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. Following the presentation, we will conduct a question-and-answer session. As a courtesy to others, we ask that each participant limit themselves to one question and one follow-up. Instructions will be provided at that time for you to queue up for questions. Please note that questions will be taken from financial analysts only. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 two 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.
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 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 measure 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 three 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. 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 CAD 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 CAD 30 million on an annualized basis since the fourth quarter of fiscal 2021.
While we are very pleased with that 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.
Thank you Jonathan and good morning everyone. I will now turn to slide four which provides details on our top line performance. Quarterly active customers during the third quarter were 211,000 compared to 246,000 in the second quarter of fiscal 2022. Net sales were CAD 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 per active customer versus Q2 and entirely offset by higher margins per customer per quarter.
Return to top line growth is also a key component of Project Blue Ocean and is 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 a 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 five, 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 credits and incentives as a result of our targeted customer addition strategy and operating efficiencies in part resulting from Project Blue Ocean. These improvements, when combined with continued reduction in SG&A, excluding depreciation and amortization, result in a CAD 3 million adjusted EBITDA improvement or a 260 basis point adjusted EBITDA margin enhancement versus the previous quarter, cementing our commitment to profitability. I will now move to slide six to review our cash flows and capital expenditures. Cash flows used in operating activities totaled CAD 14 million, remaining stable compared to the second quarter fiscal 2022.
A slightly larger net loss and lower contribution from net working capital were offset by higher depreciation. Capital expenditures came in CAD 7 million, mainly investing in 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 buildup to support Goodfood On-Demand. As outlined at 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 CAD 11 million since the fourth quarter. This positive performance has been the 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 use in the coming quarters. Lastly, we ended the quarter with cash and cash equivalents of CAD 99 million which continues to provide significant balance sheet flexibility to execute on our growth strategy. Before turning it back to John, 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 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 CAD 29 million in the current quarter is over CAD 8 million lower than the fourth quarter of 2021. That is a reduction of over CAD 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. On that note, I'll turn it back to Jonathan Ferrari to provide additional details on Project Blue Ocean and which includes the ongoing revenue growth margin and SG&A improvements we are executing.
Thank you John. I'll now turn to slide seven 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 consists in attracting 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 rightsizing our footprint to improve asset basic 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 eight 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 improve profitability by nearly CAD 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 limiting the number of grocery products available to weekly meal kit subscribers. Other initiatives include the automation of 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 in 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 CAD 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.
Thank you Sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If you're using a speakerphone, we ask that you please lift the handset before pressing any keys. Once again, please press star one now if you have a question. Your first question will be from Frederic Tremblay at Desjardins. Please go ahead.
Thank you, g ood morning.
Good morning Fred.
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. Like, what do you attribute to pricing versus other cost containment initiatives there?
Hey Fred, it's Neil. Thanks for the question. Yeah. We, as Jonathan and Jonathan mentioned in the prepared remarks, we've been focused quite a bit on getting our gross margin back to historical levels. 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 have led to what you've seen printed this morning. The price increase that Jonathan 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.
Perfect. On the SG&A line, I guess focusing on the marketing side of things, I think you mentioned marketing efficiencies in comments on the slides. Can you give us a bit more details about that about, you know, your current marketing approach and maybe thoughts on marketing initiatives as we approach the back-to-school season as well?
Definitely. 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. 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.
On that basis, we're, you know, in line with our historical averages, and combined with an improving gross margin, higher ARPU 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. 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.
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. 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. 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.
Great, I'll get back in the queue. Thanks.
Thank you. Next question will be from Ryan Li at 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? Yeah, just some more color on that. What specific changes you're seeing?
Good morning Ryan, t hank 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. 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. 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, you know, 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 or, you know, across the country. In the cases where we're able to provide great value with our Goodfood brand product, customers are in fact more open to switching brands than they might be otherwise.
That being said, what we saw in the price increase that we talked about from a ready-to-cook 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. 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.
Okay, t hank you. Maybe along the same lines in terms of, I think the SKU rollout 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 rollout over the near term?
Yeah. Hi Ryan. The SKU count continues to increase on a net basis. As we said last quarter, 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 meal solutions. You know, as we've been approaching profitability here, we've also been making changes in team size, so you know, the output that we're able to accomplish is lower as well. 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. 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. 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.
Okay, t hanks for that. Maybe one last one on the MFC rollout. I think you indicated that you may fall short of the 20 target but in terms of the remaining MFCs planned for the year, is it gonna be more weighted towards the summer as you prep for having more MFCs ready for the fall or is it like evenly spread out across the quarters?
In terms of the MFC rollout, 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. We had estimated originally that it would take us about 20 MFCs or, you know, 18-20 MFCs in order to cover Montreal and Toronto with that coverage. I think the good news is we should be able to achieve that coverage with less MFCs than we originally anticipated. It's probably just the growth of a couple MFCs from here. That'll really help us achieve again the unit economics on the On-Demand offering even more quickly than we were expecting.
Okay, t hank you. I'll just get back in the queue. Thank you.
Thank you. Your next question will be from Martin Landry at Stifel GMP. Please go ahead.
Hi, good morning guys. Jonathan, you were talking about, you know, consumers trading down, you know, consumer sentiment is reaching new lows. 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 purchased at a grocery store? Are you priced at a premium or equal or lower to products found in grocery stores?
Our intent has been to think about how to provide great value to our customers while maintaining and improving our margin basis, right? 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, you know, on an apples-for-apples basis and the prices in supermarkets are increasing extremely quickly on a week to week basis. I would say our pricing compares favorably to the supermarket.
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 an Uber Eats or a DoorDash. 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. From that lens, we're really able to provide great value to our customers. We see our ability to maintain pricing power in the coming quarters as being quite strong.
Okay, t hat's interesting. You know, the cheaper option versus restaurants. 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?
Yeah. There's two major trends that we're seeing in this inflationary environment. There's certainly trading down across all levels, right? Going from the restaurant to meal kits and meal solutions. As you would have seen in the brick-and-mortar banners, there's going from conventional to discount shopping. 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. 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.
The second thing that we're seeing in our data is certainly customers' willingness to switch brands. 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.
Okay, t hank you.
Thank you. Next question will be from Luke Hannan at Canaccord Genuity. Please go ahead.
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, you know, like one of the quarters in the first half? Or does that mean you'll be profitable on sort of a run rate basis at some point in that first half?
Good morning Luke. Look, when we 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. Then, perhaps just as importantly, you know, we're spending the last few months and the next few months on really improving our unit economics. And you see that with the, you know, continued rise in our gross margin since the lows of Q4 2021. And the significant reduction in our fixed cost base with the, you know, the reduction in SG&A that you've seen over these last three quarters. As we head into 2023 which begins in early September, we have the advantage of the, you know, back to school, people settling back into routine.
Ultimately, with a cost structure that allows us to be profitable, you know, at an attractive revenue levels. Ultimately, you know, in the first half of 2023 is when we see the flipping of the switch and starting to be profitable on an adjusted EBITDA basis on an ongoing quarterly basis.
Okay, understood. 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 I 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?
Sure, Paul. No, completely right? There's ultimately a number of different levers that bring us to cash flow. You know, the first one being the largest and most important is the one we just discussed which is getting back to an adjusted EBITDA profitable level. That's the first and foremost. That follows with, you know, working capital is our next opportunity. You know, it could be better as we head into Q1, just in terms of the complex seasonal nature of our business and it's an area that we're you know, 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've definitely extracted value out of our balance sheet and our plan is to continue. Lastly, from a CapEx perspective, you know, the days of large CapEx dollars and I think there's a chart in our earnings presentation that really demonstrates that, t hose days are over. Ultimately, where we're now spending our capital on CapEx is really on the MFC rollout. As I think we've laid out in some of our previous calls, you know, we're talking under CAD 400 ,000 per facility.
With you know just a little bit of capitalized IT and other you know ongoing maintenance CapEx. We put those three pieces together and you know ultimately our objective as we head to 2023 is to be masters of our own destiny. To do that we A have to be profitable. B we have to have positive cash flow. Then ultimately we're masters of our own destiny and not reliant on you know capital markets going forward.
Understood. Last one for me and then I'll pass the line. You have CAD 99 million in cash on the balance sheet as of the end of last quarter. I'm curious to know how much capacity, if any, you have on your revolving credit facilities.
The CAD 99 million is. It includes you know the full use of our facilities. We have you know very supportive lender base. We typically towards the end of the quarter draw down a portion of that revolver but it's not needed for ongoing operations. Ultimately through the months within the quarter that revolver is given back or paid back to our lenders. It, the CAD 99 million includes the full use of our lending facilities.
Okay.
Not needed for ongoing operations.
Got it, t hanks.
Thank you. Once again, as a reminder, if you have a question, you will need to press star one on your telephone keypad. Your next question will be from George Doumet at Scotiabank.
Yeah. Hi guys. Good morning guys. I just wanna talk a little bit about the CAD 7 million On-Demand sales before credit incentive. Do you have that comparable number for last quarter for Q2 but by and large, it seems to be flat to down? Any color on that?
Hey, good morning George. I don't have the number in front of me. It was roughly around five. It's up maybe around 40% quarter-over-quarter.
Thanks, t hat's helpful. You guys commented on the curtailing grocery availability in weekly subscriptions to streamline processes. Can you talk a little bit about what maybe that entails?
Yeah. Over the period of COVID, any SKUs that we were launching were available across the country to both our weekly subscription customers and our Goodfood On-Demand or Goodfood WOW customers at the time. The SKU count was available to 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. 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.
That continues to be, you know, optimized in terms of margin, in terms of selection, in terms of areas of the country that we are delivering to. That's helped us increase our picking efficiency by about 2.5x on the production floor and well, keep AOV and increase gross margin in the meantime.
Okay. I just have one last quick one. I know in the past you guys shared AOVs of 60-70 for On-D emand. Just wondering maybe if you can tell us how much of those fall, you know, how many orders typically fall in the under 25 or kind of 20-25 range and maybe some strategies we're doing to get those folks to order a little bit more to be more profitable for delivery?
Yeah. Hopefully when you're placing your orders George, you're placing the 60-70 average. 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 gonna be implementing over the coming quarters are around continuing to offer people the ability to place Goodfood On-Demand orders with smaller basket sizes but giving them, you know, fees or flat fees or service fees at certain dollar levels that we're currently under development and A/B testing.
So it's not a significant portion of orders. Obviously, to hit a CAD 60 average, you need to be in and around that. Sorry, I was just getting a call. Yeah, small percentage of orders and we're gonna use fees and both kind of carrot and stick, so upsells throughout the process to get people to add more things to their basket.
Great, t hanks guys.
Thank you. Next question will be from Michael Mariano at RBC. Please go ahead.
Thank you. Good morning. You guys announced a 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, you know, if we should expect more announcements that are similar to this in the coming quarters.
Good morning Michael, t hanks for the question. We announced the Pusateri's partnership earlier this week. This is a really an incredible partnership for us in the GTA region. You know, 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. To us, there's a spectrum of ways in which meals can be solved. At the most prepared end of the spectrum, it's a ready-to-eat meal or ready-to-heat meal, something that, you know, takes less than a minute to heat up or that's ready to eat. Middle of the spectrum is our meal kit offering that really simplifies and inspires our weeknight dinners.
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. This partnership with Pusateri's 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 CAD 10-CAD 15 price range.
A high quality product that's also quite affordable. Ultimately, it allows Goodfood to make sure that we're focusing on our core competencies and that we're selling, you know, the highest profit margin products that we can on a consistent basis. 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. This is an awesome partnership. We're looking at the results closely and there could be future partnerships announced based on the results that we see here.
Okay, that's great, t hank you. Maybe just to double-click on it, are you guys seeing sort of differences in the unit economics between the Pusateri's branded products and your own?
So the objective for us from, you know, 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, you know, 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. 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. We're able to leverage some partners to do the manufacturing of the ready-to-eat products.
I think it's a great win-win. As we look into profitable growth for 2023, we're really gonna 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 gonna 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. Lots of things to come. We're really excited about 2023.
That's great. Thank you and appreciate the additional color there. I'll pass the line.
Thank you. At this time, Mr. Ferrari, we have no further questions. Please proceed.
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.
Thank you, sir. Ladies and gentlemen this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.