marley Spoon expects to recoup from each customer on average 3 times what it costs to acquire them.

Hospitable Australian market

One of my key concerns last time I wrote about Marley Spoon was that the Australian food delivery market was already overcrowded. Foodora had recently been squeezed out by bigger competitors like Deliveroo and Ubereats, and Marley Spoon itself was forced to pull out of the UK market in 2016.

But Fabian Seigel sees Marley Spoon’s key competitors as the big supermarket chains, owned by industry incumbents Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES), rather than Ubereats or Deliveroo. And he considers our local Australian grocery sector to be much more hospitable than the UK’s.

“The higher supermarket food prices in Australia allow us to generate healthy margins and presented a better argument for growing rather than spreading our resources thin like in lower margin markets like the UK,” he said.

Higher margins would allow Marley Spoon to reach profitability much faster and with less capital investment. This is evidenced in their financial results: the Australian segment has grown revenue, contribution margin and operating EBITDA at a much healthier rate than both the European and American geographies.

Competitors

Seigel also isn’t intimidated by competitors like HelloFresh, particularly in a fragmented grocery market like Australia’s. “Groceries are the largest vertical in consumer spending which allows space for multiple brands to serve the customer,” he said.

“The sheer magnitude of the grocery category will allow ample space to build multiple billion dollar revenue consumer brands over the coming years. This is not and won’t be ‘winner takes all’.”

Should you invest?

So would I now feel comfortable recommending an investment to our Foolish readers?

Probably not quite yet.

Marley Spoon is still a high-risk investment – the company only has a market cap of a little over $150 million, and I would need a longer track record of positive growth results before recommending you commit your money to the Marley Spoon cause.

And while the meal kit delivery service industry is growing fast, its profitability still hasn’t been proven. For example, HelloFresh dwarfs Marley Spoon in terms of size – it brought in over €600 million in total Group global revenues in 1H18 – and yet it still posted a net loss of €45 million for the half.

Marley Spoon’s share price is up about 12% since it released its 1H18 results at the end of August, which shows that market sentiment is slowly turning in its favour. But I’d suggest it’s still one to leave on your watch lists – for now at least.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers 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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