Rocket Internet SE
has mastered the process of identifying promising technology startups—and then starting copycats in other countries.
In nine years, the Berlin-based company, one of Europe’s highest-profile tech companies, has launched about 100 online businesses in 110 countries.
But questions remain about whether many of those ideas—such as a meal-kit service called HelloFresh—will ever be profitable businesses. Rocket said Thursday that HelloFresh and five of Rocket’s other biggest portfolio companies reported a combined loss of €210 million ($235 million) for the first six months of 2016, down from a €300 million loss in the same period last year. The loss came despite another year of strong revenue growth.
Company officials say Rocket’s best businesses are likely to turn a profit soon enough. Investors cheered the narrowing losses, sending Rocket shares up 6.8% in Europe on Thursday. “We are on track to meet our profitability targets,” said Chief Executive Oliver Samwer.
Still, the red ink, and a series of recent valuation markdowns for some of Rocket’s biggest and most promising companies, have spooked investors. Rocket shares are down 27% so far this year, and worth about half their initial public offering price in 2014.
Founded by Mr. Samwer and his two brothers in 2007, the business monitors tech startups world-wide for others to copy. Executives then assign a team of roughly 20 engineers, marketers and managers to launch clones. Rocket holds stakes in the copycats and focuses on a few areas, including selling food, furniture and fashion over the internet.
Mr. Samwer’s strategy is for his startups to expand for five to nine years before becoming profitable.
Illustrating the challenge of that strategy, though, is HelloFresh, a meal-ingredients delivery company. Rocket said Thursday that HelloFresh losses more than doubled to €45.7 million in the first half of 2016. Rocket’s chief financial officer, Peter Kimpel, blamed the cost of the startup’s expansion in the U.S.
HelloFresh’s six-month revenue more than doubled to €291.5 million from the previous year.
HelloFresh is five years old and competes with companies such as Blue Apron and Plated in the U.S. It also operates in Australia and several European countries. A clone of a Swedish company, it delivers weekly boxes with gourmet dinner recipes and fresh ingredients. Next week’s menu includes bayou-spiced rockfish.
At one point, HelloFresh was one of Rocket’s most promising investments, with executives planning for an IPO last November, valuing the company at the time at €2.6 billion. Rocket pulled those plans, citing unfavorable market conditions.
In an interview Thursday, Dominik Richter, HelloFresh’s global chief executive, said the company’s current focus is on winning market share. He added that he believes HelloFresh is still “structured in a way to become a public company eventually.”
Its biggest struggle is the same as that for many startups: hitting the sort of critical mass that would allow it to throttle back on expensive marketing. Free of that significant cost, the business, in theory, would be poised to capture the profit baked into its economic model.
At HelloFresh, here is how that breaks down: In the U.S., its cheapest nonvegetarian box contains ingredients for six servings over the course of a week, and costs $69. Costs for preparing and delivering the box come to about $30 to $40, according to three former employees. That breaks down to roughly $15 for the food and $3 for the packaging and ice packs for the fresh meat and seafood. Another $3 goes toward labor, and as much as $15 for delivering the box. Those numbers give as much as $33 of profit on each box.
But for HelloFresh to get its product noticed in New York in recent months, it has offered $40 off the first box. In the U.K., it offers £25, or nearly $33, off a £39 box and gives subscribers three cards that they can give to friends—for a completely free box. It is also advertising heavily online. HelloFresh ran a subway ad campaign in New York. In London, it hands out discount cards at subway stations.
Based on its U.S. prices, customers need to be willing to pay $11.50 a serving and have a stable-enough schedule to commit to using the boxes to cook dinner several times a week, before the delivered ingredients spoil.
‘We are on track to meet our profitability targets.’
Ed Boyes, who became co-CEO of HelloFresh’s U.S. operations earlier this year after running its U.K. operations for four years, declined to comment on the economics of each box.
He said the marketing expenses pay off.
“Those initiatives are profitable after a defined period, and we continue to add an increasing number of new customers,” said Mr. Boyes.
He said it was cheaper to buy food from HelloFresh than from the grocery store, because his company sends customers pre-proportioned ingredients for the dinner. “We’ve got a very clear idea of…our customer base,” Mr. Boyes said. “It’s really a suburban audience. People in settled routines. It’s people who need help to get healthy food on the table.”
Write to Stu Woo at Stu.Woo@wsj.com