The Big Question About Blue Apron’s IPO
Meal prep pioneer Blue Apron has filed for an IPO on the NYSE under the symbol APRN. If successful, it will be the first of its genre to make the transition to a public company. This is happening at the same time that some notable start-ups in a similar space like Sprig and Maple have ceased operations.
If successful, Blue Apron could open the gateway for similar companies like Hello Fresh and Sun Basket to try their hands. Other notable rivals include Plated and HomeChef, which bills itself as the second largest service, providing almost 3 million meals per month.
The IPO, of course, is accompanied by an S-1 filing, which provides an opportunity to peak (a bit) under the hood at its underlying performance. I must admit to being both a user of these services as well as a skeptic: while there is no doubt an underlying consumer appeal, the economics of customer acquisition and churn have always seemed to be problematic. I love the product but I question the business model.
Blue Apron has undoubtedly proven that there is a consumer market. Revenue has grown tenfold in two years, from $77.8 million in 2014 to $795 million in 2016. The company fulfilled 4.3 million orders in the latest quarter and $244 million in revenue suggests an easily achievable $1 billion-plus business by year end at its current growth. Not surprisingly, the company has yet to show an annualized profit, with an adjusted EBITDA loss of $46 million in the latest quarter. Many of the key metrics to judge the company seem to be in a mild decline with average order size, average number of orders per customer and average customer value all down.
According to Pat Vihtelic, CEO of Home Chef, business has grown 10x over the last year, is cash flow positive and has been profitable since March of 2017. A case could be made that if these companies ratchet down their marketing spend and slightly slow growth, the underlying business model for meal kit delivery remains sound.
The real question surrounding Blue Apron (and any of its cohorts) is the cost of acquisition per customer and the churn rate of a customer once acquired. In this regard, the IPO filing sheds little light. On a fiscal year basis for 2016, the company spent $144 million in marketing to generate the $795 million in sales, or around 18%, and marketing costs seem to be on the rise in the latest quarter, climbing to 24.8% of net revenue, perhaps in an attempt to accelerate revenue growth ahead of the IPO.
My own experience with several of these services suggest that churn is an issue, much of it driven around the subscription nature of the model. While the experience (and food quality) has by and large been excellent, the need to order ahead doesn’t work particularly well with my busy lifestyle. Blue Apron’s product quality, recipe sophistication and commitment to the planet all resonate well with my values. I’ve also used services like Plated and Home Chef, the latter of which focuses on slightly easier to prep meals and seemingly more accessibility.
However, I tend to order for a few weeks and then stop, enticed by a new offer or a new service. An excellent local grocer in our area, Standard Market, offers its own version of these kits and requires much less advanced planning, with an easier answer to, “What’s For Dinner Tonight?”
I think the future of meal kits might look as follows:
- Expect grocery chains to get involved, with the ability to provide more immediacy. Chains like Kroger, Publix, Giant Eagle and Whole Foods are all currently testing variations. These might be private label or done in conjunction with the existing services. Pat Vihtelic, CEO of Home Chef, suggests that these programs need not be “mutually exclusive” and I would agree. With these programs in their nascent development, several models can and will emerge.
- This might also be an e-commerce sweet spot, with a built-in delivery mechanism that presumably has lower costs and slightly more immediacy. Peapod, Fresh Direct and Amazon Fresh all have offers.
- Already prepared meal services abound, from Diet to Go, Nutrisystem and BistroMd also abound, offering more convenience, but perhaps also more weekly commitment.
- As mentioned earlier, on-demand complete meals like Sprig and Radish were intriguing but also more complicated to master from a supply chain standpoint. There remains plenty of competition in this space as well, with options like Freshly on a national basis and lots of local competitors. The need for localized production and distribution suggests a more costly and complicated model.
- Variations on the theme of meal kits are occurring to meet the diverse dietary needs of consumers, from healthier options, vegan options, paleo options and the like. Additionally, more nuance around portion size will also be critical, being able to serve families of 2,3,4 or 5.
Clearly, these companies have tapped into a real consumer need for simplification of the meal while also providing some family togetherness in the process. Not all of them will make it, though, so I would expect inevitable consolidation along the way as the industry evolves and matures.