Welcome to the Goodfood fourth quarter 2020 financial results conference call. At this time all participants are on only listening mode. Following the presentation, we will conduct a question and answer session. As I encourage others, we ask that each, please limit your self to one question, and if necessary one follow-up. The session will be provided at that time for to queue up for questions. Please note the questions will be taken for financial analysts only. If any one has any difficulties joining 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, November 11th, 2020, at 8:00 A.M. Eastern Daylight 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 like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may proceed.
[Non-English content] Thank you. Good morning, everyone, and welcome to this call for Goodfood Market Corp, in which we'll present our financial results for the fourth quarter and fiscal year ended August 31st, 2020. I am pleased to be joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer, and by Philippe Adam, Chief Financial Officer. Our press release reporting fourth 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. Now turning to slide three, which outlines our key financial highlights for the fourth quarter and fiscal year.
Our exceptional results this quarter and year validate Goodfood's long-term business strategy and leading position in the e-commerce, grocery, and meal solutions markets. During this year and this quarter, we experienced tremendous growth, accomplishments, but also significant business and human challenges. While the second half of fiscal 2020 has been amongst the most difficult periods in our history, it was also the most rewarding.
In addition to managing personal and family considerations, our employees worked tremendously hard to keep up with the essential needs of Canadians coast to coast while implementing enhanced safety protocols to keep our workforce and customers safe. To all Goodfood employees, I want to say thank you. Our results this year and quarter surpassed our expectations. For the second quarter in a row, we are pleased to report net income and positive EBITDA, in addition to record levels on several key metrics.
We are also very proud to report positive EBITDA for the full year, a first in our history and a clear demonstration of our business model strength. First, our annual growth in revenue outpaced our growth in subscribers by a factor of two as our strategy to expand our product offering and provide larger share of our customers' grocery basket, combined with the new customer behavior trends, translated into larger basket sizes and more frequent orders.
As such, our revenue for the year reached CAD 285 million, a 77% increase. Second, our gross margin has continued to increase substantially, hitting 32.8% this quarter, a 6.1 percentage point year-over-year improvement and 30.3% for the fiscal year, a 5.3 percentage point jump compared to last year.
A decrease in incentives and credits, improvement in shipping costs driven by our Good Courier initiative, and increased density and automation investments contributed to the gross margin increase. Third, we are very pleased to report our second consecutive quarter of net income and positive EBITDA. This reflects not only growth in revenue and gross margin improvement, but also an efficient operating leverage driven by our scale and higher order rates.
We are also immensely proud of having achieved profitability for the full fiscal year on an EBITDA basis, with adjusted EBITDA reaching CAD 4.7 million for the year, a margin of 1.6%. This margin represents an improvement of 11.7 percentage points compared to last year. Overall, our financial performance this quarter has been exceptional, driven by accelerated penetration of online grocery shopping. I will now turn to slide four to provide an e-commerce grocery market update.
This year has been marked by a pre-pandemic and a pandemic period. Before the pandemic, the online grocery market was already set to take off, and its penetration amongst Canadian households was forecasted to grow significantly. Online grocery in Canada was expected to surpass the CAD 3 billion mark by 2023 on the back of a 21% compound growth rate.
Turning to slide five, you can see that years of growth were turned into months, and that inflection point of the online grocery industry came much sooner. The online grocery market is now estimated to already be in the CAD 6 billion-CAD 8 billion range currently, and expected to reach approximately the CAD 25 billion mark by 2025, growing at a 56% compound growth rate. This acceleration of growth is driven by a sharp rise in first-time users, as 55% of polled Canadians had purchased groceries online by March of this year.
We are excited by these growth prospects and our outstanding customer experience, operating footprint positions us uniquely to capitalize on these tailwinds and build leadership in the online grocery industry. Moving to slide six. Here you can see the strategy we are executing to build this leadership on the back of robust unit economics. Our strategy is simple.
We want to build a large subscriber base and gain market share, we do that through ensuring a world-class experience for our members by increasing selection and flexibility, as well as investing in automation and density. That allows us to maximize our profitability per subscriber, which in turn allows us to add more subscribers, the wheel keeps rolling. This strategy is enabled and supported by very strong unit economics.
Our average order value continues to grow sharply this year, with approximately 94% of revenue coming from subscribers with three or more orders. The increases in average order value and gross margin, combined with stable order rates and lower customer acquisition costs since March, equate with an industry-leading marketing payback period of just north of five months. Switching to slide seven for key business highlights.
First, we delivered record financial results by responding to Canadians' strong and sustained demand as they embraced online grocery shopping in a way that marks a pivotal and permanent shift in consumer shopping habits. As such, we generated record revenues and positive EBITDA for fiscal year, and ended the year with a strong CAD 107 million cash balance.
Our strong performance throughout the year has been recognized by the capital markets, as we have been included in the S&P/TSX SmallCap Index and were selected to TSX 30 as a top 30 performing stock on the TSX. Second, in 2020, we have also taken the steps to support our growth trajectory with the leasing or construction of four facilities during the year. This footprint of purpose-built manufacturing and fulfillment centers, along with our new cloud kitchens for prepared meals, now reaches 590,000 sq ft from coast to coast.
Third, we further improved our members' experience through multiple customer-centric initiatives, including the ramp of Good Courier, which now delivers over half of our orders, and the launch of our mix-and-match platform, Goodfood Flex, and our same-day delivery subscription, Goodfood WOW. We also increased our product offering from approximately 40 SKUs a year ago to approximately 400 SKUs currently.
New product launches this quarter include staples such as 2% milk, butter, an increased variety of breads, proteins, snacks, and desserts such as olive oil, candy, delicious pies. Finally, we deepened our bond with our community. We have taken steps throughout the year to communicate with our ecosystem transparently. We made PPE available and mandatory to our employees everywhere and provided meals to frontline healthcare workers, among others. On that note, I'll now turn the call over to Philippe Adam to go over our financial performance.
Thank you, Jonathan Ferrari. Good morning, everyone. Slide eight provides details on subscribers and revenue. Our fourth quarter is usually our slowest period in the year, impacted by the nicer weather, vacation time, and time spent outside the home. However, the acceleration of online grocery adoption alleviated these seasonality trends as demand for our products maintained itself to a large extent.
Unit economics remained strong throughout Q4, and revenue showed a significantly lower quarter-over-quarter sequential decline, decreasing only by 3% compared to 9% for the same period last year. At the end of the fourth quarter, Goodfood subscriber base reached 280,000, with the addition of 8,000 net new active subscribers in the last few months. Revenue has also grown to CAD 83.7 million, up CAD 38.4 million or 85% compared to the corresponding period in 2019.
The increase in revenue was primarily driven by sustained order rates and bigger basket sizes from our current subscribers, which are fueled by the continued expansion of our product offering. As previous mentioned, 94% of our fiscal year 2020 revenue came from customers who have placed three orders or more, a clear testimony of our subscriber base loyalty. Please now turn to slide nine, which looks at our profitability levels.
Our gross profit increased to CAD 27.5 million, a record, or a margin of 32.8%, an increase of 6.1 percentage points year-over-year. The increase in gross margin resulted mainly from lower credits and incentives as a percentage of revenue, improved unit economics for packaging and shipping, which are explained by a higher density among the delivery zones, with Good Courier now representing just above 50% of our orders, and increased purchasing power with key suppliers.
This was slightly offset by higher food costs and by CAD 1.1 million of COVID-19 related costs, such as temporary wage increase, Personal Protective Equipment, and additional production employees. We are extremely proud to report a second consecutive quarterly positive adjusted EBITDA in our short history at CAD 5.3 million, or a margin of 6.3%. Adjusted EBITDA was also positive for the fiscal year, hitting CAD 4.7 million, or 1.6%.
This strong performance resulted primarily from higher revenues and gross profits, the efficiency of our marketing strategy, as well as the operating leverage effect as SG&A expenses as a percentage of revenues decreased year-over-year, despite continuing to invest significantly in our people, with several key additions in our IT and online grocery departments. Similarly, we reported a second consecutive quarter of first net income.
It reached CAD 1.6 million, compared to a net loss of CAD 3.6 million for the same period last year. The first year of profitability is a great accomplishment and solidifies our business model and strategy as we continue to develop and launch new online grocery and meal solution products on a weekly basis. Turning to slide 10 for cash flow and capital expenditures.
We generated record cash flow from operating activities of CAD 2.4 million and CAD 8.6 million, respectively, for the fourth quarter and the fiscal year. This was enabled by a positive net income, but also by a favorable variance in non-cash operating working capital as a result of our balance sheet structure and growing scale. The capital expenditures for Q4 and fiscal 2020 were respectively CAD 2.9 million and CAD 10.2 million.
They were mainly related to the build-out of our fulfillment centre in Montreal, the construction of the flagship facility in the GTA, and the continued investment in automation equipment and technology. Note that our CapEx plans have been delayed by the COVID-19 pandemic to some extent. We are still confident we'll be able to complete our investments and achieve our plan with minimal delays.
For fiscal 2021, we plan on investing between CAD 20 million and CAD 30 million in capital expenditures to build out our flagship facility in Toronto, build the infrastructure for same-day delivery across the country, and further increase our automation. We ended the quarter in a solid financial position with cash equivalents, and restricted cash of CAD 107 million. We have good flexibility to grow from current levels, withstand headwinds, and execute on our strategy.
Finally, we'd like to turn to slide 11 to provide some color on our outlook. The current pandemic has changed habits across consumer markets. We have seen a sustained shift to grocery shopping completed online, and we expect this shift to accelerate over the coming years as consumers realize how easy, convenient, and affordable it is to receive grocery items purchased online, delivered directly at their door.
Our online platform and deliver-to-home fulfillment model has supported the significant growth in demand, which we expect to continue to be strong. With that said, some financial consequences of the pandemic will most likely reverse over time. We have incurred roughly CAD 3.5 million of pandemic-related expenses that are non-recurring. While a portion of these costs have subsided already, some are still being incurred for the time being, and we anticipate they may stick for a few quarters.
The pandemic has brought about business challenges and opportunities, and evaluating the full range of medium and long-term impacts today is still a challenge. We anticipate that a significant portion of grocery shopping done in stores has shifted and will continue to shift online. We also foresee that a large portion of food consumption done at restaurants and other hospitality businesses has and may very well continue to shift to e-commerce or meal solutions.
With our developed footprint of purpose-built fulfillment centers, best-in-class last-mile logistics, and well-established brand, Goodfood is in an ideal position to capitalize on these industry shifts. This concludes our financial highlights for the fourth quarter and our prepared remarks for today. We will now be pleased to answer any questions you may have. Thank you.
Ladies and gentlemen, if you'd like to ask a question please press star then one on your touch-tone telephone. To remove your self from the queue, press the pound key. Again, to ask a question, press star, then one. Our first question comes from Martin Landry of Stifel. Your line is open.
Hi, good morning. It looks like you're seeing increased loyalty amongst your customer, which is great to hear. I'd like to dig deeper into your revenue per customer. Your ARPU, when I look at it on a gross sale, has increased significantly year-over-year. By my calculation, it stands around CAD 340, that looks like it's higher than Q1, despite unfavorable seasonality, as you mentioned, with the summer. That increase of CAD 50 year-over-year, I'd love to hear if you could discuss a little bit more the main drivers of that growth.
Thanks, Martin Landry. Good morning. Definitely during these summer months that are seasonally slower usually. We did experience a year-over-year improvement in order rates and order frequency, which helped drive that increase in ARPU. I think part of that is pandemic related, and part of it is also related to our long-term strategy. In building out ways for us to increase the speed of delivery and the flexibility in which customers can engage with us, the intent is to build out longer term, higher order rates and frequencies.
The second piece on the basket size increases is really driven primarily by the increase in our selection. The more products that we have available to our customers, whether it be ready-to-cook products, ready-to-eat meals, our expanding selection of grocery products. As the selection grows, we're seeing our customers opt into all sorts of new products. That's the other main driver in increasing the ARPU year-over-year.
Okay. If I can follow up on that. You're saying that some of the growth has been related to pandemic and some of the growth has been related to your strategy, it looks to me it's still very early days in your grocery offering. You mentioned you have 400 SKUs. You want to go to in excess of 2,000 SKUs. Your basket size is moving up already with a limited offering like you're talking about. Where could your ARPU go in the coming years? It seems to me that there's a lot of torque in there. Would love to hear your views on that.
Absolutely. I think, as you mentioned, it's early days as we launch Goodfood WOW, our same-day delivery offering. The number one piece of feedback from our customer base is, we'd love more selection. It's pretty magical to get everything we love from Goodfood delivered on a same-day basis, just like magic. Our customers are loving it and they're really demanding for more selection.
As that selection increases and as our penetration of same-day delivery grows, which today is only currently available in Montreal, as those key components move, I think we'll start converging the economics closer to industry average basket sizes and order frequencies for groceries and online groceries. If you just look at where we are today versus those averages, there's probably a 30%+ upside in the longer term as we build out that selection and as we roll out same-day delivery across the country.
Okay. That's helpful. Maybe just one last one as a follow-up as well is, any chance you can give us some details on your rollout of that grocery offering or same-day delivery across the country, timing wise?
What I can say at this stage is progress in Montreal is going very well. The rollout in and around the Montreal island was really our key ground to test out all of our processes, work through any kinks in same-day delivery and really get a good grasp on it. The next market to launch will be in Toronto. We'll have same-day delivery in the GTA I would say beginning of 2021.
Okay, perfect. Thank you and congratulations on the great quarter.
Calendar year 2021.
Our next question comes from Ryan Lee of National Bank Financial. Your line is open.
Hey, thanks for taking my questions, and congrats on another good quarter. Just had a couple of questions. The first, with regards to the SKUs for the private label grocery, can you talk about at this point, what's the plans in terms of how fast that's going to grow over the next year in terms of next year's trends? Could you talk on that?
Secondly, the second question is there's been some concern about a shift back into discount. Through the pandemic in the grocery channel, there's been a shift into conventional and one-stop shopping, and that's kind of slowed over the last couple of months. What's your view on the shift back into discount now, and does Goodfood have any levers that it can pull to mitigate some of the impacts there?
Yeah, sure. This is Neil Cuggy. I'll take the first one, and Jonathan Ferrari, you can pile on for the second half of the question there. In terms of SKU adoption, as Jonathan Ferrari just alluded to in the last question, it's the number one ask from our clients, which is really exciting. We've been focusing quite a bit over the last year on building the team, building the capabilities, kind of ironing out the machine to launch SKUs every week.
If you go on the website and look at our New Arrivals section for groceries, you'll have an idea of what's coming online every week. We also have SKUs that we're launching across ready-to-cook and ready-to-eat on a regular basis as well, new categories, new recipes. It's pretty exciting, the pace of change.
We think we can still hit 3,000 to 4,000 SKUs in the next 24 to 36 months, and we're in a good place to start hitting a pretty high run rate of additional items and getting on the website on a weekly basis. Right now, I think in the last couple weeks we've been in the 15-2 0 range, and as we said, we started the year around 40 and ended the year over 400. Really good progress on that from the team. Jonathan Ferrari, why don't you take the discount versus conventional?
Yeah, sure. Our view around why the shift was happening from seeing that growth in discount into conventional was driven really by two things. The first one was the kind of wider aisles and safer feel of the shopping environment in conventional banners was driving foot traffic there during some peak moments of the pandemic.
The second piece is really the shift from share of stomach or kind of restaurant meals. Share of stomach from restaurant was shifting more towards conventional banners and conventional shopping because of the demographics of the customers. The way that we think about it in the Goodfood context, we don't need to worry about the size of our aisles or the safety of the experience from a customer perspective. It's really clear to customers why Goodfood offers a safe shopping experience.
The second piece around shift of the share of stomach from restaurants into conventional banners or discount banners, we're still benefiting from that shift in the share of stomach. As we build out some really great meal solutions on the prepared meal side. Our intent there is to offer a selection of delicious restaurant quality meals at grocery store prices.
We're still able to hit that value component while benefiting from the shift in the share of stomach from the restaurant industry into grocery. These habits are being reinforced over the months and years that the pandemic is lasting. These shifts and purchasing trends and change in behaviors are really being reinforced, and we expect this to have positive tailwinds in the years to come.
Okay, thanks again, guys.
Our next question comes from Frederick Tremblay of Desjardins. Your line is open.
Thank you. Good morning. I was just wondering if you could comment on how things are trending in Q1 so far in terms of the order frequency and order size. Have you seen a change since the recent uptick in COVID-19 cases and some additional stay-at-home measures?
Hi, Frederick Tremblay, it's Philippe Adam. Thanks for your question. First of all, Q4 was between wave one and wave two of the pandemic, and we saw that the new trends were very sticky and average order value and order rates were impacted very favorably. Our basket size, I think John alluded to it, grew a strong double-digit year-over-year. So far in Q1 is the same trends. It's still strong order rates. Obviously, it's always better in Q1 than Q4, which is our summer. And average basket size is growing with the number of SKUs that we're adding as well in our product offering. So far the trends remain sticky, especially as we are in a second wave right now in Canada.
Great. Just wondering on your thoughts on the post-COVID-19 world or once the vaccine is available. I appreciate the comments earlier about the potential upside to the basket size. When you're thinking about your number of subscribers, what are some of your assumptions there in terms of customer retention once we move past the COVID-19 crisis?
I think the most important shift in our strategy in the past 12 months has been from saying our growth in subscriber base is going to be the primary driver of our flywheel or the primary growth vector for Goodfood. That made a lot of sense in the first few years of the business because we were working on building out a national brand, building out national infrastructure to support our customers, building out our logistics and supply chain networks.
It was really the most intelligent way to scale the business and to build out our strategy on that front. Over the past 12 months, even before the pandemic, you'll recall, we started developing the two other vectors of our flywheel. In addition to subscriber growth, we've also been building out this strategy to increase our selection.
From 40 SKUs to 400 SKUs today to 4,000 SKUs in the future, which is a major growth vector for Goodfood. It's showing improvements on not only basket sizes but retention and customer lifetime values. The third piece of that growth vector is really the acceleration of our delivery speed.
There will always be a segment of our customer base that is on a weekly subscription, and it's going to be the most cost-effective, really the most value-oriented way to receive a Goodfood delivery. Adding same-day delivery into the mix is really, if you think about it's really turning our potential from selling to a customer once a week, so 52 times a year, to being able to service our customers 365 days a year if they want to.
From that perspective, it's really another huge growth driver and growth vector for the business. Those three pillars, the subscriber growth, the growth in variety and selection, as well as offering a faster speed of delivery, they're all working together to improve the whole economics of the business, the basket sizes, retention, customer acquisition costs, and order frequency. We're tracking really nice quarterly progress on all of those metrics through our strategy.
Pushing forward, I think the business was on a great trajectory pre-COVID-19. We're in a situation where a lot of these trends have been pulled forward and a lot of attention has been brought onto Goodfood during this pandemic. Even beyond, I think we're still in the very early innings of digitizing one of Canada's largest industries. It's hard to forecast what might happen in any short-term time period. In the long term, we're still in the very early innings, and that's how our team is building out our strategy and running our operations.
Very helpful. Thank you.
Our next question comes from Luke Hannan of Canaccord. Your line is open.
Thanks, and good morning, everyone. I wanted to dig a little bit further into the gross margin line. Obviously, it was up 6.1 percentage points year-over-year. That's a very healthy improvement. I'm curious to know, in the press release, it talks about how scale and purchasing power with suppliers sort of help drive that performance year-over-year.
I'm curious to know if your suppliers or if your company is impacted at all, we've all seen the headlines for supplier fees being passed by your brick-and-mortar peers, the incumbents, onto their suppliers. Is that something that affects you or your suppliers? Did that help you sort of gain purchasing power with them in the quarter?
Hi, Luke Hannan, this is Neil Cuggy. It's a great question. We don't participate in those supplier fee games. We negotiate pretty favorably with price with our suppliers and as we said, we do business with over 100 farms and artisans, so it's very difficult for them to make their business work if we're layering on fees and fees and fees. In short, no. What has driven increase in gross margin definitely has been affected by food costs and purchasing powers. That's really exciting to see. As we've continued to scale, we've been able to get better terms and better pricing for our customers. That's kind of what I can say on that for now.
Okay. Following up on that, as far as food cost inflation, I noticed that's something that wasn't called out in the press release or the MD&A. Is that still sort of an ongoing issue for you guys to mitigate? Is it still such a pervasive issue that you're still maybe considering passing through price increases or any color there will be helpful.
For sure. I think one thing to add to our supplier relationships as well as I think about it a little more, is as we've grown selection and through press releases and conference calls, suppliers have been reaching out to us to do business. They understand the traction that we're getting in selling our grocery products with our customers and have been very excited to do business with us, which has been a great change over the past 12 months, and we anticipate that growing even further.
I think to your second question, food cost inflation has been definitely felt in parts of our portfolio of ingredients and has been offset a lot by purchasing power and going direct to farms in other parts. We put forth a price increase in July, late Q4, and that was well-received by customers given the food cost inflation environment. So far in Q1, we don't anticipate any major changes. We've been able to kind of play with the menu and use our purchasing power to offset any changes there.
Okay. Last one for me, and then I'll pass the line. Just on the competitive environment. We know, obviously, one of your competitors in the space launched their online offering. I think it would've been early on in your fiscal Q4. I'm just curious to know if you've noticed any impact from that or maybe other competitors coming into the space. The online grocery market, we can all see it's obviously expanded quite considerably since the onset of COVID-19. I'm curious to know if you've been able to maintain your share with the onset of these new competitors, if you've been able to grow share, or if you've noticed any other sort of competitive effects, we'll say, in your areas of operation.
Yes, certainly. I think what the pandemic has made clear is that the penetration of online groceries in Canada is going to happen much more quickly than we were expecting in the past. Whereas some of the most optimistic forecasts were suggesting somewhere between 5% and 10% penetration in online groceries in Canada within the next few years, now we're seeing analysts and major competitors in the space think that 20% penetration in the online grocery space is not unreasonable.
What that means is all of the competitors in the space are thinking about how this shift is going to affect their business and their customer offering. It certainly creates some questions around what to do with a store network that might see 15%-20% of their business shift in some way. It creates a lot of questions around that.
Our view is all of the different ways in which a customer is interested in interacting with online groceries, whether it be click and collect, one-hour delivery, same-day delivery, and then next day and beyond, all of those different ways in which a customer can be serviced needs to be offered and available to those customers. We do expect that all competitors in the industry will be building out those different offerings and beefing them up in the coming years.
Okay. Appreciate all the comments.
Our next question comes from Michael Glen of Raymond James. Your line is open.
Hey, good morning. Just circling back to gross margin, can you maybe talk a little bit more about the Good Courier initiative? I guess I'm definitely surprised to see this myself. When it was first described, I never thought it would generate the size of upside we're seeing on the gross margin. Where's that coming from exactly?
Yeah. Hi, Michael Glen. This is Neil Cuggy. It's an extension of the strategy that we've been talking about for a long time. Focusing on building density has been the number one way in which we can reduce delivery costs, whether we're working with partners or with Good Courier. When we see a certain market hit a threshold of density, the payback for launching Good Courier in that market is multiples in the first year. We've been able to build a team and a playbook that we can roll out those markets increasingly quickly over the past 12 months.
Just an extension of what we've been talking about and doing for the last five or six years. It also allows us a lot more control so we can be much more customer-centric. The Good Courier team can have Uber-like tracking. We can have moving billboards on the side of wrapped vans in the cities. It allows us to do refrigerated transportation as well. There's a huge amount of upside to owning that piece of the delivery experience.
I think you might have stated your current penetration on Good Courier is about 50%. Do you have any projections as to where that might track in coming quarters?
Yeah, that's right. We're currently just above 50%. Again, the way that we look at it is on a city-by-city basis. It doesn't even have to be a large urban center. It can be what we would consider a Tier 2 or Tier 3 center as well. We'll continue to roll out where it makes the most sense. I can't give you a clear forecast. I don't think that's something we want to share at this point.
What we can say is it'll be an increasingly large number of deliveries, and we'd hope that the percentage would continue to increase. Obviously, we're trying to grow the overall base at the same time. If the overall base is growing faster, then we can get Good Courier in the market. That's not necessarily a bad thing for the overall business either.
Okay. Just in terms of customer acquisition cost and really want to hone in on marketing spend here. In coming quarters, we're thinking about this Goodfood WOW launching more broadly throughout Canada. How should we think about marketing spend surrounding this launch or these rollout efforts?
Q4 is always a seasonal time of the year where we tend to reduce our marketing spend as it tends to land less well with customers that are just spending more time out of their homes and going to markets and walking around. There are other seasonal periods of the year, such as Q1, certain parts of Q2 and then Q3, where customers tend to be more receptive to signing up to an online offering.
The other two key points I would add to that is, one, in launching new products, so in growing the selection of our products, as well as offering this new WOW and same-day delivery offerings. There is some awareness that we need to build out, both within our customer base and within the broader Canadian population. We'll be investing in building that awareness out, I would say, within the coming quarters.
Okay. Thanks for that. I'll leave it there.
Pleasure. Thank you.
Our next question comes from Brian Lee of Eight Capital. Your line is open.
Morning. Congrats on the quarter. Thanks for taking my questions. The majority of my questions have been answered. I was wondering if you could maybe touch on profitability on non-meal kit businesses. Are you guys seeing some signs of profitability on private label or ready-to-eat meal solutions? Could you maybe speak to when you expect to see profitability across those segments?
Hi, Brian Lee. It's Philippe Adam. First of all, every segment of our business has been growing quite a bit, meal kit too. Directionally speaking, you can think of non-meal kit, which is meal solution and private label, directionally in line with what we said in the past as a percentage of sales. In terms of profitability, yes, it's going the right direction, not to the meal kit level side yet.
It's still, let's say, diluting to our gross margin and to our, a bit, margin on a consolidated basis. It's definitely going the right direction as we are strengthening our relation with our suppliers, automating the operations for sure, and launching more SKUs, getting more scale and operating leverage in these segments. Yeah. That's what I can say about this.
Got it. Thank you. Second question I have is, in terms of SG&A, obviously you've seen improvement as a percentage of revenues. Was it the reduced marketing spend? Could you maybe touch on the main drivers of the change?
A good question. If you look at our Q4 year-over-year, it decreased and we're very proud that we're able to show strong operating leverage in that quarter, and it's one of the main reason why we're profitable as well. We're still investing quite a bit in our teams. We're still hiring lots of key people in IT, online grocery, and other key departments.
You have to think that G&A still represents a big portion of our SG&A. Obviously, as you can see, marketing is going very well. Marketing payback went from seven months in 2019 to five months in 2020. Definitely very efficient marketing strategy helped us on that front. A lot of investments have been made and are being made in our SG&A.
Got it. Thanks for answering my questions. I'll jump in queue.
As a reminder, to ask a question, please press star, then one. Our next question comes from George Doumet of Scotiabank. Your line is open.
Yeah. Good morning, guys, and congrats on a strong quarter.
Thank you.
I just wanted to follow up on the gross margin questions. Just wondering how much of that was just strong operating leverage to a seasonally quarter, and how much of that was more structural gains in terms of efficiencies and lower incentives? Just trying to think about that line, I guess, going into next year.
Yeah. Hey, George Doumet. It's Neil Cuggy here. I would say operating leverage was lower than in Q3, for sure. Some of the other things that we had in Q4 that were continued from Q3 were a high number of agency employees, which come at a higher cost, and all of our central Canadian pay programs that are associated with the first wave of the pandemic.
We were able to deliver really good results despite having quite a bit of pressure on the actual labor bucket of our gross margin. You can take reference to my answer on food cost inflation from the last participant as well. In terms of percentages coming from operating leverage and credit incentives and efficiency, just to give you an exact percentage, I think credit incentives, we performed quite well in Q4, both on the incentive side and on the credit side. The team continues to manage those metrics very tightly.
In terms of efficiency, I think we have still a lot to go in terms of taking costs out of the equation. Our facilities today are still quite manual from an online grocery perspective, which is why we're very excited about the new facilities coming online, and being able to reduce our picking costs well over 50% for any of our online groceries. There's a lot of efficiency still to come in the coming years, and we think a lot of the labor cost can be taken out.
Okay, thanks for that. In general, free cash flow generation has always been pretty strong because of, I guess, the negative working capital from the meal kit business. As we continue to focus and roll out on grocery, how should we think about impacting the working capital requirements for the business?
Hi, George Doumet. Definitely managing the inventory with more SKUs is something that we think about. Far we were able to operate our business still as a just-in-time business. If you look at our inventory turnover, it stayed mostly flat year-over-year, even though we've added many facilities throughout the year and several hundred of SKUs.
I think we're doing a good job, and we can even be better over time. What's also important for us is to control waste. Like we said in the past, we had about 1% waste across our supply chain and we were able to keep that percentage close to 1%, even lower, in the last quarter. We're striving to continue to operate the same unit economics, improving them even though we're adding several thousand of SKUs.
Okay. Just one last one, if I may. I'd be happy to hear your thoughts on this one. Can you maybe talk to the differences in terms of the subscribers acquired during COVID-19 versus prior to COVID-19, maybe qualitatively and maybe from a churn perspective?
Happy to do so. I think the general takeaway is the customers that we were acquiring during COVID-19, represent fairly similar purchasing patterns and economics to the customer base that we had before that. I would say an important part of the reason was, during some of the peak weeks of COVID-19, we were indeed turning down demand.
We were focusing on servicing our existing customers, solidifying our supply chain to actually fulfill our customer promises to our existing customers, rather than taking on all of the customers that were demonstrating interest in online groceries and meal kits. Generally speaking, I would say because of that, we didn't get a lot of customers that were just there for a few weeks and churned out. The customer base looks fairly similar to the rest of the base.
From a churn perspective as well?
That's right.
Okay. Those are my questions. Good luck across the line. Thanks.
Thanks very much.
There are no further questions. I'd like to turn the call back over to Jonathan Ferrari for any closing remarks.
All right. Thanks, everyone, for joining us on the call, and we're looking forward to speaking with you again next quarter.
Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.