How is it that the nation’s leading direct to consumer (DTC), prepared meal service Freshly, sold to Nestlé in 2020 for up to $1.5 billion, only to close its doors just over two years later?
Since late December 2022, the website has declared: “It is with a heavy heart that we announce the Freshly meal delivery service has ceased operations.”
So what happened?
Freshly endured the same profitability challenges that all DTC meal services face.
But in the end, Nestlé’s bet on Freshly was based on one fundamental belief…
…a belief that turned out to be wrong.
Paul Graham, co-founder of Y Combinator, one of the world’s most well-known startup incubators, insists that:
“The very best startup ideas tend to have three things in common: they’re something the founders themselves want, that they themselves can build, and that few others realize are worth doing.”– Graham, Paul. “How to Get Startup Ideas.” Paulgraham.com, Nov. 2012, paulgraham.com/startupideas.html. Accessed 24 July 2023.
From the jump, Freshly appeared to check all three of these boxes.
‘Something the Founders Themselves Want’
While juggling fast-paced, early careers in investment banking and the restaurant industry, CEO and co-founder Michael Wystrach found himself struggling to eat well. When he sought out an easy, healthy and cost effective prepared meal offering in the market, he came up empty.
So, he decided to hack together his own solution. Wystrach worked with a physician who was a family friend to mock up an initial menu and employed the chefs at his restaurant to help prepare the meals.
He noticed a difference in his health, weight and mood almost immediately. Friends and family began to take notice and soon enough they were all requesting his prepared meals.
Recognizing an opportunity, Wystrach decided to send an email blast to about 100 friends in the immediate Tucson, Arizona area.
The next day he had over $2,000 in orders. He was on to something.
In a very real sense, Freshly was born from Wystrach scratching his own itch.
Box #1, check. ✔
‘Something That They Themselves Can Build’
Because Wystrach grew up on a ranch and spent the majority of his life working at the family restaurant, The Steak Out, he knew just enough about the food industry to be dangerous.
He also held a finance degree from the University of Arizona and had accumulated over 14 years of prior business and investing experience.
Part of that experience included attempting to open a second ‘The Steak Out’ restaurant location in Dove Mountain, Arizona. His timing could not have been worse. It was late 2007, and the Global Financial Crisis had just begun.
The massive development plan in the Dove Mountain area that promised 100,000 new homes and further commercial development ceased operation overnight. As a result, the restaurant was fighting for its life from Day 1.
Miraculously, he managed to keep the doors open for over 4 years through various side hustle ideas and gimmicks. According to Wystrach:
“One of the… gimmicks that I had tried was delivering some of our healthy meals directly to people’s homes. While it wasn’t successful enough at the time to keep the restaurant open, I knew there was something there.”– Wystrach, Michael. “Bankrupt Restaurant to $1.5 Billion Company in 7 Years.” Medium, 4 Jan. 2021, mikewystrach.medium.com/bankrupt-restaurant-to-1-5-billion-company-in-7-years-f46255e250d9. Accessed 24 July 2023.
And oh yeah, the physician family friend, Dr. Frank Comstock M.D., who helped develop the initial menu? He had a son named Carter Comstock who was also deep into health and fitness.
Previously a lifelong friend of Wystrach, Carter Comstock would quickly join Freshly as a co-founder.
The foundation of the skills, tools and experience required to turn Freshly into a success were all there.
Box #2, check. ✔
‘Something That Few Others Realize Are Worth Doing’
A number of direct-to-consumer (DTC) meal kit delivery companies such as Blue Apron, HelloFresh and Plated all entered the US market in the same year as Freshly in 2012.
Prior to this time, there were virtually no existing US competition in the DTC meal space. Moreover, Freshly was offering something different – ready-to-eat, prepared meals.
To take it a step further, other companies that eventually did offer prepared meals, shipped their products frozen with dry ice. Freshly pioneered the space of refrigerated, prepared meals with gel packs.
Ultimately, in the early days, there were no other prepared meal services operating in the US at scale. Freshly was the first of its kind.
Box #3, check. ✔
From inception in 2012, to being purchased by Nestlé in 2020 for up to $1.5 billion, only to close its doors just over two years later in January 2023, Freshly had one hell of a ride…
Headquarters Move to New York
Early prospective investors Highland Capital Partners and Bob Davis convince the Freshly team to move their headquarters to New York (from Phoenix, AZ) to take advantage of their connections there.
July 16, 2015
February 1, 2016
Freshly Now Available in 10 States
With the new addition of Texas, Freshly is now available for delivery in 10 states (Arizona, California, Colorado, Nevada, Washington, Oregon, Idaho, Utah, New Mexico and Texas).
April 25, 2016
July 12, 2016
January 7. 2019
October 30, 2020
Nestlé Acquires Freshly
Nestlé USA acquires Freshly for up to $1.5 billion — $950 million, plus an additional $550 million based on future growth milestones. Freshly is now available in 48 states and shipping over 1 millions meals per week.
December 15, 2020
Freshly Launches FreshlyFit
This is the company’s first dedicated product line focusing on “a lower-carb, protein-powered nutritional profile to help fuel workouts, optimize recovery, maintain muscle mass, and support weight management”.
February 11, 2021
5th and Largest Largest Dedicated Order-Assembly Facility Opening
The 134,000 square-foot facility is opened in Austell, Georgia. The company has similar facilities in California, New Jersey, Maryland and Arizona.
November 21, 2022
January 21, 2023
Freshly Ceases Operations
In late December 2022, the Freshly website is updated to announce they will be closing down. Final orders are accepted through January 17, 2023, with the final day of shipping set for January 21, 2023.
Why Did Freshly Shutdown?
As you can see from the timeline, everything appeared to be going great…until it wasn’t.
So, what happened to Freshly?
Nature of the DTC Meal Sector
It’s no secret that the direct to consumer meal sector is a slog and the road to profitability is long and winding.
I think any honest post mortem needs to start here.
Freshly was private prior to their sale and therefore their exact finances are unknown. That said, publicly disclosed figures from similar businesses in this same sector help paint the picture.
Take Blue Apron for example. Most recently, their 2022 adjusted EBITDA was a loss of $79.3 million, compared with a loss of $39.2 million for 2021.
Since their start in 2012, Blue Apron has yet to reach profitability.
And they are not alone. Plated was ultimately acquired by Albertsons Companies in 2017, but never reached profitability and was discontinued in 2019.
Sure, these are both meal-kit businesses and the economics are not apples to apples with a prepared meal service like Freshly. But inflation, rising logistics costs, low average order values and high customer acquisition costs plague all DTC meal businesses over the long run.
It’s no wonder that the senior management at these companies unanimously emphasize customer acquisition and growth over profit.
But when growth starts to slow and customer churn starts to accelerate, all hell breaks loose.
Post Pandemic Headwinds
Nestlé’s North American CEO, Steve Presley was convinced that the eat at home wave in the United States would persist post pandemic.
This was the fundamental bet Nestlé made when acquiring Freshly.
During an interview with CNBC on October 30, 2020 (the same day as the acquisition) Presley was asked whether or not the US was at a “peak eat at home moment”. He responded, stating the following:
“I think this trend will stick. It’s not going to turn around in 6 months or even immediately when there’s a vaccine or better therapeutics available. I think we’re in a period where we’ll see this growth stay for a sustained period of time.”– “Nestle USA Acquires Meal Delivery Company Freshly.” Www.youtube.com, 30 Oct. 2020, www.youtube.com/watch?v=mvAo3JrVrmg.
Here’s a look at the change in the monthly average of OpenTable U.S. restaurant bookings from February 2020 to September 2022, as compared to the same month in 2019…
To put in bluntly, Presley turned out to be wrong.
Six months following his interview, restaurant bookings had not quite returned to pre-pandemic levels, but they had bounced back in a big way.
During an investor seminar in late 2022, Mark Schneider, Global CEO at Nestlé, ultimately conceded that “… customer retention did not maintain the levels we saw during the pandemic and hence, the narrowness of this business case became so much more apparent.”
There is no doubt both Wystrach and Comstock would have prefered a different outcome for the company they spent nearly a decade building.
But the timing of their sale to Nestlé could not have been better.
Wystrach has already moved on to his next adventure at the Charlotte-based petcare startup, Petfolk. The company was founded in 2019 by none other than Audrey Wystrach, Michael’s sister!
Meanwhile, Comstock has become an active startup investor and advisor to other founders.
Will Factor succeed where Freshly failed?
Only time will tell…
Keith X. Donovan
Hey, I’m Keith! Since 2011, I’ve been working for and with startups. More recently, I’ve founded a few websites and rediscovered my love for storytelling. Startup Stumbles is where I get to fuse these two passions. I hope you’ll discover what I have – that failures are often far more informative and interesting than accomplishments.