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Boxes of Goodfood products are readied for shipping in Montreal on July 14, 2020. The seven-year-old company is now taking aim at a much bigger market: online groceries.Christinne Muschi/The Globe and Mail

Goodfood Market Corp. helped popularize the meal-kit business in Canada, got a sales boost during the pandemic and reached $100-million revenue per quarter this year.

Now the seven-year-old Montreal company is taking aim at a much bigger market: online groceries. On Tuesday, Goodfood launches a one-hour delivery service to high-density markets starting in Toronto and Montreal.

It’s a key step in its two-year-old strategy to expand beyond meal kits and compete directly with Canada’s food retailing giants in a fast-growing segment that’s up for grabs.

“The online grocery industry is expected to grow eight times faster than the overall grocery industry” and reach $25-billion in annual sales by 2025 – about 10 times the size of the meal-kit market, Stifel GMP analyst Martin Landry wrote in a note last week. “Goodfood has a window of opportunity left open by the national grocery chains which are ill-prepared to face the online shift of their industry.”

The service is launching amid mounting questions about further growth in the meal-kit space, which is dominated in Canada by Goodfood and Berlin-based HelloFresh SE.

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Orders for meal kits – packages of ingredients shipped with cooking instructions – and prepared meals, which Goodfood also sells, rose in popularity during the pandemic. But Goodfood’s growth has tailed off with the loosening of pandemic restrictions. In Goodfood’s third quarter, ended May 31, it reported its first decrease in active subscribers, a 0.6-per-cent drop to 319,000 from second-quarter levels. Goodfood’s stock is down 40 per cent this year.

“The meal-kit opportunity in Canada has largely been addressed, in our view,” RBC Capital Markets analyst Paul Treiber wrote in a recent note.

Moving beyond meal kits has always been part of the plan, said Goodfood’s 33-year-old co-founder and chief executive officer, Jonathan Ferrari, a former investment banker.

“When we started Goodfood, our intent was always to one day fulfill the full grocery shopping needs of our customers, and meal kits were for us what books were to Amazon,” he said in an interview.

“It’s one of those David and Goliath type stories where it would be easy to assume the big players are better equipped to win, but we think we have found a unique positioning for this business, and we’ll be able to capture a significant amount of the dollars transitioning” to online sales.

Goodfood’s strategy, centred around winning over millennials, includes offering its “Goodfood WOW” private-label products modelled after the offerings of Trader Joe’s and Marks and Spencer. It now has 1,000 available products for sale; the goal is to reach 4,000. Private-label brands come with much higher gross margins than national brands.

Mr. Ferrari said he believes groceries can increase to 20 per cent of Goodfood sales in its current fiscal year, double levels from last year.

The company has invested in capacity to handle same-day deliveries in key markets, starting in Montreal, Toronto and Vancouver, during the past 13 months. The service offers customers the ability to order unlimited grocery deliveries for $9.99 a month as long as each order totals $35. Further investments to support one-hour turnaround in dense urban markets will cost about $200-million over three to five years.

“We think if we’re able to get our meal kits and grocery products to our customers faster than the time it would take them to go to the grocery store and come home, we think that will be the next big wave of adoption,” Mr. Ferrari said.

A recent consumer survey by Stifel GMP suggests more than 60 per cent of customers offered deliveries within two hours or less would be willing to change grocery retailers, while 85 per cent of respondents said they saw value in having online grocery orders delivered within two hours.

But even grocery giants are still chasing profitability when it comes to e-commerce. Loblaw Cos. Ltd., whose online business is dominated by click-and-collect orders for in-store pickup, faced some labour-inefficiency challenges during the pandemic as it chased the spike in volume. More recently, the company has used batch picking by department, as well as an app that helps to allocate labour during pickups, to make order fulfilment more efficient. It is has also tested an automated microfulfilment centre in Toronto to open up more order slots.

Sobeys owner Empire Co. Ltd., meanwhile, has partnered with British-based Ocado Group, which provides automated picking technology at fulfilment centres for home deliveries. Sobeys launched its online grocery service, Voilà, in the greater Toronto area in the summer of 2020, and plans to open four fulfilment centres across Canada, including one that will launch the service in Quebec and Ottawa soon. Metro Inc. has built a significant home delivery business, and has also stepped up plans for click-and-collect services.

Investors aren’t betting on a David vs. Goliath outcome for Goodfood yet. Goodfood’s expansion comes with “higher perceived risk related to increasing investments to support grocery/delivery capabilities,” National Bank Financial analyst Ryan Li said in a recent note. Mr. Landry at Stifel GMP said it’s not clear how much Goodfood needs to spend to raise awareness about its grocery offerings, adding investors attribute “little to no value” to the grocery business yet.

Mr. Ferrari is determined to deliver. “We’ll be selling more meal kits a year from now than we are today,” he said. “But the way in which consumers will be receiving those meal kits with groceries, that’s the game-changing part and where we think we can build $1-billion-plus in sales from this strategy.”

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