The Business Of
Fast Food | Huel | What Are Their Margins?
Morning All!
So, yesterday we dug into how Huel makes money. And we saw that the company had 914k customers in 2022. We saw that each customer spent £73 on average for an order. And we saw that the average customer ordered 1.72 times over the year! And I kind of left you hanging about whether 1.72 times was good or not… sorry!
Don’t worry… we’ll really dive into this on Friday! But anyway, enough with revenues. Today, we’re going to switch gears and look at what costs are required for Huel to run their operations. And the chart below shows us that the huge majority of expenses are to do with cost of goods sold and admin costs.
Given that Huel is a private company. There’s not a whole lot of detail in the company’s reports about costs. But that won’t stop us - let’s have a bit of fun and work out what the costs really are! So without further ado, let’s dive into the biggest cost line - cost of sales…
Canadian Protein Anyone?
Okay so, what are the cost of goods sold? Well the ‘goods’ that are being sold here are the Huel products. And the main cost of making those products is the various ingredients needed for the recipes!
Now of course, for each product the ingredients are slightly different. But behind all of Huel’s products, there are 7 main ingredients that are used. And the image below tells us what they are…
Okay, so those are the main raw materials needed. But where do Huel get them from? And how do they turn them into the Huel powder? Well, Huel’s procurement team works with suppliers from all over the world to find those ingredients. For example, Huel’s pea protein is sourced from Canada! And the ideal balance is obviously to find ingredients that are good quality… but not too expensive!
These ingredients are then transported to Huel’s manufacturing facilities. With the company having facilities in the UK, US, Europe and all around the globe. And employees at these facilities are responsible for blending together all of the ingredients. To manufacture Huel’s products! This brilliant video gives you a nice overview of how Huel’s manufacturing process used to work in the early days.
Okay so, we’ve identified the ingredients. We’ve found suppliers that produce these ingredients. We then transport those ingredients to our facilities. And then manufacture our products. But they key question we haven’t asked yet is - how much does this all cost?!
Well, the chart below shows us that in 2022, Huel’s gross margin was 55%. Meaning that the cost of goods sold was 45% of revenues. But hold on, gross margin was 62% in 2021 - so why the sudden drop?!
Good spot! Well, in their 2022 annual report… Huel tells us that the reason for this fall in gross margin was because of the increased cost of ‘global freight services’. Hmm okay, but what does that actually mean?
Well, remember we said that after Huel find the ingredients they want… they need to then transport it to their manufacturing facilities around the world? Well the cost of transporting these ingredients is what’s called as freight! Huel will need to transport their ingredients via containers on ships. And to understand why shipping costs were so high in 2022, this article does a pretty good job at explaining the main drivers.
~4,300 Orders A Day… Someone Help Us Out!
Okay, so we’ve sourced the raw materials. And blended them all together in our manufacturing facilities. Now what? Well, we need to get them into the hands of consumers don’t we! And these costs are called distribution costs. Because it’s the cost of distributing what we’ve created!
But how exactly does this distribution happen? And what are costs involved? Because it doesn’t sound that simple. We saw yesterday that Huel had 914,000 customers in 2022. And the average customer ordered 1.72 times. So that’s ~1.6m orders in the year. Which works out to ~4,300 orders a day! I’m not sure about you - but 4,300 orders a day seems like quite a lot of work to sort out!
Well, do Huel sort out all these orders themselves? Absolutely not! It would cost so much to build their own warehouses - like we saw Tesco have - to store the products. And then the cost of employees to pick and package the products. Instead, Huel partner with a logistics expert firm, Kuehne + Nagel, who take care of the distribution side of things. And Huel will pay them a fee for their service.
So, what actually happens? Well, after Huel’s products are blended together at their manufacturing facilities around the world. They’re taken to distribution centers run by Kuehne + Nagel. At these centers, Huel’s products are stored, ready to be ordered by customers. And once orders come in, Kuehne + Nagel employees package the orders and distribute them to their customers’ destinations.
Currently, Huel work with Kuehne + Nagel on 4 distribution centers. In the UK, Luxembourg, Poland and most recently, Japan! I don’t think it’s publicly available information who the distribution partner is in the US! But some of you may be thinking - why are these distribution centers so spread out?
Well, it’s because Huel don’t want to be far from their customers! If an order comes in from Japan but the closest distribution center is in the UK. It’s going to take a long time for the Japanese Hueligan to receive their Huel! And as Huel continues to grow globally, I’m sure we’ll see more distribution centers closer to consumers!
Fuelling Huelling Growth Through Facebook Ads…
Okay, so we’ve made the Huel products. We’ve packaged them. And they’re ready to be distributed by Kuehne + Nagel. But how are we going to get customers for our Huel products in the first place? Yup, you guessed it - we’ve got to do some marketing! Now, whilst Huel’s annual report doesn’t tell us how much the company spends on marketing. I found this article which claims that Huel spent a pretty hefty £18m on just Facebook Ads in 2019!
But hold on! Huel in 2019 made £50m in revenue. So that would mean that Huel spent 36% of their revenue in 2019 in just Facebook Ads! Can that be right?! Most consumer-facing companies spend ~10-15% of their revenues on marketing. 36% looks a bit too high doesn’t it…?
Huel’s advertising spend = Shaquille O’Neal. Normal advertising spend = Shaq’s girlfriend!
Well, yes 36% is very high. But for a young startup that’s solely focused on growth. On getting new customers. 36% actually doesn’t seem that high! Especially when you consider that the £18m they spent led to 2.5 billion impressions on Facebook. And 2019 saw Huel’s revenues grow 93%! Would revenue growth have been that high without those Facebook Ads attracting new customers - probably not!
No Profit, Who Cares?
Okay, so just before we wrap up. Let’s go through what Huel’s profitability looks like after taking away raw material costs, distribution costs and marketing costs from their revenues.
Well, the chart below shows us that Huel’s Adjusted EBITDA margin was negative in 2022 at -1%. This means that the company wasn’t profitable in 2022. And it was barely profitable in 2020 and 2021 too. But does this really matter?
And no, it doesn’t really matter at all! But why? We’ve just covered companies like Nvidia, TSMC, ASML and McDonald’s. Who all had margins above 30%. So why doesn’t it matter if Huel aren’t making any margin!
Well, as we saw with Deliveroo, and as we’ll see tomorrow. Profitability isn’t the aim right now for Huel. Startups often lose money. In fact, some are encouraged to lose money to prioritise growth! Amazon’s Jeff Bezos was initially viewed as a lunatic for running Amazon without caring about profits. But his strategy has been adopted by many founders since. With the hope that their startup will at some point have enough customers and revenues. That they can benefit from economies of scale to drive profits in the long run!
7th Jun 2023
And that’s a wrap for today! I hope you enjoyed diving into Huel’s cost structure. Tomorrow we’ll look at how Huel survives without any profits. And whether we think Huel can reach profitability at some point soon!
Have a fabulous day!
The Business Of Team