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Blue Apron Holdings, Inc. (NYSE:APRN)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, good morning and welcome to the Blue Apron Holdings Fourth Quarter and Fiscal Year 2018 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions.

With that, I'd now like to turn the call over to Felise Kissell, Senior Vice President of Corporate Affairs and Investor Relations. Ms. Kissell, please go ahead.

Felise Kissell -- Senior Vice President of Corporate Affairs, Investor Relations

Good morning everyone, and thank you for joining us. As a reminder, late yesterday, we issued an 8-K filing related to transferring a substantial portion of Blue Apron's production volume from Arlington, Texas Fulfillment Center, to our largest and most efficient facility, in Linden, New Jersey. Additionally, at that time, we also released our fourth quarter and full year 2018 Earnings Results. With this disclosure, purposely accelerated so that you have all information readily in-hand.

Brad Dickerson, Chief Executive Officer of Blue Apron, and Tim Bensley, Chief Financial Officer, will now review the disclosures more in-depth and be a resource for any questions you might have.

Various remarks that we make during this call about the company's future expectations, plans, and prospects constitutes forward-looking statements. For purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995, actual results may differ materially from those indicated by these forward-looking statements as a result of various important risks and other factors including, those described in our earnings release, and the company's SEC filings. In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements.

During this call, we may be referencing non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. You are encouraged to refer to the earnings release and SEC Filing, where we have described these measures in more detail, and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call are on our investor relations website, located on investors.blueapron.com, under "Events and presentations."

With that, I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad.

Bradley Dickerson -- President, Chief Executive Officer

Thank you, Felise, and good morning everyone. On today's call, I will review the strategic actions under way across our direct-to-consumer business, where we are beginning to see positive customer trends as a result of our sharpened focus on attracting and engaging customers who represent high value to the business. Continued focus on new channels, including expand the scope of our strategic relationship with Jet, and strengthening operational capabilities where we continue to gain significant efficiencies, and have further optimized our network primarily in our Linden Fulfillment Center.

Our progress on each of these actions has reaffirmed our confidence in achieving profitability on an adjusted EBITDA-basis both in the first quarter of 2019, and for full year 2019. I will discuss each of these strategic actions in more detail, and then, Tim, will then provide insight into our fourth quarter and Fiscal 2018 Results, as well as a view of 2019, before we both take your questions.

First, an update on our direct-to-consumer business. Last November, we shared our approach to more thoughtfully and strategically serve our customers by prioritizing segments that demonstrate behavioral attributes such as, proven retention, brand affinity, and high potential to increase engagement with our product offerings.

This emphasis on further engaging our best base of best customers, and growing this valuable segment is routed in our understanding of consistent trends within the business. Specifically, as we discussed in our last earnings call, the top 30% of our customers on a net revenue basis acquired in recent cohorts, account for more than 80% of our net revenue from such cohorts in the year after acquisition. These customers, have an average payback on our cost to acquire them of less than six months. And the average net revenue per customer for the top 30% of our customers was 10 times greater in the year after acquisition than the average net revenue per customer of remaining 70% of our customers.

Since we communicated this more focused and disciplined approach, we've deliberately reduced our marketing spend and strategically invested in attracting consumers who have high potential to be valuable to the business. While it's still early, we ae seeing encouraging trends in our customer metrics, most notably, average net revenue per customer, which increased on a year-over-year basis, demonstrating the quality of our customer base is strengthening.

Continuous product innovation that serves diverse taste, cooking, and lifestyle preferences, strategic partnerships that enable us to efficiently align our platform with like-minded brands, and differentiated brand messaging are and will continue to be strong drivers of our focus to attract and engage high-quality consumers.

As you know, in late December, we launched an exclusive national direct-to-consumer partnership with WW, formally known as Weight Watchers. This partnership is a first of its kind for us, both in customization of our digital platform and continuity. As this dedicated menu offering is always-on, and available to health-and-wellness-conscious consumers year-round.

While the results are still very early, this partnership has shown higher-than-expected demand to date, and we've been encouraged by the favorable response and interest in this offering demonstrated by both new and existing Blue Apron customers. In the months ahead, our culinary team plans to iterate and improve upon our offering based on the preferences of this health and wellness-focused consumer segment.

WW, very recently promoted the partnership using tools such as dedicated promotional materials in WW studios, including at recent open houses for current and prospective members, and email campaigns to its members across the country. We will continue collaborating with WW to elevate the partnership externally.

We look forward to building on the launch of WW, and plan to pursue additional strategic partnerships that align to our brand, as well as our focus on attracting and engaging more best customers.

Turning now to channel expansion, as we broaden the reach of the Blue Apron brand, beyond our direct-to-consumer platform to more households across the country. We are proud to introduce Blue Apron Knick Knacks, our most flexible culinary innovation to date, created for online and brick-and-mortar retail.

Our Knick Knack product gives consumers the flexibility to pair store-bought protein and produce of their choice with Blue Apron Knick Knacks, a refrigerated product with an extended shelf-life that includes: specialty, pre-portioned sauces, grains, and dairy ingredients from our premium suppliers; proprietary Blue Apron ingredients, including our line of custom spice blends; and a step-by-step Blue Apron recipe, specially designed with customization in mind for protein and produce pairings to complete a meal for two.

This new offering is a differentiated, highly scalable product with appealing benefits. Consumers can now elevate their everyday home cooking experience using their preferred protein and produce with a Knick Knack recipe that delivers the quality, flavors, and culinary experience that Blue Apron is known for and trusted to deliver. This offering also gives retailers an extended shelf-life solution, and the ability to cross-merchandise their own products, which we expect will increase our addressable market by reaching consumers in innovative ways through diverse channels. We are proud to announce that Jet will be our first retail partner to sell Blue Apron Knick Knacks on their City Grocery platform, beginning tomorrow, February 1st.

As you likely recall, in late-October, we began featuring a rotating selection of two-serving Blue Apron recipes on Jet's online and mobile platforms, available for same-day, or next-day delivery to consumers across the New York City metropolitan area. To date, we've been pleased with the demand for our selection of products, and have since added two additional recipe offerings to our rotation of meals, as consumers enjoy the convenience of adding Blue Apron products to their online shopping cart as part of their grocery routine. We look forward to expanding the scope of our relationship with Jet by adding Knick Knacks to our branded experience on its City Grocery platform.

As we make progress in our channel expansion strategy, we continue to apply learnings from previous partnerships, including our Costco pilot, last year. In fact, insights from these opportunities led us to expand our portfolio of products by creating new innovations like Knick Knacks, that simultaneously solve for consumer flexibility while offering retailers tangible benefits.

We are in active discussions with additional prospective partners, as we focus on expanding our selection of individualized two-and-four-serving meals, and our new Knick Knack offering in the retail environment. We are also pursuing additional strategies to expand same-day or next-day on-demand delivery of Blue Apron products to consumers in other parts of the country.

Now, an update on operations, as we continue to optimize our network with a focus on maximizing efficiencies. We have achieved tremendous progress toward operational optimization, particularly in the fourth quarter, where cost of goods sold as a percentage of net revenue improved to approximately 61 %, representing the strongest cost of goods sold efficiency we have seen in any quarter reported to date. This performance was primarily driven by improvements in our Linden Fulfillment Center, which continues to be our largest and most efficient facility.

Following an assessment of our operational structure, in light of these significant efficiency gains, we identified and opportunity to further optimize or fulfillment processes by transferring a substantial portion of the production volume from our Arlington, Texas facility to Linden, and consolidating our Texas fulfillment operations. Under the leadership of our Chief Supply Chain Officer, Alan Blake, we are confident that this transition will be seamless, due in part to our close coordination between facilities.

Arlington, will operate as a smaller facility, and serve customers in the Eastern Rockies, Lower Midwest, and certain southern states. Our operational presence in Richmond, California, will continue to serve customers in the western states, including the Pacific Northwest. Linden, will continue to serve customers on the East Coast, Great Lakes, Upper Midwest, and Southeastern U.S. regions. We believe this change will enable us to most effectively utilize our production capacity, and automation capabilities in Linden, shorten transit times, decrease our shipping spend, and reduce duplicative overhead costs across the business.

As a result of this strategy, while we will be hiring in Linden to meet the increased production volumes, our staffing needs in Arlington will change. Specifically, after a transition period, we will be revising production schedules in Arlington, resulting in a substantial decrease in the number of employees needed to meet the new volumes. Decisions that impact our employees are never taken lightly, but we are confident this approach will enable us to continue to optimize our operations, as we work to build a strong, profitable business.

We are entering 2019 with confidence, given progress on our strategies, actions currently under way, and opportunities that remain ahead for the business. Our focus this year is to implement the appropriate initiatives that will drive a sustainable revenue base, and profitability on an adjusted EBITDA basis. I am proud of our team's commitment toward these goals as we build a foundation for future growth.

I will now turn the call over to Tim.

Tim Bensley -- Chief Financial Officer

Thanks, Brad, and good morning to everyone. Turning to our financial performance, for the fourth quarter, we improved our net loss by 39% year-over-year, to $23.7 million, and reduced our adjusted EBITDA loss by 60% year-over-year to $7.8 million. For the full year of 2018, net loss and adjusted EBITDA improved 42%, and 56% year-over-year, respectively. The bottom-line outperformance from the guidance provided on our November earnings call, was driven by effective expense management, purposeful acquisition marketing strategies, and ongoing gains, and operational efficiencies across all of our fulfillment centers, and in particular, in our Linden, New Jersey Center, our most efficient facility.

Now, revenue in the fourth quarter was $141 million, slightly higher than our original outlook, compared to $188 million in the prior year, and $151 million in the third quarter. Fourth quarter marketing spend was 14.4% as a percentage of net revenue, compared to 13.4% in the prior year, and 15.4% in the previous quarter. Our revenue performance was a result of both typical fourth quarter seasonality and the transition to our more deliberate customer acquisition strategy, focused on the most efficient acquisition channels. This disciplined customer acquisition mindset also contributed to higher average net revenue per customer, both sequentially and year-over-year.

Going forward, we will continue to hone our strategies focused on attracting and engaging customers with proven affinity with our direct-to-customer platform, who deliver paybacks on our customer acquisition spend of on-average, 12 months or less.

We continue to build and leverage our operational capabilities, resulting in significant COGS efficiencies within the quarter. COGS, excluding depreciation and amortization, with 60.8%, as a percentage of net revenue, improving 930 basis points from the prior year, and 720 basis points quarter-over-quarter. We made great strides in labor and food costs as a result of enhanced planning and process-driven strategies. Given this significant operational progress, as announced, we will be transferring substantial production volume to Linden, from our Arlington Fulfillment Center, and consolidating our Texas fulfillment operations in the Arlington facility. I'll discuss the impact of the transition in more detail, in a moment.

Product, technology, and G&A, or PTG&A costs decreased 15% year-over-year to $45 million, and were 6% lower quarter-over-quarter, as we continue to tightly manage costs, and specifically, as a result of the actions taken in mid-November to streamline our workforce. We incurred employee severance, and other costs of $2.2 million in the fourth quarter, related to these actions, and we remain committed to our ongoing cost-savings initiatives as a key part of our plans to achieve profitability on an adjusted EBITDA basis in 2019.

Our cash flow profile was strong in the fourth quarter, driven by improved adjusted EBITDA performance, and lower capital expenditure needs with cash and cash equivalence of $96 million at year-end. Capex spending in the fourth quarter was minimal, at $2 million, with limited capital expenditure needs expected in the foreseeable future.

Entering 2019, I am confident that we are taking the right steps to optimize the business, including: allocating marketing investments to attract and engage consumers with high-affinity attributes. Initiating strategic partnerships that advance our product and platform innovations. Managing resource allocation and expenses with rigorous discipline, and implementing ongoing operational efficiency gains across our fulfillment centers, including leveraging Linden at greater scale.

Specifically, in regards to that last point, I'd like to speak to the financial implications of actions we announced late-yesterday, related to our Arlington facility. We expect to incur approximately $1 million in restructuring costs over the first and second quarters of 2019, including severance of $0.3 million, and other extra costs of $0.7 million. We expect to generate annual savings of $7 million beginning in the third quarter of 2019, including $4 million COGS, and $3 million in PTG&A.

As Brad mentioned, our Arlington facility will remain in operation, but will service a smaller geographic footprint. Overall, we continue to expect a reduction in PTG&A expenses of $40 million in 2019, compared to 2018.

Now, turning to our outlook for the first quarter. Given the improving financial performance of the business, we expect to achieve significant bottom-line improvements, with net loss in the range of $11 million to $14 million in the first quarter of 2019, compared to a net loss of $32 million, in the same year-ago period.

We expect to achieve profitability on an adjusted EBITDA basis, in the range of positive- $2 million to $5 million in the first quarter of 2019, compared to an adjusted EBITDA loss of $17 million, in the first quarter of the prior year, as we build upon sequential quarterly improvement in net revenue, variable margin, and PTG&A expenses. For easy reference, we have posted a reconciliation chart from net loss to adjusted EBITDA on Blue Apron's investor relations website.

For full year of 2019, we expect that our net loss will significantly improve from 2018, and we remain confident in achieving profitability on an adjusted EBITDA basis for the year. We are building the foundation for a strong, profitable business by cultivating a high-quality and loyal customer base that we believe will ultimately put us on a path for top-line growth. As I mentioned on our last earnings call, we are deliberately not pursuing unproductive revenue. While we expect this to result in a lower overall net revenue and customer count in 2019, we anticipate average net revenue per customer and orders per customer, leading indicators of a strengthening customer base to notably improve during the year, while reflecting typical seasonal trends in the business.

We believe that our new product and platform innovations, and strategic partnership opportunities could accelerate our anticipated growth. We will certainly keep you updated on this progress.

In summary, we continue to emphasize focused execution working cross-functionally across the organization to propel improved performance, and actively pursuing the appropriate strategic initiatives to create value for our stakeholders.

Brad and I will now take your questions.

...

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. To allow everyone the opportunity to ask questions, we ask that you have one question, and one follow-up as needed.

Our first question will come from Edward Yruma, of KeyBanc Capital Markets. Please, go ahead.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hi, this is Sara, for Ed. Thank you for taking our question. It's nice to see that the WW partnership is off to a good start. Can you give us a bit more detail on the behavior of those customers you brought in through that, and how big this business could be for you this year? And do you expect to offer WW meals, or anything WW-related -- to brick-and-mortar? Thanks.

Bradley Dickerson -- President, Chief Executive Officer

Sure. I think it's important to note that -- and again, this really ties specifically to our best customer strategy in going after high-affinity customers with the thought being that partnerships like WW is a great opportunity for us to attract and acquire customers in group stages versus individual consumers, one-at-a-time. So, we love this idea around partnerships, and partnering with folks that have a large subscriber basis that we can speak to and talk to in relation to our offerings. So, obviously, it just kicked off, at the end-of-December, early January; it's still very, very early, obviously. This is a unique relationship for us, it's our first kind of all-year-round offering, so we are in this for the long-game, by all means. It is still very early, and we're working very closely in collaborating with WW, and making sure that we launch this in the correct manner, and a great consumer experience.

And in doing that, we wanted to be careful knowing that January typically is a high-in-demand month anyway, for our type of product, and also, for WW. We wanted to be careful that we capped kind of the capacity of this product in January, to begin with, just to make sure that we could match supply and demand, and have a great consumer experience. And out of the gate, what we recognized was that there was a pretty high demand from our customer base, both, new customers coming in that were interested in the WW offering, and also, our existing customer base. And that did create some challenges with just meeting that capacity cap we put in place to make sure we had a great customer experience.

And in collaborating with WW, again, in the spirit of a long-game here, we wanted to make sure that we didn't stress and challenge that capacity anymore than we needed to early on. And what you've seen is WW has kind of been a little bit pulled back a little bit more on the messaging of the Blue Apron product in January. They are also going through a rebranding effort, and focused a lot of messaging their rebranding, and so forth. So, we've kind of been careful here, in the early stages, not to really challenge our ability to meet supply and demand. Now, that we have about a month under our belts, we've got a better feeling on demand.

What you're going to start to see in us collaborating with WW, is you're going to start to see the message some more going forward, on their platform, on our product offering, which should increase, hopefully, the idea being it should increase the demand coming from their platform to match with the demand we've been seeing at our platform, and continue to expand this offering going forward.

In summary, we're really pleased with the interest in the product, and that really has been without any significant WW messaging and push to date, which will start to change in February, so we're really excited about that. And again, it's still early here, it's a year-round effort, so this is going to be a consistent collaboration with WW going forward. We love the idea of partnerships like this going forward to attract larger consumer basis to our product offering, and it also matches up, obviously, very nicely with our ability to have product offerings in the health and wellness category, which is important for us, too.

As far as a retail offering, we are the exclusive provider for them on a direct-to-consumer basis. We just kicked off this relationship, we're very focused on that right now; we want to be successful on that. But obviously, the partnership is off to a great start, we are collaborating in a great level of detail with them right now, and we would be happy to continue to expand those conversations and product offerings down the road. But at first, we've got to be successful with -- we just kicked off right now, which is the direct-to-consumer offering.

Operator

Our next question comes from Rupesh Parikh, of Oppenheimer. Please, go ahead.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Good morning, and thanks for taking my question. So, on the product innovation, the Knick Knack product line you were discussing, I was curious if you've tested the product, thoughts on the margin profile. And then, what you plan to do from a marketing effort for some of these new products. Thank you.

Bradley Dickerson -- President, Chief Executive Officer

So, the Knick Knack product, again, came out of our learnings from the Costco pilot last year, and some of the challenges that we talked about in the November earnings call, was around shelf-life, and shrink, and so forth, in that business model. The great thing about Knick Knacks is it gives us a much more shelf-stable product, a longer shelf-life. And it really focuses on, what I call, the backbone of the recipe: the taste profile of the recipe, it's the sauces, it's the grains, it's the spices. And obviously, the most important thing, it's the recipe itself, and a step-by-step recipe.

So, this was really kind of -- this innovation came from the idea of can we have a more flexible offering for our consumer, where they can match up some of their preferences, and be more flexible around which type of protein, or which type of produce they may want to match up with the taste profile. So, with a combination of lessons learned on the challenges of the retail environment, along with the view of how can we have a more flexible offering to the consumer. So, this product has been tested a little bit with consumers, obviously, historically, we've done some testing with this.

The great part of this right now, with the Jet relationship, is speaking with them, and we're going to launch this in collaboration with Jet, and you'll see much more from us around the launching of this from a media perspective, and a PR perspective next week. That is the plan in getting collaboration with Jet. So, we're excited to do that, kick that off next week with them. The idea with this product though, obviously, is it can go beyond the platform level of online retail, and could be, obviously, an interesting take into brick-and-mortar retail, in other areas, in other channels going forward, also.

From a margin profile perspective, obviously, we're looking to kind of match our current margin profile. This product will be priced -- the pricing of this product may change a little bit based on recipe, but in general, the product pricing right now, it's $7.99, which again, is for a 2-serving product that the customer would go match protein and produce up with. And the margin profile, in general, should be similar to our core product margin profile.

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Great, thank you.

Operator

Our next question comes from Michael Graham, of Canaccord. Please, go ahead.

Michael Graham -- Canaccord Genuity -- Analyst

Hey, good morning, and thanks for all the information and detail. I just really wanted to ask about sort of the cadence for next year on the customer front -- or this year, rather, on the customer front. You talked in the past about Q being a heavier marketing quarter, and just wondering how that fits relative to your outlook for a lower number of customers. And I'm wondering if you could make a comment on whether you feel like there's a chance that as we exit 2019, you might be sequentially sort of adding to the customer count by then, or just any thoughts you can give us on that.

Tim Bensley -- Chief Financial Officer

Absolutely. I'll give Brad a break, and take a shot, Brad can jump in with any comment at the end of it. As I kind of said in my script, Q1, we do expect to see some sequential improvement in revenue as we normally do because of the seasonality of the business, but overall, as we move through the year, based on our more deliberate marketing spend, and as we -- as we said at the end of the third quarter, and said so far, on the call today, that doesn't mean that we -- marketing spend both in absolute dollars and as percentage of net revenue. As we move through the year, we would expect in the first phase of this strategy for us to see overall net revenue decline, and customer count decline.

Kind of on the seasonal base, as the way that you would expect from previous years, we are committed to growth, certainly, in the long-term. And that path to growth, the first step of it is this idea of building or landing on a sustainable, profitable customer base. And then, the strategy we've got in place, hopefully, we should be building on that, the exact timing of when we return to that growth both in customer count and revenue. In fact, I probably should point out that -- going back to my prepared comments -- that we would expect probably to hit, return to revenue growth before customer count growth as you should see the key metrics of revenue per customer, and orders per customer increasing as we move through the year, and we get a higher mix of kind of this best customer into our base.

The precise timing of when this thing turns around and back to growth is going to really depend on how well we do, and the timing of how well we do against our key three strategies that Brad's really gone through, you know, how well do we execute this. But as customer strategy, and the part of it where we're actually out there, starting to acquire a higher mix of people that we expect to act more like our best customers, post-acquisition and do it more efficiently, as well, but getting to that better than one-year payback.

The second thing is just the results of things like the WW partnership. I mean, that's obviously a big deal to us now, as Brad said, we're in it for the long-term. But we also are looking for, continue to look for and explore other partnerships that we think will be right on-point for us to be able to have access to a partner that's got a customer base that we can bring on board efficiently, and quickly, as well. So, to the extent that we can find more partners like WW will be important to where that inflection point comes as well.

And of course, the last thing is our channel expansion initiatives, how quickly they ramp up. We're pretty excited about this Knick Knacks product, and that being sort of a breakthrough in the category, but obviously, it's early days, it's just getting out there now, with our first retailer, with Jet.com, so we'll see how that goes. But how those three strategies basically progress over time, and how quickly we're successful is really going to determine where that inflection point, active growth happens.

Michael Graham -- Canaccord Genuity -- Analyst

That's really helpful. Thanks so much.

Operator

Our next question comes from Ross Sandler, of Barclays. Please, go ahead.

Ross Sandler -- Barclays -- Analyst

Hey, guys, this is Mario Lu, on for Ross. I have a question on the volume shift to Linden, and a follow-up after. First, can you give us a little more detail into what you guys saw differently this time around when you did your assessment of your operational structure? As on prior quarters, you mentioned that the fulfillment center in Texas and California was relatively close behind Linden. What changed this time around?

Tim Bensley -- Chief Financial Officer

Let me jump in on this one first, and then, again, I'll pass it up to Brad for a little more color. So, as you know, last year, as we're getting Linden kind of up and improving their operational efficiency, it actually made sense for us to put more volume into Arlington because, Arlington was a significantly more efficient facility back then.

There was a pretty big geographical overlap that Arlington or Linden could handle in terms of how we can get fresh and good product to our customers. But what we're doing now basically is saying, hey, based on just geographic proximity, and the fact that Linden is now overall more efficient, there's a bigger geography that Linden can handle at a better variable margin, or lower overall COGS than Arlington can.

It's still really important that we have Arlington. In fact, Texas, itself, as it turns out, is one of our largest markets, so it's important that we keep a base of operations in that part of the country to both efficiently and from a quality standpoint, get great product to our customers. But really, as Linden became overall, more efficient from an operating standpoint, it just expands the geography that we can serve from Linden, at a better overall cost than Arlington, and that's essentially what's happening now with the move of volume, transfer of volume from Arlington into Linden.

Bradley Dickerson -- President, Chief Executive Officer

And just to add on to that, obviously, Linden is now performing what it was built to do, it was built to be our largest and most efficient center. And to Tim's point, we wanted to be careful in that. Linden, just crossed the efficiency threshold of the other two centers over the last couple of quarters, so we wanted to make sure that it was a sustainable, efficiency gain, and we still see the path even increase efficiency, going forward, in Linden.

The timing of this really was more around the confidence we have in the Linden facility going forward now, based on a couple of quarters of results. Now that we feel good with that, that this just made sense, from a geographic perspective, literally, Arlington was shipping to geographic regions that probably Linden should've been shipping to, but we had to wait for Linden to get to kind of the consistent efficiency, which it now is at, and that's why this was the timing, and the shift in timing as we go forward.

Tim Bensley -- Chief Financial Officer

I guess, just to tackle on one last thing on the point you brought up. It is still true that all three of our fulfillment centers improved their efficiency, and improved the overall variable margin last year, and obviously, we expect to work with all three of them to continue on those kind of trends in 2019. But it really is, with Linden, being our most efficient, and having some pretty good geographic regions in the Eastern half of the country, this really made sense at this point.

Ross Sandler -- Barclays -- Analyst

Just a quick follow-up, if I could. So, the volume shift to Linden, should see a lot of benefits in the long-term, but do you guys expect any short-term, gross margin strides from the volume shift, as you did in the past, when you shifted volumes from Jersey City to Linden?

Tim Bensley -- Chief Financial Officer

No, not at all. Linden, is really operating very well, like Brad said, it's doing basically what it was designed to do. It's our most efficient, and most automated facility, and we've really made tremendous progress there, especially, in the second half of 2018. So, it's basically up and running, and ready to take on more volume.

Bradley Dickerson -- President, Chief Executive Officer

Historically, we were shifting volume into Linden when it was a new center. It is now, to Tim's point, an up-and-running, and efficient center, so this is a much different circumstance.

Operator

Our next question comes from Matt Trusz, of Gabelli research. Please, go ahead.

Matt Trusz -- Gabelli & Company -- Analyst

Good morning, and thank you for taking my question. I'm just wondering, out of the 557,000 customers you have today, how many would you characterize in rough numbers, are 30% type of customers? How much more do we have to go and like, thinking about what retention looks like, and how that's evolved.

Bradley Dickerson -- President, Chief Executive Officer

Without quoting a specific number, I'd tell you that the customers that we have on hand today obviously make up multiple cohorts all the way back to the beginning of -- people that were really here from the first day that we started the company. So, the older cohorts have a much higher percentage of best customers because, those are the people that have retained, and stayed on. One of the definitions of our best customers are people that have high retention, and high order rate. So, there's a higher percentage certainly, than 30% of that number that we consider the best customers.

The most recent cohort that we brought on, or each new year, about 30% of the people coming on fall into that category of best and near-best customer. So, clearly, from our acquisition strategy in the last couple of years, there are still some people that will continue to fall off that aren't in that category. The idea, though, is as we bring these new cohorts on, for instance, now starting in 2019, that just the higher percentage of those people come in from Day 1, being in that category, people that can progress to be retained, high order rate, and best customers moving forward. Certainly, higher than 30% of that base, but still, a number of people that from the most recent acquisition cohorts that are not in that group.

Matt Trusz -- Gabelli & Company -- Analyst

Thank you, and just related to that, as far as your ability to bring people on. As you're studying your brand in the marketplace, have you seen brand perception evolve at all? I wonder about, on the positive side, the effect of these partnerships, and what that has, and then, on the negative side, or potentially negative, the effect of losing scale and marketing less on a relative basis. Thank you.

Bradley Dickerson -- President, Chief Executive Officer

In general, we haven't seen a significant change relative to the brand piece of it. The idea on the partnership side is just what you're saying, it's to elevate our brand and highlight our capabilities. Partnerships like WW, and introducing our brand, and our culinary expertise to different consumer bases, especially in the health and wellness area, that WW participates in, is something that we think is an elevation of our brand, and in our culinary team and expertise, for sure. Partnerships like our partnership with Jet gives us the ability to show capability in a non-subscription, on-demand manner, which we think is important, and obviously increase adjustable market for us, pretty substantially, outside of subscription business.

Those things are important from a brand perspective, and I'd say, equally as important from a capability perspective, as we build those competencies going forward, especially in the on-demand area. I think from pulling back on marketing and so forth, I think this gets back to us being very strategic about where we place our messaging, and where we place our dollars. And I think, we don't want to get into too much detail on all the attributes of best customer because, that's a very, obviously, competitive-sensitive thing for us to be sharing. We have some external help in these matters, too, around not just what are the attributes of the best customer, but what is the best way to reach them, and the best messaging, and the way to talk to them.

So, I think even though we're pulling back on marketing dollars, I think we're focusing that messaging on the right messages to get to the right customers and therefore, I think the positive offset, the pullback on dollars is better, and more consistent, more focused messaging that offsets those less dollars.

Operator

Our next question comes from Heath Terry, of Goldman Sachs. Please, go ahead.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thanks. Just to get back to Linden and the operational side of things a bit, can you give us a sense of sort of with this move, of some of the volume from Arlington to Linden, where will Linden be from sort of a capacity utilization standpoint? How much head room will you have in that facility? And then, if you could also give us a sense, I guess, sort of unrelated, of what you're seeing in shipping costs, generally. Obviously, a lot of press around shipping costs, broadly across e-commerce, going higher. Is that something you guys are experiencing, to the extent that that's going to be -- or some litigation of that is going to be of benefit of shifting volume to Linden? Is that something we should be taking into account, as well?

Bradley Dickerson -- President, Chief Executive Officer

No, thanks to you. Let me address both those things. First of all, in terms of capacity, and naturally, of course, with the overall revenue coming down in 2018, and planned to be down a bit more in 2019, we have ample capacity across our fulfillment center network for growth. We don't expect to have to put any significant amount, or really any growth capital into Linden, Arlington, or Richmond, California over the coming year, to be able to -- or over the coming number of years, to be able to handle the capacity that we foresee. There's no issue, we have plenty capacity in Linden to bring this on, and then, when we hit an inflection point to grow beyond that, so no issues there.

As far as shipping costs go, actually, over the last couple of quarters, we've actually improved our shipping costs. It's not improved as much as the labor and food components of COGS, but shipping continues to be an area that we're improving. We've got a great contract that we entered into last year with FedEx, as well as a lot of great sort of last mile local carriers. We've done a good job in kind of optimizing the mix of those carriers, as well as just optimizing the mix of overall shipping routes. So far, the productivity that we've seen with more optimal shipping routes, the new contracts that we have, have actually done a good job of allowing us to keep our shipping costs low, and in fact, it actually improved year-over-year in 2018. So, so far, good shape.

The actual movement from Arlington to Linden has an impact of -- has a positive impact on shipping costs because when we move things from Linden into Arlington during 2017, we're actually taking a shipping penalty. And at the time, that made sense because Arlington was significantly more efficient from a COGS standpoint. Moving back to Linden actually gives us some shipping costs upside. So, I feel pretty good going in to next year, that we're not going to see a bunch of pressure on shipping as an overall cost to our COGS line.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you, very much.

Operator

Our next question comes from Matthew Kirschner, of Guggenheim Securities. Please, go ahead.

Matthew DiFrisco -- Guggenheim -- Analyst

Thanks. It's actually Matt DiFrisco, also with Matt Kirschner. Quick question is, I guess, on the 25% or so customers, if you look on a year-over-year basis that you've lost, or taken the opportunity to not go after, is there a certain region that they've skewed to, or age bracket? Can you give us somewhat of the demographic that you've lost? And then, I'm curious about sort of the snowbird effect, later Easter, and everything. Is there a benefit there, also, in that sometimes a later Easter keeps the snowbirds down in Florida, a little longer? I know that's been historically, somewhat of a thing, where you've seen people turn off the subscription when they come back north.

Tim Bensley -- Chief Financial Officer

I'll take the first part of that. I'll let Brad handle the snowbird question. I think on the first part of the question, which was...

Matthew DiFrisco -- Guggenheim -- Analyst

25% loss from a certain region --.

Tim Bensley -- Chief Financial Officer

Absolutely. It's kind of interesting. We have -- our customer base is very geographically dispersed. We actually -- we do skew, obviously, a little bit young, and a little bit higher income in overall demographics. But we have a pretty broad customer base, generally, and as we've kind of lost customers during the year, generally speaking, the loss has been kind of mixed across our customer demographics, both geographically and by all other metrics. It's not, we haven't lost a big percentage in -- disproportionately big percentage in any one geography versus another.

Matthew DiFrisco -- Guggenheim -- Analyst

What about demographic? With the demographic, though, wouldn't that be counterintuitive to trying to target your 30%?

Tim Bensley -- Chief Financial Officer

Yeah, but when you think about that, it's really, especially in the newest cohort that, it's 70% of your mix that's in that kind of other not-best, or near-best customers, that's a pretty big percentage, so I think it kind of washes out the overall demographic impact. So, the overall number of people that we're losing kind of looked like the average customer that we have.

Bradley Dickerson -- President, Chief Executive Officer

Remember, the most important part of the attributes here, we're talking about for best customers is more behavioral, it's less demographic as far as regional and so forth. It's more: are they interesting in cooking? Do they have a lifestyle that matches up with our type of product? That is more the match of what we're seeing with best customer, the 30% versus the 70%. Instead of things like where they live and things like that. Just remember, that was something we also talked about back in November, too.

On the planning piece that you talked about, what you're talking about is something we call seasonal planning, basically. It's looking at our seasons. And there's obviously definitive seasons in our business. This is where the middle of our busiest season relative to New Year, and New Year's resolutions. People want to eat healthy, people want to cook more, during this time of the year. Obviously, we've talked a lot at length, historically, about our different seasonal patterns around the strong ones being January, and then, back-to-school, in September. The weaker ones, being more in the holidays, when people are either traveling or having larger type of family meals, or busy doing other things. In the summer, when people are traveling, and also outdoors.

How we're approaching this going forward is we're planning our business on a seasonal basis. And this is something we started to put in place toward the end of last year. So, every season, we are taking into account the timing of holidays, and what our consumers and our best customers, what's important to them during those parts of the season, or not important to them. So, the thing you're talking about would be something like in the spring, taking into account when holidays fall, and how that looks during that season, and also, what are our best customers doing. This goes back to the behavioral attributes, and we've had a lot of help from third-parties on this. What do our best customers do outside of cooking with Blue Apron? So, this that kind of gives us an idea of how we can better serve their needs going forward. Those are the types of things we're kicking through.

The timing of holidays does impact demand a little bit, Easter is a unique one because, it falls in kind of various timeframes during the course of the spring. But that is something that we take into account in our new kind of seasonal planning efforts that we started at the end of last year, and we'll be doing going forward.

Tim Bensley -- Chief Financial Officer

It's probably worth mentioning because you're bringing up the issue specifically also of migration of people, snowbirds, etc. That, one of the -- some of the things that we were doing last year to improve or reduce the points of friction in our e-commerce model made it way easier for subscribers or for our customers to switch the delivery location. It used to be a little bit more difficult, now, it's basically a click of a button, "Hey, I'm going to be on vacation" or "I'm going to be at my vacation home in Florida" click it, "Have my box sent there instead." We've done a pretty good job of communicating that new capability to our customers, so hopefully, that's helpful in overcoming some of those issues, as well.

Operator

Our next question comes from Mark May, of Citi. Please, go ahead.

Mark May -- Citi—Analyst

Hi. Thanks. Just a couple of questions. I'm wondering if you could speak to the retention rate for some of the most recently acquired cohorts in terms of what retention looks like in Month 2-3, etc., and if that's changed much for some of the more recent cohorts? And then, in terms of marketing, just wondering if there's anything that the company is doing new or different with your marketing campaigns, that you think is enabling you or will enable you to better target and identify this 30%.

Tim Bensley -- Chief Financial Officer

Yeah, I'll take the first part of that. On retention rates, we're kind of early into this best customer strategy, so our most recent cohort acquired through 2018, retention rates looked relatively similar, on the same kind of retention trends that we've seen evolving over time. Of course, the whole idea as we get into this best customer thing that our average retention rate should pick up as we get a higher mix of best customers. And so, we'll kind of see how that goes. And by the way, we also hope that some of these partnerships like WW will bring on, give us customers that have a higher affinity both for the health and wellness offering that we're putting out there as well as just for the overall idea of our subscription model. And so hopefully, that'll help us with our mix of customers, and hopefully, higher retention and order rates.

For now, we're kind of early days of this new strategy, so our most recent cohorts, our retention rates are kind of, like I said, performing on similar trends that we've seen historically.

Bradley Dickerson -- President, Chief Executive Officer

And on the marketing side, Mark, typical, as we talk about our strategy, if you think about trying to get more tailored and targeted to get to best customers, what you would expect from us, in a change, and that is going to a media that it's easier to do that. So, in the past, when you're looking to acquire as many customers as possible, you tend to use avenues that can tend to be very broad, and not very specific in the target audience. Things like, kind of offline, like, TV-type media, and radio, and so forth, where you're trying to reach a broad audience, and not necessarily specific types of audience. Where, on the online facet, you can obviously be much more targeted in messaging, and much more targeted in the people you're going after based on data, and information, and so forth.

Not surprising, you'll see our shift to be more online-type advertising in marketing, and less offline than maybe you've seen from us historically because, we want to make sure that we are targeting more best customers. This is not a perfect science, by any means, but that online avenue gives us the ability to target much better. Type of messaging, important, too, I mentioned that earlier, so we've had a lot of help from some outside agencies to understand the attributes of what our best customers are, trying to understand how we think they would best want to be spoken to, and we're making sure that we're messaging them in the right way.

An example of that might be something like although promotions still play a part in our business, we're being very careful in how much promotions we put out there, but maybe not as much leading with the promotion messaging overall, as making sure we're also messaging the attributes of our brand, the benefits of our brand, our culinary expertise and so forth because, it shows that our best customers are very interested in those types of things beyond just a promotional aspect to get them in the door, too. So, you'll see some of that change with us, also.

Operator

Our next question comes from Mark Mahaney, of RBC Capital Markets. Please, go ahead.

Mark Mahaney -- RBC Capital Markets -- Analyst

Hey, I just want to go back to the challenge of when, or how you get visibility into when the active customer base can stabilize. And so, could you just, again, talk through that, the level of visibility you have, and what number, what percentage of those active customers you have now, you're pretty certain are with you for the foreseeable future, for the next couple of years. And then, what that level is, and then, is it that active customers start growing because you widdled down to that level then it stabilizes? Or do you think it's going to be a mixture of that, and new initiatives that actually get a new type of customer to come in, different, demographically, or economically, or attitudinally than what you've had in the past? I know that's a broad question. I'm just trying to get at what's the visibility into when active customer base can stabilize and then, start growing again. I know it's a broad question, but thank you.

Bradley Dickerson -- President, Chief Executive Officer

No, it's a good question, Mark. Let me take the beginning of it, and I'll let Tim kind of add on to it. The overall goal for us in this strategy is to get a bigger mix of what we call best customers. So, today, when the metric we're talking about is 30% of our customers we're saying are best customers, and we're defining that more from a financial metric of how quickly they pay back when we bring them on board compared to obviously, the spend we have to get them on board.

We basically looked at our current cohorts, historically, and said, "You know what? 30% of them payback in a time frame which we think is healthy from a sustainable business model going forward. So, therefore, our goal in all of this is to increase that 30% that pay back in a healthy timeframe to a higher percentage, whether it's 40, 45, 50, 60 this is going to take some time; it's not going to happen overnight, obviously. But our ability to understand the attributes of best customer, target them at the top of the funnel, get them in, on board, then, keep them, retain them, give them the products and the tools that engage them and retain them in our subscription business is going to be really important for us going forward.

That's the overall goal here, is how quickly can we keep moving that mix of customers to a best customer, and the ability for us to do that is obviously going to turn the ability for us, to Tim's point earlier, around. You're going to have the revenue per customer kind of lead the way before the customer count because, you're getting a better mix of good customers, and therefore, we should see the ability for us to get to a stabilization and growth of revenue overall before a customer base because of that mixed shift that we're kind of targeting and going for. So, that's the overall goal of the metric we're trying to achieve as far as the timing of specifically -- and we're going to see that, I think Tim answered that question before, but maybe we can articulate that again.

Tim Bensley -- Chief Financial Officer

Yeah, it really depends on how quickly our strategies ramp up, and how successfully all across our three -- particularly, our two-core strategies on the DTC side of how well we're able to do what Brad just said, how well are we able to go out there and do a better job of targeting new customers coming in, being ones that will act more like our best customers, which means they'll have a higher retention rate, as well as a higher order rate. And then, of course, we really think that this idea of partnerships, out of the gates, with WW is another great way for us to access customers both efficiently as well as ones that should have a higher affinity to our model.

But I think the premise that you put at the beginning of your question, which is, yeah, we are going to still shed some net customers as we move through this journey in 2019. Before we hit that point of inflection, where we start growing again off of a smaller customer base is exactly the way we expect it to work.

And then, as Brad said, and I said earlier, probably likely to expect that we would return back to revenue growth a little bit before we return back to customer growth just because of the value as defined by revenue per customer, those average customers should go up as we execute these strategies.

Operator

Our next question comes from Brian Nowak, of Morgan Stanley. Please, go ahead.

Brian Nowak -- Morgan Stanley -- Analyst

Hi, this is John, for Brian Nowak. Some of your largest competitors in the meal kits space remain committed to spending behind growth in customer acquisition. Can you talk about the strategic rationale for letting up on marketing at the time when competition is still high? And related to this, are you concerned that reducing marketing might result in some of your highest-valued customers switching to one of your competitors' offerings, or hurt your ability to acquire new customers? Thank you.

Bradley Dickerson -- President, Chief Executive Officer

Consistent with our messaging from last earnings call, we are focused on building a sustainable, profitable business going forward, and that is our focus. Period. We believe there is a good model here, business model and financial model, that is here, and it is sustainable, and can be profitable going forward, and that's our focus to achieve that. That being the case, understanding that historically, in our business industry, the method has been to throw a lot of dollars at the top of the funnel, and to see what sticks in a high-growth timeframe, that might be a good strategy for us right now. We are really focused on getting to that sustainable, great foundation, strong foundation to grow off, going forward.

We are less concerned about what our competition is doing relative to their financial model, and more concerned about how we are performing to get to that strong sustainable model going forward. That being the case, if pulling back on marketing does impact our ability to maybe get to some of the customers we want, so be it. Our strategy and focus on getting to best customers, we think, is going to enable us to increase the mix of our best customers going forward. It also, I think, goes back to new product initiatives, new channel expansion initiatives. These are things that with what we're doing, we feel are unique in the marketplace that are also important avenues and ways to attract customers beyond just spending money at the top of the funnel.

Operator

Our next question comes from Youssef Squali, of SunTrust. Please, go ahead.

Youssef Squali -- SunTrust -- Analyst

Hi, this is Agran, for Youssef, thanks for squeezing me in. A couple of -- relative to Linden. With it now becoming the most efficient facility, and the other two continuing to improve, directionally, how much more leverage can we expect on the operational side? And also, from a mixed perspective, before, New Jersey was handling about 50 % of order volume, I believe. Where should we expect that to be by the end of the year, with the new orders moving over there?

Tim Bensley -- Chief Financial Officer

Absolutely. You're exactly right, we do still have room to improve overall efficiency, and clearly, as efficiency improve in the back half, as we move into the first half, we've still got the opportunity in the first half of the year, particularly, in 2019. I'd say that we're very, very pleased with the overall variable margin that we put up at 39.2% in Q4. And I think that's a pretty good benchmark for the kind of performance you can see going forward. So, that matter of Q3 is significant improvement. Obviously, Q3, is seasonally going to be a little bit lower of a variable margin for us, with having to have incremental packaging in ice during the hottest part of the year. But I think Q3 and Q4 are a good indication of what our COGS/variable margin performance can look like going forward, which would imply a pretty big improvement obviously, in 2019, particularly in the first half of the year.

As far as Linden, it is now growing to more than 50% of our overall box, kind of our overall revenue going forward. As things evolve, and we see where our overall customer count and revenue goes, we'll make the right decisions about where to source that revenue from, from our fulfilment center. But as we move through the year now, obviously, Linden's -- mix of our overall revenue is picking up.

...

Operator

As we approach the end of our call, I will now turn it back over to Mr. Dickerson.

Bradley Dickerson -- President, Chief Executive Officer

Thank you everybody for your time today. A lot of interesting and exciting things going on in our company, in our brand, a lot of hard work going on with our teammates across all of our company. We look forward to updating you in the future conference calls around our strategies around best customer, around partnerships, specifically, our WW relationship, and our Jet relationship, and obviously, the expansion into other channels and new products. Thank you again, and we'll talk to you later.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 61 minutes

Call participants:

Felise Kissell -- Senior Vice President of Corporate Affairs, Investor Relations

Bradley Dickerson -- President, Chief Executive Officer

Tim Bensley -- Chief Financial Officer

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Rupesh Parikh -- Oppenheimer & Co. Inc. -- Analyst

Michael Graham -- Canaccord Genuity -- Analyst

Ross Sandler -- Barclays -- Analyst

Matt Trusz -- Gabelli & Company -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Matthew DiFrisco -- Guggenheim Securities -- Analyst

Mark May -- Citi-- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Brian Nowak -- Morgan Stanley -- Analyst

Youssef Squali -- SunTrust -- Analyst

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