HelloFresh: The world's most ruthless food startup

HelloFresh set out to disrupt the global food business with pre-packaged dinner ingredients. Then the German company got to the U.S., and its ruthless strategy collided with reality.

HelloFresh meal kit.
(Image credit: Courtesy HelloFresh)

Dominik Richter is not a chef, a gourmand, or a food snob. It's a Tuesday in March, and the 32-year-old in a hoodie has chosen to lunch at a kale-and-juice joint that could easily make you think you're in Los Angeles, except it's in Berlin. But rather than opine over the lactose-free yogurt dressing on the Super Green Detox salad, Richter is stabbing his pumpkin seeds and lettuce as if to establish dominance over the leafy prey.

It's tough to discern whether Richter, the co-founder and CEO of HelloFresh — known for delivering the ingredients for Instagram-perfect home-cooked meals like Argentinian-Style Cod With Almond Herb Chimichurri and Chicken Thighs in Kimchi Sauce With Asian Pear Slaw, and now the No. 1 meal-kit company on the planet — actually derives any gustatory pleasure from food. "We're in the business of creating meal solutions for different meal occasions," he explains, perhaps thinking I'd never before heard of the concept called dinner.

Richter doesn't seem to much care for the social aspect of food either. He's not a fan of work coffees or breakfast meetings or this lunch, for instance. He prefers to put his head down and work. "Leading by example," he says with a German-accented lilt, explaining how he's managed to become the king of a brutally competitive industry that at its peak had more than 100 contenders. "Being the one that is very structured, very motivated, very hands-on, doing everything that needs to get done."

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It was likely all these qualities that originally caught the attention of Oliver Samwer back in 2011. The German internet mogul was always prowling for future CEOs. He had a type — MBAs from elite European business schools who had done a few years at investment banks or consulting firms, often with a serious athletic streak — and collected them. Richter checked all three boxes. As one of Samwer's former executives puts it: "You could have chosen a hundred other guys — same look, same profile."

Around the time Samwer decided to activate Richter on his latest venture, the almost-billionaire was feeling restless. During the prior four years, he and his brothers had amassed a fortune by copycatting overseas startups, building and selling European versions of eBay, YouTube, Groupon, Facebook, and more. Rocket Internet, their four-year-old flagship company, was a veritable clone incubator, having staffed and funded more than two dozen startups. Yet even as his net worth swelled, Samwer was no longer content to just plunder market share from the innovators. He wanted to own entire categories.

"The time for blitzkrieg must be chosen wisely," he wrote in an email to managers of Home24, one of his clone companies that sold furniture online. "Each country tells me with blood when it is time. I am ready — anytime!"

A new category Samwer wanted to test — and dominate — was meal kits. A Swedish startup called Linas Matkasse sold preportioned groceries with corresponding recipe cards that arrived weekly through the mail. In Sweden, the concept had proved extremely popular.

HelloFresh (then still under the code name Jade1314) launched from Berlin in October 2011. The meal-kit venture was a small bet for Rocket. But for Richter, it was an opportunity to fulfill a vision of himself he'd nurtured since college: He wanted to be a startup founder. Over the years, he'd made attempts — there was his idea for an Airbnb-type site geared to university students and the plan for a campus-based food-delivery service. More recently, he and Thomas Griesel, also an MBA and a champion miler and steeplechase runner, had been pitching a daily fantasy-sports betting site for professional soccer. But they'd been unable to persuade investors to buy into their dreams.

Now Richter had a backer, and better yet, a potentially massive opportunity. If meal kits turned out to be more than a Scandinavian anomaly, he'd be able to disrupt one of the biggest industries in the world: the grocery supply chain.

Inside the defunct wholesale bakery in Berlin that now houses HelloFresh's headquarters, the decor is hardly subtle in reminding you that, yes, this is a fresh-food company. Farmers' market–style, green-and-white striped awnings shelter rows of computer monitors. Farmhouse tables are a folksy contrast to the industrial concrete floors. The co-founders' office is set apart from all this charm. Lofted in the back, inside a sparse, glass-walled conference room, are Richter and Griesel, whom Richter had recruited to help start the company, silently pecking at their laptops, in mission control.

"You'd go up the stairs and there was a glass container, with Dominik and Thomas sitting in there, not talking to their employees, making sure no one is socially interacting with them," recalls Simon Schmincke. In September 2012, the startup was plotting its U.S. takeover. Schmincke, one of many executives Rocket kept in reserve as entrepreneurs-in-residence, was hired to become HelloFresh's new U.S. CEO.

In the summer of 2012, HelloFresh sent Schmincke to open a new office in New York. The U.S. team, starting out months after other branches, scrambled to catch up. Every Tuesday, the staff woke before dawn to drive a rental car to the New Jersey warehouse and pack meals for the weekly shipment. By the end of the summer, they were delivering food to New York City, and then the tristate area, and then to the whole Eastern Seaboard the following year.

It was hard and unglamorous work. Later, one intern sued, likening his internship to little more than manual labor for a $1,000 monthly stipend, far less than minimum wage. (The case was settled out of court.) Employees in the Rocket system were swapped out like tires on a Formula 1 racecar. Nine months into the job, Schmincke himself ran into a visa issue; he was dismissed as CEO of U.S. HelloFresh and replaced by a British executive.

Still, the U.S. ops team hustled to go national. By early 2015, they had leased fulfillment centers in Texas and California, enabling the company to ship meals anywhere in the lower 48 states within two days. They had also leased a 35,500-square-foot raw warehouse in Linden, New Jersey. It was their first time setting up and operating a warehouse all on their own.

For the team of operations managers, this was an exciting step. The managers were running a tight-knit group: Many were in their 20s, had graduated from elite colleges like Princeton and Northwestern, and were working their first jobs building a business from scratch. "It was ungodly amounts of work, but we were motivated by a vision that we were going to write the playbook for how you ship these crazy meal kits," says one of the managers.

After they signed the Linden lease, the team set up the new operation over the 2014 Christmas holiday. The next two months were grueling — installing equipment and assembly lines, and hiring a new staff, all while shipping thousands of meal kits every week.

In March, Griesel and another German manager, a former McKinsey & Co. consultant named Adrian Frenzel, arrived from Berlin to tour the warehouse and assess the team's progress. "We were happy, thinking they're going to be excited — because we'd done it all so fast," says another manager.

But that wasn't how the Germans responded. Instead, Frenzel launched into all the things wrong about the facility, down to the unswept dust in a corner of the warehouse floor. (Frenzel declined to comment.) The U.S. ops team was nonplussed. "Any person could walk in here and find 50 things wrong," says the second manager. "There's a new staff. We're growing like crazy."

The Germans' blunt style rankled the workers. "Let's say somebody unloads a container by hand," says the second manager. "That's a lot of work. And you'd have the Germans standing there, literally with their arms folded, watching. Then, when anyone finished, they'd say" — the manager affects a German accent — "‘Do another one.' They treated them like animals."

By early June 2015, five of the American ops managers, including the chief operating officer, had quit. "It was hard to see the vision anymore," the first manager says.

Frenzel stepped in and took over the COO's duties full time. He hired a new warehouse manager, a former Navy supply officer who shared his top-down approach. Morale plummeted. Order at the facility began to unravel, creating a sense of lawlessness. "It was a free-for-all," says one former employee.

"People would come to work late and high, or go into the bathroom and hide their beer in the ceiling, and drink in the bathroom," says the former employee. In the summer of 2015, staff used drugs and drank alcohol in the open, according to three employees who witnessed these activities or found empty bottles and drug paraphernalia on the premises.

If you live in a major city, chances are at some point you've been hounded, cornered, or harassed on the street by what one former Dutch HelloFresh customer dubbed "foodjehovas" (translation: food Jehovahs). If you think the company is aggressive in signing you up, wait till you hear customers' stories of trying to quit. In January 2016, the customer in the Netherlands, who had tried and failed to get HelloFresh to stop contacting him after canceling the service, wrote a profanity-laced Medium post railing against the hyperaggressive tactics of the startup, comparing HelloFresh to some combination of stalker ex-boyfriend, religious proselytizer, and mobster.

HelloFresh, in its assertive way, was attempting to address what has emerged as a fundamental problem with the meal-kit business: People quit. Why? Perhaps the novelty wears off, or there's guilt about all the wasteful packaging, or simply because they are too lazy to cook a gourmet meal every night. Whatever the reasons, it turns out the majority of customers ditch their HelloFresh subscriptions after receiving only a few boxes.

But now, as HelloFresh and its biggest U.S. competitor, Blue Apron, pass their sixth birthdays, they know what the quit rates (also known as churn rates) really are. While neither company discloses figures, third parties, including Dan McCarthy, an Emory assistant professor of marketing, and Second Measure, a research firm that analyzes pools of credit card data, have examined the companies' data. Their findings, which largely match up, paint a grim picture: Nearly half of subscribers of both services cancel within a month. Just 20 percent stay on as long as six months, and the numbers dwindle from there.

"Without marketing, the business is dead," says Eugene Auh of Oakchun Advisors, referring to the constant need to replenish the ranks of quitting customers with fresh subscribers. In 2016, Auh was hired to analyze the meal-kit business for a conglomerate interested in potential acquisitions. Auh eventually told his client to steer clear of the industry. Revenue growth comes "at an astounding cost," he says.

Back at the Berlin café, as Richter and I finish our salads, I ask him how the company plans to become profitable by the end of the year — he's promised as much to the public markets.

He locks eyes with me and gets an edge in his voice. "We have a lot of experience with starting markets and then basically driving them to profitability over time," he says. The company has never publicly detailed any profitable operation, either globally or in individual markets.

"We're in over 10 markets right now, and a bunch of markets are already profitable," he says, but won't specify which ones. "Basically, over the course of the year, almost all of the markets will have turned profitable. Hence, we will also be profitable." As he talks, he keeps holding my eyes until I blink and look away. But he doesn't elaborate further.

Richter has the tunnel vision of an athlete, who — like his original benefactor — is willing to accept only one outcome: winning.

At 2 o'clock sharp, he excuses himself. "I actually have another appointment," he says. A few minutes later, back at the office, I walk by and notice he's upstairs, sitting alone in his glass box, typing intently on his laptop.

Excerpted from an article that originally appeared in Inc. Reprinted with permission.

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