Here is the video from this transcript: YouTube
The meal-kit delivery industry was booming around 4 years ago. And Blue Apron was amongst the first movers in the U.S in 2012. But in the end, it seems that it did not benefit from the traditional first mover advantage. Other competitors just kept emerging: HelloFresh, Plated, Home Chef, Freshly. The list goes on and on. Relatively speaking, these competitors fared way better. Some even went on to get acquired. So, what went wrong at Blue Apron?
Blue Apron came in guns blazing, wanting to solve a problem. It proposed a time and money saving subscription package for a very defined segment of the population: The urban working professionals who valued home-cooked meals. And these customers loathed the hardest period of any given day: Dinner time. So Blue Apron delivered meal kits to help them save time on grocery shopping, recipe hunting and meal preparation. Their first delivery was a box containing the ingredients for three recipes: Seared hanger steak, barbecue Cornish game hen, and lemongrass shrimp with soba noodles. And for $10 a meal, what could go wrong?
Blue Apron was killing it. In 2015, they managed to pull in 135 million dollars in venture capital funding from investors such as Bessemer Venture Partners. And at that time, it was valued at an impressive 2 billion dollars. That’s a huge jump from their 9-million-dollar valuation back in February 2013.
Their marketing strategy to attract new customers was superb. High level financials painted a rosy picture. Revenue grew to nearly 800 million dollars in 2016. The number of customers rose from 213 thousand in Q1 2015 to over 1 million in Q1 2017. This is when they decided to go for an IPO that valued them at 1.9 billion dollars. However, that was 33% below what Wall Street Bankers targeted.
Investors were rightly concerned about Blue Apron’s profitability trajectory. Their first quarter loss in 2017 was as big as their loss for the entirety of 2016. Blue Apron was clearly struggling to attract customers beyond the metro areas. Moreover, investors were worried about Amazon’s move in the industry with its Whole Foods acquisition. Amazon was expected to leverage Whole Foods to create its own delivery kit brand. Meal-kit delivery companies were also in a heated battle with food delivery companies. UberEats, GrubHub and DoorDash offered customers a marketplace for all types of food at all price points.
A month after Blue Apron’s IPO, their stock price was down nearly 50%. Their COO immediately stepped down, followed by their CEO, three months later. Now, from my research, I get a sense that the venture capital investors knew that Blue Apron’s unit economics were not improving. They wanted to cash out as fast as possible. I took a look at Blue Apron’s 2017 prospectus and it did not contain a lot of information about its unit economics. They only provided a simple graph that shows their customer acquisition cost and customer lifetime value. Some analysts were right to question these numbers.
What this chart shows is that Blue Apron spends $94 to acquire a customer, who in turn generates $939 to Blue Apron over the course of 36 months. With a 31% gross margin, the ratio of Lifetime Value to Customer Acquisition Cost is around 3 times. Don’t get me wrong, it’s an okay number, only as long as you can retain these customers.
Blue Apron was spending a lot of money on marketing but they had reached their peak in 2017. If they wanted to attract more customers, they needed to increase their cost of acquisition.
This is when the veil of Maya finally fell. When Blue Apron could not onboard new customers, investors could see the real number of loyal customers.
An assistant professor at Emory University estimated that Blue Apron’s retention rate was only about 30%. Blue Apron was already aware of that problem. They tried to fix it by spending marketing dollars on existing customers by developing loyalty programs. But the ship had sailed already.
It seems that Blue Apron was not the only one suffering from the low retention. But in Blue Apron’s case, what hurt even more was the mismanagement of costs. Other companies managed their costs well but lacked the expertise and scale to grow further. Thus, a wave of acquisitions followed. Plated was sold to Albertsons for 200 million dollars. Home Chef was sold to Kroger. Chef’d sold its assets to True Food Innovations.
During that time, Blue Apron was exploring the partnerships avenue. They partnered with Costco to sell the meal kits in stores. Blue Apron also offered the kits through GruBHub and Walmart. They even partnered with AirBnB to sell kits created by Airbnb Experience hosts. None of these partnerships worked for Blue Apron. They did not no much to tackle the real problems. Unit economics. Customer retention. Or even if they did, they were not as effective.
If you were short on Blue Apron, congratulations. Their share price fell below $1 in December 2018. They had to conduct a 1 to 15 reverse stock split to maintain their listing on the stock exchange. To be fair, other competitors were declining as well, but not as much. HelloFresh’s stock price declined by around 40% in 2018. But they managed to get it back up by around 400% since then. Quite impressive. I can’t say the same for Blue Apron. They went the opposite way, nosediving by around 42%.
Maybe they will be acquired by a supermarket chain? Or maybe they will need to cease operations? Either way, this story does not end well for investors. Did you ever try meal delivery kits? What has your experience been? As always, let us know.