Goodfood – bad business

 
I’ve tried Goodfood meal kit once somewhere in 2018.
Food was good 😀 , no problems with delivery, but I cancelled my subscription right after my promotion period ended.

Mostly because of the following two reasons:

• Price.
  The full price of one Goodfood serving is similar to the price of a food court or some simple take-out restaurant. But with the Goodfood meal kit, you have to actually cook!
  On top of that 1 serving was sometimes not enough for me, so I had to eat 2.
• Excessive packaging.
  Starting from the insulated box, which is half cardboard and half aluminum foil (requires extra steps to recycle properly) and finishing with the salt that was packed in a separate plastic bag. Yes, a whole 5 grams of fancy black salt was packed in a separate plastic bag. Basically everything was packed in plastic.
  In the end, the amount of waste after just one meal kit was enormous. Hopefully, they’ve done some improvements on that in 2022.

While I’m sure that any meal kit business has and will always have its fans, I believe it is a very niche product and you can’t make big money here.
It was a trend when it started and everyone was eager to try it, but it is not a mass-market product.
Even with the addition of on-demand grocery delivery, I still have a negative view of Goodfood business and stock price.

When COVID came, stock prices of many unprofitable businesses, including Goodfood went up.
Even though restaurants closures and lockdowns gave a boost to Goodfood sales, they were not able to make any profit during this period.
Goodfood is a Canadian company, so all numbers are in Canadian dollars.

 
There are lots of problems with Goodfood:

1. Since the beginning of 2021, the number of Active Customers and Revenue stopped growing.
   
   As seen on Goodfood Q2 2022 Presentation

   At the same time management is boasting about growing on-demand customers.
   The majority of those on-demand customers (more than 50% according to management) are new clients and most likely they are signing up because of huge incentives, namely 60 dollars in free groceries coupon, that I have received twice already in my mail. And once I’ve received an 80-dollar coupon from Metro, so… Goodfood promos are not even the best.
   Customers are considered active if they made any purchase in the last 3 months. Unlike with meal kit where you agree to be charged regularly and it is an adventure to cancel your subscription, there is no commitment with on-demand subscriptions, you don’t like it, just stop buying.
   So, who is really active customer and who is not?

2. FOOD is burning cash like crazy, at the same time issuing more shares and debt:
   2018: 4M shares at $2.50 = $10M
   2019: ~7M shares at $3.50 = ~$25M, ~1.4M of those shares were dumped by insiders
   2020: $30M in debentures
   2020: ~4M shares at $6.05 = $25M, plus ~1.6M (another $10M) shares were dumped by insides again!
   2021: 4.8M shares at $12.50 = $60M
   2022: another $30M in debentures
   Total is $190M+ in 4 years.
   The last offering of 4.8M shares at $12.50 is really epic, considering that the share price is below $2.50 at the moment.
   Also, about 2022 Debentures, my poor financial knowledge doesn’t allow me to completely understand where this interest rate is coming from, but I think it is high:

   The conversion option, net of related issuance costs and deferred income taxes, has been recorded in
   shareholders’ equity for an amount of $4.5 million. Factoring in the 2022 Debentures issuance costs, the
   effective interest rate on the Debentures is 12.6%.

3. I’m definitely not an expert, but even I can see some troubles with FOOD‘s Balance Sheet:
   As of Q2 2022, Goodfood has ~$106M in Cash, no problemO here.
   But Accounts receivables are ~$4M and Accounts payable are ~$45M!
   11 times higher! Today’s difference between Accounts receivables and payable gives a hint about what kind of profit or loss the company will have next quarter.
   And Goodfood is sitting on another $40M of possible future losses.
   Total shareholders’ equity is $65.2M which translates to $0.87/share. And this is a very optimistic number because in case of bankruptcy you will mark down Inventories to $2M-$3M as food has tendency to rot and mark down Fixed assets to maybe $15M, cause you won’t sell this furniture any higher.
   Ah, and forget about $4M of Intangible assets.
   In the end, you get ~$200M in Total Assets vs $255.5M in Total Liabilities, ie. negative equity.
   
   Goodfood Q2 2022 Financial Statements

 

4. Competition is big in the meal kit business and even bigger in groceries.
   As I’ve mentioned before, I’ve already received better promos from other companies, $80 from Metro vs $60 from Goodfood.
   But on top of competing with all the major grocery chains in Canada, there is a new player coming to the market:

   SkipTheDishes, Canada’s largest and most trusted food delivery network, today announced the nation-wide expansion of Skip Express Lane, its innovative grocery and household item delivery service. The rollout of Skip Express Lane across Canada will see the launch of 38 new fulfillment centres by mid-2022 from coast to coast, delivering local favourites to Canadians in 25 minutes or less in a brand new service that reinforces Skip’s leadership in the food delivery space.

5. FOOD is firing employees which turns into lower quality of the service, just read reviews on Google Maps.
   Here is a headline from the paywalled article dated April 7, 2022:

   The Montreal-based meal-kit company Goodfood has seen three rounds of layoffs in the last six months. As it struggles with inflation, supply-chain issues and labour shortages, this week it laid off 70 staff members and is shuttering its Ontario distribution centre.

   Laying off employees because of labor shortages…
   It seems to me, that journalist from The Logic has some problems with the logic!

6. “Rightsizing the organization”.
   Apparently meal kit subscriptions are not important and not a growth story for Goodfood, and it is not a problem, because they have always planned to be an on-demand grocery delivery service! 😮
   According to departed Director Hamnett Hill:

   Our plan has always been to build a national grocery brand and delivery infrastructure by initially winning the subscription meal-kit market, once Canadians began to order groceries online.

   As if there are not enough grocery brands already, national, international or local. Even relatively small local Montreal grocery such as Branche d’Olivier can do delivery.
   OK.
   Before Goodfood had weekly subscriptions, which means 4 deliveries a month or 12 deliveries a quarter.
   Now they are moving to an on-demand service which gives 8-9 deliveries a quarter according to CEO:

   …And then I think on your second comment, if you want to kind of triangulate towards the revenue per customer per quarter, it’s eight to nine orders per customer per quarter…

   So, we are coming from 12 to 9 deliveries a quarter.
   Meal kits were per se the same groceries packed with cooking instructions, thus making them a value-added product with a higher margin.
   Groceries on the other side well, just groceries, a low margin business, as far as I know.
   Rightsizing indeed.

7. That might be like the most important problem, that will overshadow all other problems: high inflation and thus rising interest rates.
   It will hit (already hit) all the companies, but unprofitable, like Goodfood, the most.

If I must give a rating to TSX:FOOD stock, my rating would be “DO NOT BUY“.
If things turn around, you will always have a chance to purchase shares.
If you are already a holder, you can still hold and gamble, unlike oil futures, the lowest the stock price can go is zero. 🙁