Investors questioned the future of a company operating in an industry with few barriers to entry, a reputation for high customer churn, and a lack of profits for the foreseeable future.
As if Blue Apron didn't already have an uphill battle in its upcoming IPO roadshow, its sales pitch took a definitive turn for the worse when Amazon (NASDAQ:AMZN) announced its acquisition of Whole Foods Market (NASDAQ: WFM) for $13.7 billion. Not only does that combination create an unprecedented powerhouse in groceries, combining the leading e-commerce business with the country's largest organic grocer, but it also seems like the perfect team for taking over the meal kit industry.
Both companies have already dabbled in pre-portioned, ready-to-cook meals. Whole Foods has partnered with meal kit providers like Purple Carrot to carry its offerings in stores. Amazon, meanwhile, has made meal kits from Martha Stewart and Tyson Foods available on Amazon Fresh.
In spite of ample competition, Blue Apron has put up substantial growth and become the U.S. industry leader. Sales grew 133% last year, and the company is on track to clear $1 billion in sales in 2017. For investors wondering if Blue Apron will thrive or dive over the coming years, there's one key factor to watch.
Customer loyalty is crucial
The fears about the threats to Blue Apron from big supermarket chains are valid, but they won't necessarily derail the company's growth. Not all industries have high barriers to entry, but a handful of companies generally rise to the top as they build out economies of scale and develop brand reputation.
Take beverages. Anyone can make soda, but Coca-Cola and Pepsico have risen to the top of the industry by creating popular beverages, establishing global distribution networks, and buying up smaller brands as they prove their value.
Blue Apron could follow a similar path if it can generate the customer loyalty it needs to keep growing.
In its S-1 filing, the company revealed that customer retention becomes more difficult the more time a customer spends on the service, saying, "Over time, our Customers on average order less frequently, or sometimes cease ordering." That is a concerning admission, as it's more expensive to acquire new customers than retain existing ones. According to Blue Apron data from 2014, customers ordered $410 of goods in the first six months they used the service but only $529 over the next 30 months, another sign the service loses its stickiness as time goes on.
Still, the vast majority of the company's orders come from repeat business. Last year and in the first quarter of 2017, 92% of orders came from repeat customers, a promising sign for the company. Blue Apron has stepped up marketing efforts to boost customer retention, as marketing expenses more than doubled in the first quarter of the year to make up 25% of revenue.
The company now has over one million customers, and that headcount has increased sequentially in every quarter over the last two years except once due to seasonality.
Blue Apron certainly has its share of fans, but its loyalty will be tested if companies like Amazon and Whole Foods aggressively enter the market with low pricing and the long-term commitment to sacrifice profits for market share. Thus far, Blue Apron has shown that it can muster some degree of customer loyalty, but the attrition of long-term customers is concerning. The company is not yet profitable and marketing expenses are increasing disproportionately -- winning over new customers is costing more and more.
Blue Apron's current leadership position in meal kit delivery means little if it fails to hold onto that position as major competitors throw their weight into the space, because as they do, it will only become more difficult for Blue Apron to grow its top and bottom lines.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, PepsiCo, and Whole Foods Market. The Motley Fool has a disclosure policy.