Goodfood Market Corp. (FOOD) Earnings Call Transcript & Summary

I'll go briefly over what's happened in the past 12 months at Goodfood. So much has happened between new product introductions and investments in the manufacturing network and the continued rapid growth in the subscriber base.

So for those on the call that may not be super familiar with Goodfood or fully up to date with recent developments, can you just provide a high-level view of the company's recent evolution from a meal-kit-focused business to a leading online grocery company?

Yes, happy to. So when the -- in the first few years of building Goodfood, we were focusing our attention on meal-kits. So meal-kits, as most people are aware of today, we have preportioned ingredients that we send to our members, everything that they need to cook meals at home. And meal-kits, for us, are the equivalent of what books were for Amazon. And so meal-kits are the item that we chose to merchandise that would be scalable, that would have the ability to build a perishable supply chain network across the country. Because it's limited in the number of SKUs that you merchandise, we were able to scale the business quickly, build a brand. In the past 12 months, we've added about 100,000 households to our subscriber list. We're at 246,000 subscribers as of the end of February. We operate across the country. We recently opened our latest facility in Vancouver. So from Montreal and Calgary, which were our 2 previous fulfillment centers that we're servicing the whole country, we added Vancouver in order to improve gross margin in Western Canada, ability to offer better quality to our customers by not having deliveries go through the Rockies and reduce our environmental footprint as well. So the amount of miles that any of our boxes are making from fulfillment to delivery to our customers. And so as we're building up that -- the network for perishable deliveries to our customers, we understood clearly that our members were asking us for more variety of products. So our members would, in all of our focus groups, our surveys, our members were telling us, we'd love to be able to have a one-stop shop at Goodfood. We'd like to be able to complete our entire grocery basket at Goodfood. So the future of where the business is going is our meal solutions, our ready-to-cook meals, our prepared meals, our breakfast products, those are like the differentiated center of our basket that's going to be defensible and unique to Goodfood in the years to come. And we announced that we launched a selection of private label grocery items. So grocery items that are under the Goodfood brand. We started selling them towards the end of last summer. We're at about 100 private label grocery SKUs today. And we are growing that to somewhere between 3,000 and 4,000 SKUs, which we expect to be able to complete approximately 80% of the grocery basket with those 3,000 or 4,000 SKUs that represent about 20% of a typical grocery store's inventory. Phil, is there anything that you want to add to that?

Yes. One thing that's important to understand, you talked about the new products. Meal-kit is still the bulk of our revenue with maybe 90% of our revenue and all the ready-to-eat meals, breakfast and online grocery is about 10%, but it's growing very, very quickly, especially right now with the online grocery.

Perfect. And then if we turn to the current social challenge we're facing with COVID-19. With restaurants being closed and people working from home, have you seen a positive impact on demand for home meal solutions and grocery products from existing and new members?

Definitely. So there is a lot of opportunity and risk to manage for us. So this is a -- we're kind of calling this, it's war-time management for us, and our leaders need to step up. I think there's an opportunity for us if we continue to successfully deliver on our customers' expectations. There's an opportunity for us to accelerate the transition from offline grocery shopping to online grocery shopping in Canada. There's an opportunity for us to deepen the relationship that we have with our customer base as well. So being there for our customers in their time of need is building a strong emotional connection. We've received e-mails from now thousands of our customers that are thanking us for being there. We're seeing increases in orders from existing customers. So some of our existing customers are trying some of our new products. They're trying some of the private label products, specifically. We're definitely seeing interest in loading up on proteins, pasta, bread. So it's an environment where people are interested in trying those new products, which is good. We have an increase in new sign-ups as well. I think it's important for us to realize that we are only 4 days into this quarantine, working-from-home situation in Canada, so it's still very early to tell what's going to happen once panic buying of groceries die down. But definitely, starting on Friday, when Quebec closed schools, and then yesterday and the day before when Ontario, Alberta, B.C. declared states of emergency, we saw some increased demand. Definitely, the counterpoint to this is how do we manage our supply chain. That's a huge consideration for us. And number two, how do we continue to make sure that our employees who need to be in our factories, so our employees that are working from -- our office employees are able to work from home without any issues. But factory employees, we need to make sure we're keeping them safe. We've set up extra procedures, questionnaires to identify anyone that might be at risk in the workforce and ask them to stay home. We've also purchased temperature guns to be able to check our workers' temperatures as they're coming into our facilities. And I think that has actually made the rest of the workforce feel more comfortable, knowing that we're taking all of these important measures. And on the supply chain side, we had started working on this almost a month ago when we have a couple of suppliers from China that we're living the early stages of their outbreak there. And it went from us trying to secure the supply chain from them to us learning from them in terms of what they were seeing and what kind of action we needed to take to secure our supply chain in Canada. So by no means are we shouting victory yet, but we do have inventory of some critical items, and we're working through the harder-to-source items right now. And the expectation is it's complex right now because of all of the panic buying that's going on in Canada. Hopefully, in the next few weeks, that will die down and the supply chain will become a little bit easier to manage. But that will be counterbalanced with cases of -- more cases of COVID-19 that will likely be found in the workforce. And so we need to think about how to run the business with people taking sick leave and with suppliers taking sick leave as well.

And if I can add to that, Jon, we have more than 1,000 suppliers now, and we're lucky enough to have 80% to 85% of our supplier in Canada, local supplier mostly, close to our factories. Therefore, on the supply chain side, it's alleviated the pressure a little bit. And the balance of the 15% to 20% of our suppliers that are outside of Canada are mostly in the U.S., which also doesn't impact too much right now our supply chain. Another risk is the USD-CAD that is pretty high right now. Even though our suppliers are in Canada, this could impact the pricing for some of the needs and the produce. So we're keeping a close eye on this, and we're negotiating seriously. But so far, so good, like Jonathan mentioned.

And if you were to see some inflation in your food cost, would you be able to pass that on to the customers? Or how would you protect margins in that situation?

I can take this one. I mean we've done a price increase recently. It went very well in Eastern Canada. Right now, we're trying to keep the same price and keep the same level of quality and offering to our members. But we can -- we can always play with the menu, if we need to, the recipe, we can always play with the food cost, but definitely keeping the same price for our customer is something pretty important for us right now.

Okay. And...

The other thing I can add to that as well, Fred, is we've started a weekly update communication with our members. I think in times of crisis, being open, transparent and available to be seen in our communications is one of the most important things that we need to do with our customers, our employees, investors. So we started a weekly communication with our members. And through that, we'll be able to flag any issue, any ingredients that we might need to swap out, for example, with another comparable ingredient or if we need to make tweaks to certain recipes. And our expectation is -- our first expectation is let's source 100% the right products, the right ingredients. But if we do need to make modifications to our recipes, we expect that our clientele is going to be understanding in these conditions.

Yes, sure. That makes sense. Anything else you want to mention on COVID-19 before we move on to other topics?

I think that makes sense. Phil, is there anything else that you wanted to mention?

Just one advantage that Goodfood has, if you compare to the grocers that there is less touch point in the supply chain. And definitely, we operate under a federal license, which has high sanitary measures, and there's no open shelves as well that people can touch the foods. I think that's another favorable aspect of our business model, and people are starting to realize that. And that's why we see the impact on the order as well.

Perfect. If we can move on to the private label grocery initiatives, certainly very intriguing and exciting opportunity. Can you just describe the current offering? And you mentioned 100 SKUs. You want to get to 3,000 to 4,000. So maybe a brief overview of what you have now and where you're going with the private label grocery item?

Yes, that makes sense. So it's important to understand the why behind our private label strategy. So the first why is having private label items allows us to limit the number of SKUs. So we don't need to have 10 different types of Dijon mustard. We can have 1 or 2 formats, and that will be good and make sense for the customers. Number two is our private label strategy allows us to cut out national brands. And so it helps us have a higher margin on the products that we're selling. And then lastly, our private label strategy is intended to be a long-term differentiator. So we know that President's Choice has put a lot of value into their President's Choice brand. There's Farm Boy as well that was acquired by Sobeys because of the strength of their private label brand. And then if you look into the U.S., Aldi and Trader Joe's are great examples of really differentiated supermarkets that have like cult-like followings around their products and their services, and they've been able to build some great differentiated businesses. So currently today, we have just over 100 products on our private label grocery items. We have -- in terms of the offering, there's cooking oils, olive oil is a big seller, nut butters, cheeses, pasta, condiments, so hot sauces, for example, we have Goodfood coffee, juices, all sorts of breads. So that's just to give you a sense of what's up today in terms of offering. And we built a team internally that is able to work with suppliers, source the products, brand them under the Goodfood brand and list them up on the website. So we expect that the acceleration of new SKUs is going to happen very quickly. Our ratings and NPS are very high on these private label products. There's definitely operational complexity that needs to be managed. So we need to have people, process and technology to go from the couple of hundred SKUs that we have today to a few thousand SKUs, and we're planning automation investments around that as well. But what's great is that we're able to have a plan and learn and adjust along the way.

Perfect. And on the pricing front, those items are typically sold at a discount to the alternative that you'd find in a typical brick-and-mortar store. Just wondering how you guys are able to offer these discounts? And then if that's more of a short-term move to gain market share? Or do you see that as being a sustainable strategy in terms of pricing?

So we're aiming at, let's say, between 10%, 15% to their branded equivalent at the grocery store, and we are able to achieve these pricing while keeping our margin for 3 main reasons. So main reason is the waste. We are a just-in-time business model. Throughout our supply chain, we have approximately 1% of waste. And when you compare it to the grocers that have 10%, 20% and sometimes 50% in the lettuce and some of the produce, that's helping us to get very good pricing to our clients. Also, we don't have physical retail stores to pay for. And like Jonathan said, we have only 1 brand and it's our brand for now. So we don't have to share the margin with other CPG companies. So really -- like the discount really depends on the categories. For some of the categories, the discount is higher. For some, it's a bit less. But overall, 10% to 15%, that's our target that we've been able to achieve so far.

Okay. And with that push into private label, you're obviously competing more directly with traditional grocers. Have you seen any kind of competitive response from them? And what do you think are the keys to Goodfood's success if the grocers start to more aggressively go after that online business?

Yes. I think the share of online grocery shopping versus offline grocery shopping is only going to grow. We've seen 20% adoption and penetration rate in certain other countries in Europe. So the share of online groceries is only going to grow. And with the growing market, competition will come into the market. What we've seen so far is a little bit more advertising from Loblaws on their PC Express, so they're leaning in on click and collect, which, in our opinion, is a different market than customers that are interested in home delivery. And Metro is offering -- is doing a little bit of advertising as well in terms of their grocery delivery in Ontario and Quebec. But neither Loblaws nor Metro have announced plan to invest in e-commerce fulfillment centers. And our view is, in order to be cost competitive in the medium term, so to actually make money on any -- on deliveries, our view is you need to have e-commerce fulfillment centers. And Sobeys is the only grocer that has announced plan to launch a fulfillment center for e-commerce groceries. They're going to be launching in Toronto in the spring. And other than that, the other grocers have not made any moves in the space. And maybe to answer your question about longer-term positioning. We -- what's important is making sure that we have a differentiated strategy. So we're going to be cost competitive because we're -- we've been operating in the online grocery space for many years before the others had launched. So there's a cost component. But we also realize that we have a differentiated brand, a brand that's very popular with 25- to 40-year olds, and we have a unique product portfolio, including meal solutions, ready-to-eat meals, ready-to-cook meals that are just not available anywhere else, and we think that's going to drive the purchase of the entire basket.

Perfect. Looking at your active subscribers, obviously, very strong momentum continues. What do you think will be the main drivers to keep the momentum going in the future? And one of the questions I get asked a lot is when does the -- when does that stop? And I don't know if you guys look at it from a penetration of meal-kits point of view or maybe your thoughts on where your subscriber numbers can eventually go?

Sure. So when we think about the size of the market we're going after, we're planning for approximately 10% penetration of online groceries in Canada. So that represents a $13 billion market based on the $130 billion overall grocery market in Canada. And within that $13 billion market, there's going to be -- included in that is meal-kits and the overall online grocery offering. So from where we are today, if you put together everything that's being sold in terms of online groceries, we're sub $2 billion for sure right now. So there's a 5x or 6x growth that we're expecting in the market. What do we need to do in order to make sure that we capture -- continue to capture a leading share of that market? In our opinion, it has to come with flexibility for the customer, so making sure that we grow our product selection in a way that's relevant to the customer and we let them combine products however they want in their carts. We also need to be thinking about our environmental impact. We need to be thinking about speed of delivery, so closing the time between cutoff and delivery to the customer. And we need to be making sure that we're using the advantages that we have in our cost structure to deliver a greater value proposition to our customers.

Great. And can you comment on recent trends for some of your -- some of the key metrics in terms of the customer churn, customer acquisition cost? Any comments on that? I know you don't specifically provide those numbers but directional comments on that?

Sure. Like we said in our previous call, order value has been going up high single-digit percentage. It's a good trend that we're seeing with the addition of new products like online grocery and ready-to-eat kit meals. So that's been trending very well. Customer acquisition cost has been stable, slightly up. It varies with the seasonality. Didn't change much, but increased a bit. This ante, what we're seeing right now with COVID-19 that can have a good effect on CAD, but it's too early to tell. And then churn, churns went down, so retention rate went up a bit. We're a bit more stable. We're still growing very quickly. We had 46,000 new subscribers in the past 6 months. But still, it's more stable than before, and so why the churn went down a bit, and it goes with the maturity of the business. Apart from that, order rate has been moving with the seasonality as well. So that's most of the metrics that could be of interest, unless you have another one on your mind, Ross or -- sorry, Fred or Jon?

I'm good on that.

No, I think that's good. Just want to go briefly on some capacity expansion that you've announced. So Vancouver is open. The next one, I guess, is the facility in Toronto, which you've announced in conjunction with the $30 million convertible debenture offering. Maybe briefly speak on your decision to go ahead with the facility in Toronto?

Sure. So Jon touched on adding more flexibility to the members and definitely being in the biggest city in Canada, that's definitely going to help being closer to a member with -- well, probably shorten the lead time for the delivery and definitely increase the quality of the product. Even though we are shipping filled trucks from Montreal to Toronto right now, and we have a very identity, we think the increased quality, the reduced lead time and even the savings that you -- that we'll be able to do on the logistics side makes Toronto an easy choice. In our prospectus for the $30 million financing, we said this facility could be operational within 24 months. We're currently monitoring the market. We didn't find any lease yet. But definitely, we are negotiating and trying to find the best facility. We're being cautious with the current economic environment. We are trying to find a solution that can allow us to open as fast as possible. But we're being cautious, and we might delay a bit our decision to engage ourselves in big CapEx and big grant. But definitely, opening in Toronto is key for us. And being close to our member in Toronto will also contribute to our position of leading the online grocery business in Canada.

Perfect. And we're almost out of time, but there was 1 question on profitability that I think we should go through. So in the most recent quarter, your adjusted EBITDA margin improved from negative 15% to negative 6.5%. So a large improvement there year-over-year. Just wondering what in your view is the path going forward to, number one, EBITDA breakeven; and number two, your long-term target of around 15%? So any color you can provide around that?

Definitely, we think our profitability path to the 15% you mentioned is a clear path. We've been able to increase the EBITDA by 14 percentage points in the last 2 years. And the gross margin are above 40% now. I think our target is 45%, therefore, we still think we can improve the gross margin piece by adding automation, adding efficiency. The opening of the Vancouver facility is a good example to increase the quality and lower the logistic expenses, and definitely contribute to the gross margin through our overall business. So the gross margin piece is a big contributor to the EBITDA profitability. Also, like people need to keep in mind that the meal-kit business is a bit more mature, therefore, is going to contribute a bit more to the EBITDA in the short term. And while we ramp up the new businesses, the new division, ready-to-eat meal, breakfast and mostly online grocery, I mean these divisions will be able to contribute in the medium term as well to the EBITDA. So the gross margin improvement and the operating leverage we'll see on the SG&A piece will -- are going to continue to contribute to our profitability path and to -- I mean to allow us to reach our goal of being breakeven first and reaching our 15% EBITDA margin. Jon, anything to add?

I think that's good. I would just add some of the grocery essentials are sold at different margin levels than our meal solutions. So a product that is more unique and differentiated will garner a higher margin than a product that is closer to being a commodity. So it's important to be thinking about product mix in the gross margin profile. And I agree with all your other comments. Thanks, Phil.

Perfect. Well, that's all the time we had. I want to thank you, Jonathan and Phil, for being on the call today and being available.

Thanks very much for having us. It's been a pleasure. Thank you.

Thanks, Jon, and thanks, Phil, and this was our last group session for this virtual conference. On behalf of the whole team at Desjardins, I want to thank everyone for joining us over the past 2 days for this very unique version of our annual conference, and we hope to see you all in person next year for the next edition. Thank you, everyone.