Goodfood Market Corp

TSX:FOOD

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Goodfood Third Quarter of Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that questions will be taken from financial analysts only. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, July 13, 2022 at 8:00 a.m. Eastern Time.

Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation.

I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood Chief Executive Officer. Please go ahead sir.

[Jonathan Ferrari, Chief Executive Officer]

Thank you. [Foreign Language] Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the third quarter of fiscal 2022, ended this June 4. I'm happy to be joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer; and Jonathan Roiter, Chief Financial Officer.

Our press release reporting our third quarter results was published earlier this morning. It can be found on our website at makegoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated.

I'll now turn to Slide 3, which outlines the progress and developments relative to Goodfood’s three key value-creating drivers. In recent calls, we outlined the three key strategic initiatives our execution is focused on and that will drive long-term shareholder value. One, we are growing on-demand active customers. Two, we are expanding our on-demand coverage and density by launching micro fulfillment centers to further our penetration. And three, we are demonstrating our absolute commitment to profitable growth through the rigorous execution of Project Blue Ocean.

Expanding on these priorities, firstly, we continue to build momentum in on-demand active customer growth as we observed these past three quarters. We now count 38,000 on-demand active customers, up 41% from the 27,000 at the end of the second quarter. As we continue to roll-out our marketing initiatives and build coverage, we aim to increase both penetration of Goodfood on-demand and the frequency of orders placed by our shoppers.

Moreover, our on-demand growth continues to be supported by a broader offering as we increase the selection of our differentiated products and continue to rapidly deliver these delicious Goodfood products. Secondly, we continue to expand our footprint of on-demand micro fulfillment centers in the third quarter, reaching a total of nine currently.

We launched three new MFCs, our low CapEx micro fulfillment centers in Toronto and Montreal, all strategically located near our customers’ homes. These new centers allow us to both increase the availability of Goodfood on-demand delivery, as well as augment the density of our deliveries to further enhance their unit economics, which has allowed us to reach over three deliveries per hour in multiple MFCs and bring delivery costs to under $9 in these centers.

Thirdly, and most importantly, we continue to focus on setting up Goodfood for profitable growth with an absolute commitment to achieve consistent and significant profitability. To chart our path to profitability, we established Project Blue Ocean, a series of initiatives to return to profitability on an adjusted EBITDA basis in the first half of fiscal 2023.

From that solid foundation, we will be set up to grow profitability for the years to come. Project Blue Ocean is in full swing and already yielding results. This quarter, we've improved gross margin by 220 basis points and by 330 basis points since the fourth quarter of fiscal 2021. This improvement has translated into our adjusted EBITDA improving by nearly $30 million on an annualized basis since the fourth quarter of fiscal 2021.

While we are very pleased with [that] [ph] result, particularly in the current difficult operating conditions and extraordinary inflation environment, we are extremely focused on executing Project Blue Ocean with a clear path to profitable growth in the quarters to come.

On that note, I'll turn it over to Jonathan Roiter to review our financial performance in detail.

[Jonathan Roiter, Chief Financial Officer]

Thank you, Jonathan, and good morning, everyone. I will now turn to Slide 4, which provides details on our top line performance. Quarterly asset customers during the third quarter were 211,000 compared to 246,000 in the second quarter of fiscal 2022. Net sales were $67 million for the quarter, an 8% decline compared to last quarter.

As we embarked on executing Project Blue Ocean, our focus on achieving profitable growth in the near-term led us to focus on our most profitable customer segments, as well as our most profitable product lines, while enabling us to optimize our customer incentive structure. As such, our active customer count declined, partially offset by 7% increase in net sales for active customer versus Q2 and entirely offset by higher margins per customer per quarter.

Returning to top line growth is also key component of Project Blue Ocean. As expected in the first quarter of fiscal 2023 with our initial focus being on our highest value existing customers, supporting our commitment to achieving profitable growth faster.

As mentioned, we also reached 38,000 households using Goodfood on-demand, a 41% growth since the second quarter and 192% growth since the January disclosure. As more and more customers discover the joy and flexibility of Goodfood on-demand combined with a seasonally strong back to school period of our weekly subscription offering, we expect active customers and orders to return to sequential growth in the fall quarter.

Please now turn to Slide 5, which looks at our profitability levels. Our profitability indicators improved on all levels this quarter with gross margin reaching 26.2%, a 220 basis point improvement compared to the second quarter. This improvement in gross margin was driven in large part by lower credit and incentive as a result of our targeted customer addition strategy [about] [ph] operating efficiencies in-part resulting from Project Blue Ocean.

These improvements when combined with continued reduction in SG&A, excluding depreciation and amortization, resulting in a $3 million adjusted EBITDA improvement or a 260 basis point adjusted EBITDA margin [has been] [ph] versus the previous quarter, cementing our commitment to profitability.

I will now move to Slide 6 for a review of our cash flows and capital expenditures. Cash flows used in operating activities totaled $14 million remaining stable, compared to the second quarter of fiscal 2022, a slightly larger net loss and lower contribution from net working capital were offset by higher depreciation.

Capital expenditures came in at $7 million, mainly investing and finalizing the build-out of our fulfillment network and technology. This represents a substantial and important reduction in capital intensity as CapEx is more than 50% lower than in the third quarter as we now have completed the vast majority of our infrastructure build-out to support Goodfood on-demand.

As outlined in the bottom of our slide on cash use, defined here as the addition of cash flow from operating activities and cash flow from investing activities has decreased by $11 million since the fourth quarter. This positive performance has been a result of improved profitability, better working capital management, as well as lower capital investment. As we continue to execute on Project Blue Ocean, we would expect to continue reducing our cash used in the coming quarters.

Lastly, we ended the quarter with cash and cash equivalents of $99 million, which continues to provide significant balance sheet flexibility to execute on our gross strategy. Before turning it back to Jon, who will provide additional details on Project Blue Ocean, I thought it'd be helpful to take a step back and summarize the significant progress we've made in improving our key profitability indicators since the fourth quarter of 2021.

The first quarter that began to see the volume deleverage driven by the relaxation of [COVID disruptions] [ph] and the reopening of the Canadian economy. Since then, we have grown our gross margin by 330 basis points. From an OpEx perspective, our SG&A of $29 million in the current quarter is over $8 million lower than the fourth quarter of 2021. That is a reduction of over $32 million on an annualized SG&A spend.

It's worth noting that this has all been done against the backdrop of record inflation and the launch of our industry leading Goodfood on-demand service, which now represents approximately 10% of our net sales. The work we have done on improving unit economics and reducing our fixed cost base is positioning us well to benefit from our expected return to quarterly sequential revenue growth in the first quarter of 2023.

So, on that note, I'll turn it back to Jonathan Ferrari to provide additional details on Project Blue Ocean, which includes the ongoing revenue gross margin and SG&A improvements we are executing.

[Jonathan Ferrari, Chief Executive Officer]

Thank you, Jon. I'll now turn to Slide 7, which outlines the key pillars of Project Blue Ocean. We're pleased with the improvements in profitability indicators achieved in recent quarters and are excited by our team's strong execution on this plan to date. Project Blue Ocean is built on three key pillars to achieve profitability and lay the foundation for profitable secular growth for years to come.

First, we are harmonizing our brand's value proposition, focusing on our existing customers and providing fresh delicious meals while tailoring our grocery assortment to customers' needs, by providing convenient and differentiated products. This will enable a much clearer value proposition to our existing and prospective customers and help build our second pillar.

Our second pillar of Blue Ocean, [consistent attracting] [ph] higher value customers. Our targeting, marketing spend, and incentive structure will aim to entice the very customers to whom this clear value proposition appeals. These customers have displayed more loyal behaviors with strong order rates and lesser churn.

Thirdly, we are aligning our operations, footprint, and cost structure to not only return to growth, but do so profitably. We've already begun streamlining meal kit operations and fulfillment to capture cost efficiencies and have also begun reviewing and right sizing our footprint to improve asset base effectiveness.

Overall, we continue to evolve and focus on our loyal customers ordering large baskets, enticing them for example to interact with both our weekly meal kit subscription and Goodfood on-demand to increase the average sales per active customer and continuing to offer the fresh, high quality meals and grocery products that the business was built upon, while leveraging Goodfood on-demand to improve convenience and serve customer use cases beyond weekly dinners.

I will now turn to Slide 8 to review how Project Blue Ocean translates into better financial performance, and a return to profitability. Since the fourth quarter of fiscal 2021, Project Blue Ocean has in part helped us improved profitability by nearly $30 million through SG&A and expense reduction and gross margin expansion.

In this next phase of the project, we are executing on key initiatives with direct top line and bottom line implications. We have revamped our incentives program and marketing focusing on loyal high value customers. Early in the fourth quarter, we also passed a near double-digit price increase in our meal kits, which has had limited impact on churn and likely limited impact on orders.

Moreover, we implemented supply chain and operational improvements such as reducing the number of ingredients sourced and limited and limiting the number of grocery products available to weekly meal kit subscribers. Other initiatives include the automation as part of our customer service and the review of our footprint, which has resulted in the consolidation of our breakfast production facility into our main Montreal facility with more consolidation likely expected in the near future.

In addition, focusing on strengthening on-demand economics along with growing our Goodfood on-demand penetration is expected to provide significant bottom line contribution bringing Goodfood to solid profitability levels. As we complete the review of our asset base and consolidate learnings from our existing footprint, we expect the fourth quarter to provide an opportunity to apply these learnings and delivery radiuses and times, automation, picking, technology and location enabling us to further improve profitability.

Finally, it is important to note that while we are committed to returning to profitability and growth in the coming quarters, our primary objective is to ensure we continue building a platform for long-term success and to invest in key people, technology, product portfolio, and efficient customer acquisition efforts.

As a result, in our pursuit to unlock and capture a disproportionate share of what we estimate can quickly become as traditional brick and mortar shopping is replaced with superior customer value proposition, a $30 billion market in on-demand grocery and meal solutions. The path to profitable EBITDA and positive cash flow will be achieved by balancing this growth and profitability.

Before opening up for questions, I would like to remind you that our fourth quarter is our seasonally slower quarter with the summer weather and travel influencing demand, particularly in our weekly subscription customers.

On that note, I will turn it over to the operator for the Q&A portion of this call.

[Operator]

Thank you, sir. [Operator Instructions] And your first question will be from Frederic Tremblay at Desjardins. Please go ahead.

[Frederic Tremblay, Desjardins]

Thank you. Good morning. Congrats on the sequential improvement in gross margin. I was just wondering if you could provide a bit of detail on the main drivers behind that on the gross margin side sequentially? Was it – what do you attribute to pricing versus other cost containment initiatives there?

[Neil Cuggy, President and Chief Operating Officer]

Hey, Fred, it's Neil. Thanks for the question. Yes. So, we – as Jon and Jon mentioned in the prepared remarks, we've been focused quite a bit on getting our gross margin back to historical levels. And a lot of the efficiencies that we've been able to see through Project Blue Ocean through some of the building changes and menu changes that we've been bringing forth has led to what you've seen printed this morning.

The price increase that Jon mentioned also was not really reflected in this quarter, so small price increase earlier in the quarter, but most of it will come in Q4 and subsequent quarters from there. I think, you know, we've been really happy with the execution of the team in these high inflation and challenging times, but continue to kind of look at any and all opportunities that we have.

[Frederic Tremblay, Desjardins]

Perfect. And on the SG&A line, I guess, focusing on the marketing side of things, I think you mentioned marketing efficiencies [in comment] [ph] during the slides, can you give us a bit more details about that, about your current marketing approach and maybe thoughts on marketing initiatives as we approach the back to school season as well?

[Jonathan Ferrari, Chief Executive Officer]

Definitely. So, we're primarily focusing on our most profitable customer segments and our most profitable product lines, right, in order to generate that improvement that we're seeing on ultimately the bottom line basis and set up profitable growth. So, from a marketing perspective, we're certainly seeing in e-commerce overall the marketing efficiencies are reduced versus the pandemic quarters.

That being said, our marketing efficiency, the lens that we look at it through is our marketing payback and the ROI on those marketing dollars. And on that basis, we’re in-line with our historical averages. And combined with an improving gross margin, higher ARPUs from our customer base and more profitable products that they're buying. it's translating into significantly improved economics.

In terms of marketing strategy, part of refining our core value proposition was to really make sure that our weekly meal subscription plan is complementary to our on-demand offering for our Goodfood customers. So for Goodfood customers that are within our on-demand zones, we're actively cross-selling our weekly meal kit subscription and our on-demand offering.

And what we're seeing from that customer base is, once a customer who's on a weekly meal plan interacts with the Goodfood on-demand, they're spending on average 2x, what other customers are spending every quarter. And so there's a real opportunity for us to focus on that cross-sell and make sure that our customers are interacting with as much of Goodfood as possible. And then over time, as we roll out additional MFCs, additional markets, additional coverage, we'll be able to roll-out Goodfood on-demand as a complement to more and more weekly meal kit subscribers.

[Frederic Tremblay, Desjardins]

Great. I'll get back in the queue. Thanks.

[Operator]

Thank you. Next question will be from Ryan Li of National Bank Financial.

[Ryan Li, National Bank Financial]

Hey, thanks for taking my question guys. Maybe the first one, can you provide more color on the change in consumer behavior as it relates to the economic conditions? How have you seen that evolving into Q4? Maybe yes, just some more color on that. What specific changes you're seeing?

[Jonathan Roiter, Chief Financial Officer]

Good morning, Ryan. Thank you for the question. So, as we exited the spring and going into the summer, we're definitely seeing changes in consumer lifestyle for the summer period. We're seeing customers and Canadians coast-to-coast spending more time traveling. And so spending less time at home has an influence right on the overall e-commerce business and Goodfood’s business as well. But we're certainly seeing that normalizing right now.

And I think this is kind of – we're within our last quarters that are quite difficult to comp from COVID levels. And so, I think we'll start seeing that normalization be reflected in our year-over-year numbers as well. I think the other piece that we're seeing is from an inflation perspective, some customers or Canadians coast-to-coast are thinking about ways to spend their money more effectively, save money, and in certain cases are trading down to more discount type products.

That's had a positive impact in the demand for private label products globally across the country. And so, in the cases where we're able to provide great value with our Goodfood Brands product, customers are, in fact, more open to switching brands than they might be otherwise. And that being said, what we saw in the price increase that we talked about from a ready to clip perspective that we did in June, we saw that part of the impact was reflected in sales growth, but also part of the impact of that price increase led to a little bit of trading down.

So, overall our basket sizes are larger from a revenue perspective, but a bit smaller from a portions perspective. That's a little bit of commentary on both the normalizing of lifestyles, as well as the impact of inflation from a consumer demand perspective.

[Ryan Li, National Bank Financial]

Okay. Thank you. And maybe along the same lines, in terms of – I think the SKU roll-out has maybe slowed the last couple of quarters and as you focus on other items, how big of an impact is the SKU and the depth there on your on-demand customers? Do you anticipate accelerating the SKU roll-out over the near-term?

[Neil Cuggy, President and Chief Operating Officer]

Yes. Hi, Ryan. The SKU camp continues to increase on a net basis, but as we said last quarter, it's important – it was important for us to hit a kind of a critical mass to be able to offer our Goodfood on-demand customers a full basket shop and very attractive add-ons to their weekly mail solutions. As we've been approaching profitability here, we've also been making changes in team size. So the output that we're able to accomplish is lower as well.

So, we'll continue to grow towards the 4,000 SKUs that we've said in the past, but we feel a lot less pressure today. Basket size continues to hold-up and product margins continue to be optimized in this inflationary environment. So overall, we're happy with what we're seeing and no major changes from a customer perspective.

Obviously, the more newness we have on the website, the more buzz, but with all of the summer travel, we think it's, you know, a good time to kind of focus on the essentials and focus on the fall quarters.

[Ryan Li, National Bank Financial]

Okay. Thanks for that. And maybe one last one on the MFC roll-out. I think you indicated that you may fall short of the [20 target] [ph], but in terms of the remaining MFCs plan for the year, is it going to be more weighted towards the summer as you prep for having it, having more analyses ready for the fall or is it like evenly spread out across the quarters?

[Jonathan Ferrari, Chief Executive Officer]

So, in terms of the MFC roll-out, our objective is to build out the infrastructure we need in Montreal and Toronto to offer consistent delivery experience with the highest level of profitability. And we had estimated originally that it would take us about 20 MFCs or 18 to 20 MFCs in order to cover Montreal and Toronto [food] [ph] with that coverage. I think the good news is, we should be able to achieve that coverage with less MFCs than we originally anticipated.

So, it's probably just the growth of a couple MFCs from here. And that'll really help us achieve again the unit economics on the on-demand offering even more quickly than we were expecting.

[Ryan Li, National Bank Financial]

Okay. Thank you. I'll just get back in the queue. Thank you.

[Operator]

Thank you. Your next question will be from Martin Landry at Stifel GMP. Please go ahead.

[Martin Landry, Stifel GMP]

Hi, good morning, guys. Jonathan, you were talking about consumers trading down, you know the consumer sentiment is reaching new lows and I was wondering if you could talk to us a little bit about your pricing strategy? Where do you stand right now for a meal kit meal delivered home versus the similar product purchase at a grocery store? Are you priced at a premium or equal or lower to products found in grocery stores?

[Jonathan Ferrari, Chief Executive Officer]

So, our intent has been to think about how to provide great value to our customers while maintaining and improving our margin basis right? And in order to do that, we've been thinking about how to price our products to reflect the amount of convenience that Goodfood is offering, whether it's through our on-demand delivery cost or through our meal kit offering.

From a supermarket comparison, I would say, it's hard to compare on an [apples-to-apples] [ph] basis and the prices in supermarkets are increasing extremely quickly on a week-to-week basis. So, I would say, our pricing compares favorably to the supermarket, but ultimately, as we do our customer research, many of our customers are thinking about the comparison of our meal kit pricing to going out to the restaurant or to restaurant delivery, right, like on a [indiscernible].

And when consumers are looking at our meal kit products, or any of our meal solutions products through that lens, they're seeing a lot of value. They're seeing 30%, 40%, 50% discounts to what it would cost them for a restaurant quality experience. And so from that lens, we're really able to provide great value to our customers, and we see our ability to maintain pricing power in the coming quarters as being quite strong.

[Martin Landry, Stifel GMP]

Okay. That's interesting. The cheaper option versus restaurants, but are you seeing that in your data? Are you doing some consumer surveys or inquiring with your customer base as to whether they're switching away from restaurants into meal kits?

[Jonathan Ferrari, Chief Executive Officer]

Yes, there's two major trends that we're seeing in this inflationary environment. There's certainly – there's treading down across all levels, right? So, going from the restaurant to meal kits and meal solutions. And then as you would have seen in the brick and mortar banners, there is going from conventional to discount shopping. So, the customers that we're focusing on are really the ones that understand the comparison in terms of a restaurant experience.

We also have the flexibility of being able to interact with our meal solutions both through a weekly meal plan and on-demand. And so the flexibility of being able to interact with the product how customers want, when they want is making that comparison even easier to the more expensive restaurant offerings.

And then the second thing that we're seeing in our data is certainly customers' willingness to switch brands. And so it certainly, you know as the national brands are increasing, pricing across the board, multiple price increases per year. The opportunity we have is for our private brand products to really shine and to show customers the value that we're offering and encourage them to switch at a time where they're most open minded to that.

[Martin Landry, Stifel GMP]

Okay. Thank you.

[Operator]

Thank you. Next question will be from Luke Hannan of Canaccord Genuity. Please go ahead.

[Luke Hannan, Canaccord Genuity]

Thanks. Good morning, everyone. Just a quick point of clarification when you talk about achieving profitability on an adjusted EBITDA basis in the first half of fiscal 2023. Does that mean you'll be profitable for like one of the quarters in the first half or does that mean you will be profitable on sort of a run rate basis at some point in that first half?

[Jonathan Roiter, Chief Financial Officer]

Good morning, Luke. Luke, as we've laid out, Project Blue Ocean is really setting us up both for a return to sequential growth in the first quarter of 2023. And then perhaps just as importantly, we're spending the last few months and the next few months on really improving our unit economics and you see that with the continued rise in our gross margin since the lows of Q4 2021 and the significant reduction in our fixed cost base with the reduction in SG&A that you’ve seen over these last three quarters.

So, as we head into 2023, which begins in early September, we have the advantage of the, you know, back to school, people were just selling back it’s routine, and then ultimately, with a cost structure, that allows us to be profitable at attractive revenue levels. So, ultimately, the first half of 2023 is when we see the flipping of [indiscernible] and starting to be profitable on an adjusted EBITDA basis on a quarterly – on an ongoing quarterly basis.

[Luke Hannan, Canaccord Genuity]

Okay, understood. And then sort of related to that as well, let's assume that you do hit profitability on an adjusted EBITDA basis. Thinking about the other two components, I guess that would be considering, including adjusted EBITDA, but working capital and CapEx. I guess I'm trying to figure out does adjusted EBITDA profitability also imply that you'll be breakeven or better on a free cash flow basis assuming you hit adjusted EBITDA profitability? Like when does working capital become more of a tailwind for you, like it has been in the past?

[Jonathan Roiter, Chief Financial Officer]

Sure. No, completely right, right. There's ultimately a number of different levers – [levering us] [ph] to cash flow. The first one being – and the largest and most important is the one we just discussed, which is getting back to an adjusted EBITDA profitable level. So that's the first and foremost. That follows with working capital as our next opportunity. And so, it could be better as we head into Q1 just in terms of, it comes as seasonal nature of our business. And it's an area that we're spending a lot of time on managing that working capital and figuring out how to create value out of our balance sheet.

I think you've seen us do that over the past nine months over the last year. We definitely extracted value out of our balance sheet and our plan is to continue. And then lastly from a CapEx perspective, the days of large, large CapEx dollars. And I think there's a chart in our earnings presentation that really demonstrate that. Those days are over and ultimately where we're now spending our capitals – on CapEx is really on the MFC roll-out.

And as I think we've laid out in some of our previous calls, we're talking under [$400,000] [ph] for a facility. And with, you know, just a little bit of capitalized IT and other ongoing maintenance CapEx. So, we put those three pieces together and ultimately our objective as we head to 2023 is [the masters] [ph] of our own destiny. And to do that, we, A, have to be profitable; B, we have to have positive cash flow; and then ultimately then we're masters of our own destiny and not reliant on capital markets going forward.

[Luke Hannan, Canaccord Genuity]

Understood. Last one from me and then I'll pass the line. You have 99 million in cash on the balance sheet as of the end of last quarter, but curious to know how much capacity, if any, you have on your revolving credit facilities?

[Jonathan Roiter, Chief Financial Officer]

Yes. So, the 99 million includes the full use of our facilities. We have very, very supportive lender base. We typically, towards the end of the quarter, drawdown a portion of that revolver, but it's not needed for ongoing operations. And so, ultimately through the month within the quarter that revolver is given back or payback to our lenders. So, the [99 includes] [ph] the full use of our lending facilities.

[Luke Hannan, Canaccord Genuity]

Okay.

[Jonathan Roiter, Chief Financial Officer]

[Indiscernible] needed for ongoing operations.

[Luke Hannan, Canaccord Genuity]

Got it. Thanks.

[Operator]

Thank you. [Operator Instructions] And your next question will be from George Doumet at Scotiabank.

[George Doumet, Scotiabank]

Hi, guys. Good morning guys. I just want to talk a little bit about the 7 million on-demand sales before credit incentives. [Jon] [ph] that comparable number for last quarter, for Q2, but [on assets] [ph] seems to be flat to down, so any color on that?

[Jonathan Roiter, Chief Financial Officer]

Hey, good morning, George. I don't have that number in front of me. It was roughly around 5. So, it's up maybe around 40% quarter-over-quarter.

[George Doumet, Scotiabank]

Okay. Thanks. That's helpful. You guys commented on the curtailing grocery availability and weekly subscriptions as to streamline processes. Can you talk a little bit about what maybe that [entail] [ph]?

[Neil Cuggy, President and Chief Operating Officer]

Yep. So over the period of COVID, any SKUs that we were launching were available across the country to both our weekly subscription customers and our Good on-demand or Goodfood WOW customers at the time. So, the SKU count was available to a 100% of our customer base. What we saw was there was decreasing marginal returns from an AOV and a margin perspective. Once we hit a certain plateau on the weekly subscription base.

So, in order to improve our gross margins on that side of the business and improve our customer experience, we cut that SKU base down to roughly what you see on the website today and that continues to be optimized in terms of margin, in terms of selection, in terms of areas of the country that we are delivering to. But that's helped us increase our picking efficiency by about 2.5x on the production floor and increase – keep AOV and increase gross margin in the meantime.

[George Doumet, Scotiabank]

I just have one last quick one. I know in the past you guys shared AOV a 60 to 70 for on-demand. Just wondering, maybe if you can tell us how much of those [fall] [ph], how many orders typically fall in the under 25 or kind of 20 to 25 range and maybe some strategies we're doing to get those folks to order a little bit more, more profitable [per delivery] [ph]?

[Neil Cuggy, President and Chief Operating Officer]

Yeah. Hopefully when you're placing your orders, George, you're placing the 60 to 70 average, but there are customers that place smaller baskets. It's part of our strategy to have as frictionless of a shopping experience as possible to create the best lifetime value and relationship with our customers, especially in the early days of Goodfood on-demand. We did launch it only in November of last year, so it's a very nascent business.

The strategy that we're going to be implementing over the coming quarters are around, continuing to offer people the ability to place between on-demand orders with smaller basket sizes, but giving them the fees or flat fees or service fees at certain dollar levels that we're currently under development and NAV testing.

So, it's not a significant portion of orders, obviously, if you hit a $60 average, you need to be in and around that. And sorry, I was getting a call. So, yeah. Small percentage of orders and we're going to use fees and both kind of carrot and sticks. So, upsells throughout the process to get people to add more things to their basket.

[George Doumet, Scotiabank]

Okay. Thanks guys.

[Operator]

Thank you. Next question will be from Michael [indiscernible] at RBC. Please go ahead.

[Unidentified Analyst]

Thank you. Good morning. You guys announced partnership with Pusateri’s a few days ago. I was wondering if you could expand a bit on the strategy behind the partnership? How the economics might differ from your existing on-demand grocery business? And if we should expect more announcements that are similar to this in the coming quarters?

[Jonathan Roiter, Chief Financial Officer]

Good morning, Michael. Thanks for the question. So, we announced the Pusateri’s partnership earlier this week. This is really an incredible partnership for us in the GTA region. So, if we take a step back, Goodfood is all about solving meals, right, whether it's our weekly meal subscription or our on-demand offering, Goodfood is about solving meals. And to us, there's a spectrum of ways in which meals can be solved.

So, at the most prepared end of the spectrum, it's ready to eat meal or ready to heat meal, something that takes less than a minute to eat up or that's ready to eat. Middle of the spectrum is our meal kit offering that really simplifies and inspires our weeknight dinners. And then at the most custom end of the spectrum is our individual Goodfood products that customers can mix and match and buy as they please to really focus on solving meals, which is a problem that Canadians coast-to-coast have every single day.

And so, this partnership with Pusateri has allowed us to bring on the Pusateri’s brand. So, the products are branded Pusateri’s for Goodfood. The products are, you know these delicious ready to eat meals, they're in the $10 to $15 price range, and so high quality product that's also quite affordable. And ultimately, it allows Goodfood to make sure that we're focusing on our core competencies and that we're selling the highest profitable margin products that we can on a consistent basis.

And so Pusateri’s is ensuring the quality of the products, the manufacturing and consistent margin that's being made on those products, while being able to cross brand and cross promote the products. So, this is an awesome partnership. We are looking at the results closely and there could be future partnerships announced based on the results that we see here.

[Unidentified Analyst]

Okay. That's great. Thank you. And maybe just a [double click on it] [ph], are you guys seeing sort of differences in the unit economics between the Pusateri’s branded products and your own?

[Jonathan Ferrari, Chief Executive Officer]

So, the objective for us from outsourcing the manufacturing of those ready to eat meals, the key benefit from Goodfood's perspective is the consistency of the margin, so we're able to really make sure that we're leveraging the volume that they have and ensuring that the margin is consistently hit. I think that's the biggest piece when we were producing all of our ready to eat meals internally.

The consistency of the margin was one of the challenges. And really it allows our team to be laser focused on improving our cost basis, the quality of our meal kit manufacturing and the operational efficiencies within the meal kit manufacturing and delivery. And we're able to leverage some partners to do the manufacturing of the ready to eat products.

So, I think it's a great win-win. As we look into profitable growth for 2023, we're really going to be focusing on solving meals and finding additional ways that we can help our customers have access to ready to eat products like this in addition to our meal kits and our private brand groceries that are kind of the à la carte version of solving a meal.

We're also going to be making sure that we're cross-selling additional on-demand orders to our weekly meal kit subscribers and ultimately increasing the penetration of our active users coast-to-coast and availability of our on-demand offering. So, lots of things to come. We're really excited about 2023.

[Unidentified Analyst]

That's great. Thank you, and appreciate the additional color there. I'll pass on.

[Operator]

Thank you. And at this time, Mr. Ferrari, we have no further questions. Please proceed.

[Jonathan Ferrari, Chief Executive Officer]

All right. Thanks everyone for joining us on this call. We're looking forward to speaking with you again at our next quarterly call in the fall.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.