Dive Brief:

• Kroger should join Albertsons in acquiring a meal kit company, Barclays analyst Karen Short wrote in a note to investors. The move, she argued, could be the sort of “outside-the-box” thinking the struggling retailer needs right now.
• Short noted the grocer’s own Prep + Pared meal kit line “has taken a fairly slow, home grown approach,” and that a third-party company would allow Kroger to scale up quickly in the growing category, add a direct-to-consumer option, and add valuable technical and marketing know-how for Kroger.
• The move would also help Kroger in its mission to expand beyond the traditional grocery channel, and could happen for a relatively modest price. “Given the stepped-up level of competition from both traditional and non-traditional competitors, thinking ‘outside-the-box’ (similar to Walmart’s acquisition of Jet.com) will be increasingly essential for it to thrive in a rapidly changing landscape, and we see a meal kit service company acquisition potentially generating a high ROI in the long run,” Short wrote.

Dive Insight:

With its stock price down 40% on the year thanks to increasing competition and pricing pressure, Kroger may need to make a bold move if it hopes to break out of its slump. Would a meal kit company do the trick?

The grocer has been slowly ramping up its Prep + Pared meal kit line, recently expanding to 25 Ralph’s stores in California. It’s testing the market right now, but it may not be growing quickly enough to keep up with demand. A third-party meal kit company would add technical, supply and marketing expertise in the high-growth category, and could quickly ramp up store availability. It would also give Kroger a direct-to-consumer meal kit offering, which carries potential risks (high marketing and customer acquisition cost) as well as rewards (high demand).

Assuming Kroger could tackle the high marketing costs while investing in innovation, the home delivery option could be valuable, and a nice complement to in-store sales. This would also give Kroger another revenue stream outside the grocery channel. Barclays analysts estimate that Plated, which Albertsons acquired this week for an undisclosed sum, brings in $200 to $300 million annually.

In this new Amazon/Whole Foods reality, major retailers are under increasing pressure to evolve their online presence — and quickly. Kroger, long known as a forward-thinking grocer, has a successful click-and-collect program and is testing home delivery in certain markets. But that may not be enough. According to Short, a meal kit company could bring some much-needed fresh ideas to Kroger. The company’s misfortunes, she writes, reflect a “fluid, dynamic” market packed with new concepts and low prices.

The main challenge for Kroger and other grocers considering a meal kit acquisition, is the equally fluid and dynamic conditions that exist in that market. Spurred by a crowded market and a troubled business model — underscored by Blue Apron’s recent struggles — meal kits are in a state of transition. There are new models emerging, including celebrity-backed kits from Oprah and Martha Stewart. Manufacturers like Kraft and Nestle are investing in the trend, too.

The next few years will likely see an explosion of innovative online and in-store meal kits, meaning grocers like Albertsons will have to fight to stand out in yet another crowded market.