The meal-kit delivery service leads in Canada and has plenty of room to grow as consumers have been slower to adopt the meal subscription service concept.

(Bloomberg)—As meal-kit companies like Blue Apron Holdings Inc. struggle in the U.S., Goodfood Market Corp. is betting that the nascent Canadian market offers better growth prospects with less potential threat from e-commerce giants like Amazon.com Inc.

“The idea that we are in the early days of that gigantic industry building is absolutely true,” Jonathan Ferrari, CEO of Montreal-based Goodfood, said in a phone interview.

Canadians have been much slower than Americans to adopt meal kits, subscription services that offer the fresh ingredients and recipes needed to make meals at home. GMP Securities analyst Martin Landry estimates the Canadian industry lags its American counterpart by two to four years, with household penetration of 0.5% compared with 1.5% in the U.S.

“In our view, with higher expected growth rates, a less competitive and more consolidated market, Canada is more attractive than the U.S.,” Landry wrote in a recent note initiating coverage of Goodfood, which is the largest meal-kit provider in Canada. He rates Goodfood a speculative buy with a C$2.75 price target, 35% above current levels.

Goodfood was taken public through a reverse takeover on June 7 by Mira VII Acquisition Corp., a capital pool company.

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Ferrari estimates that three-year-old Goodfood currently has 30% to 40% of the Canadian market even though it’s not yet available in the western half of the country. The company’s active subscriber base hit 31,000 in the quarter ended Aug. 31, up 35% from the prior quarter and up 840% from a year earlier.

New plants

Canada can eventually support 1 million to 1.5 million subscribers, and Goodfood can maintain 30% to 40% of the market, indicating a potential subscriber base of 600,000, Ferrari estimates. GMP’s Landry said the company could achieve annual revenue in excess of C$200 million by 2022, indicating a compound annual growth rate of more than 50%—an estimate Ferrari called “realistic.”

To meet this demand, Goodfood is building a new Montreal processing facility and plans to expand into Western Canada in the next six to 12 months, allowing for “pretty significant gross margin improvement” through scale and automation, Ferrari said.

The meal-kit business is a risky one, with high customer turnover and a looming threat from Amazon. The e-commerce giant filed a trademark application for prepared food kits in July, sending shares of New York-based Blue Apron tumbling as much as 12%. Blue Apron’s shares have lost 48% from their offer price in June, while Goodfood’s are up 17% in the same period. Amazon is No. 1 in the Internet Retailer 2017 Top 500 and Blue Apron is No. 197.

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“The Goodfood story is attractive and different than Blue Apron for several reasons,” including a lower cost structure, less intense competition, higher average revenue per user, better customer retention and lower customer acquisition costs, Landry said.

Ferrari isn’t worried about Amazon, which is reportedly planning to offer its grocery delivery service in Canada later this year. Being fully funded will allow the company to take advantage of the opportunities, he said.

“I think the idea that dollars are going to shift from the offline world into the online world, specifically in the grocery space, is going fuel amazing opportunities for companies like ours,” he said.

Goodfood has competitors within Canada, including grocery chain Metro Inc., which in August bought a majority stake in meal-kit provider MissFresh for an undisclosed amount.

Ferrari questioned the ability of big companies like Metro to stay on top of such a fast-changing industry.

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“When you’re this very large organization you have definitely some strengths and some resources, but on the flip side it’s very difficult to be nimble,” he said.

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