Now that supermarket giant Kroger (KR 0.56%) has acquired meal-kit delivery service Home Chef, the question Blue Apron (APRN) investors need to ask is, will that company risk becoming insolvent rather than find a partner of its own?
On a silver platter
Kroger is paying $200 million for Home Chef, the third largest meal-kit company by sales, with the potential for another $500 million in future earnout payments over five years if it can hit certain milestones. The supermarket chain said Home Chef revenue grew 150% to $250 million last year and that the service has posted two consecutive quarters of profits, something Blue Apron has yet to achieve. Even though it narrowed its losses last quarter, Blue Apron still came up $32 million short of the breakeven point.
As the industry continues to evolve, it is going to become even more difficult for stand-alone services to remain such.
Image source: Blue Apron.
Part of the problem is that, with the exception of meal-kit services that cater to a niche market, such as vegan meal-kit maker Purple Carrot, there is no real product differentiation between providers and no switching costs for consumers, so barriers to entry are low and customer retention costs are high.
That last point has weighed particularly hard on Blue Apron, which has struggled significantly since going public last year. First-quarter revenue tumbled 20% year over year to $198 million as the number of customers and orders placed dropped yet again, although they rose sequentially from the fourth quarter along with the orders they made, and revenue per customer.
The increase can be tied to Blue Apron once again boosting its marketing expenses, which rose 56% from the preceding period. That brought in 40,000 more customers, but it also meant that the acquisition costs per customer (roughly $352) far outpaced the revenue per customer ($250) it received.
Although Blue Apron recently signed an agreement with Costco to have its meal kits appear in some of the warehouse club's stores, it's not going to be nearly enough to offset the business's decline.
Little value in going it alone
Given the challenges a stand-alone company faces, we're likely to see a lot more consolidation and partnerships formed in the meal-kit space. An acquisition like the one of Home Chef by Kroger, or last year's purchase by Albertson's of Plated, gives the kit companies immediate, broad distribution, a feat that is expensive for them to achieve on their own.
For Kroger, a deal like this is essential to keep it competitive with both Walmart (WMT -0.65%), which has added meal kits to its freezer cases, and Amazon.com, whose acquisition of Whole Foods Market upended the meal-kit delivery business.
The trend also calls into question how much staying power the meal-kit industry really has. While Nielsen data finds 25% of U.S. households would consider trying a meal kit in the next six months, indicating there may still be untapped potential in the market, keeping customers around is a much more difficult proposition. Retention rates are reportedly dismal for all the major players, which is why they have to spend vast sums to keep finding new customers.
Being acquired by a supermarket eliminates the need to chase customers, but who would buy Blue Apron? Walmart offers its own line of meal kits, so getting an established name like Blue Apron could catapult it to the forefront of the industry and keep it a step ahead of Amazon. Yet with Albertson's paying $300 million for Plated and Kroger spending between $200 and $700 million for Home Chef, even Blue Apron's seriously depressed $560 million market valuation may far exceed what anyone would be willing to pay for a company that is losing money.
It may take a serious drop in Blue Apron's valuation for it to reach an attractive buyout level, though it might also mean its value to an acquirer would be seriously diminished as well. In the end, there may be no good outcomes for Blue Apron in all of this, and investors may find it has much further to fall before it can move forward.
