The value of Blue Apron Holding's (NYSE:APRN) recent IPO dropped like a cast-iron skillet falling from the counter following the announcement of Amazon.com's (NASDAQ:AMZN) plans to acquire Whole Foods Market (NASDAQ: WFM).
Meal kit delivery remains hugely popular and is growing as a form of dinner preparation, but the market isn't convinced that Blue Apron's subscription service will be able to withstand the competitive pressure if Amazon integrates Whole Food's prepared meals into a delivery service to Prime members.
Burned hand learns best
Consumers' familiarity with Blue Apron's subscription cooking experience -- in which all the ingredients needed to make several meals are delivered to your door once a week -- made it one of the most highly anticipated IPOs of 2017. The company had hoped to raise more than $500 million by pinning its business value at $3.2 billion as it sought to sell 30 million class A shares at $15 to $17 a stub. But once the Amazon-Whole Foods deal was announced, a pall was cast over the subscription service, and it slashed its valuation to just $2.1 billion after cutting its offering price to only $10 a share, ultimately raising $300 million.
But the fallout continues: Blue Apron's stock has plummeted 23% since its debut and it closed last week at $7.73 per share. There's good reason for the concern.
According to a recent Harris Poll, 1 in 4 adults purchased a meal kit delivery last year, and 70% of them continue to purchase more.
Their value derives from a combination of convenience and quality with time-saving attributes thrown in. In fact, the Harris Poll found saving time -- both in meal planning (46%) and prep and cook time (45%) -- were the top reasons consumers used services like Blue Apron.
The market researchers at Packaged Facts say meal kit delivery has the potential to disrupt not only the restaurant industry, which is already reeling from consumers choosing to eat at home rather than dine out, but also grocery stores, as consumers opt to choose simplicity without having to leave their homes to buy ingredients for a meal.
Which is why the mash-up of Whole Foods and Amazon is so devastating. It combines the best of everything consumers are looking for in a single business. You get the benefit of the healthful trend from Whole Foods' organic ingredients with Amazon's unequaled ease of ordering and delivery. There's a reason stocks of companies in multiple industries tumbled on the announcement of the merger.
No guarantee of success
Blue Apron has tried to put up a brave front in the wake of the announcement and the whack of its IPO valuation. CEO Matt Salzberg told CNBC he believed the Amazon-Whole Foods tie-up was "good for us" as it amplifies the availability of such services. Yet he noted there was no guarantee of success considering the e-commerce giant continues to struggle in cracking the grocery store nut. AmazonFresh is still only in 16 markets after 10 years of being in business.
Moreover, there's no real Amazon meal kit delivery product yet, though it does offer a few products, such as from Martha & Marley Spoon -- a collaboration between Martha Stewart and the Marley Spoon start-up -- and Tyson Foods. Whole Foods also recently partnered with delivery service Salted, but went in a different direction and brought the meal kits into its stores. So all the worry is based upon speculation that a category-killer will materialize from the acquisition, though that's not a given.
The kitchen sink
While those points are true, Amazon has huge financial resources unavailable to most companies as well as no fear of failure. Over the years it has experimented with projects as diverse as a mobile payment service (Amazon Wallet) and environmentally friendly, ethically sourced diapers (from Amazon Elements), and though it may have pulled the plug on them, it was willing to go in with gusto.
Considering the level of meal kit delivery popularity, its acquisition of a well-known brand of organic produce coupled with a huge member loyalty program list to sell to makes it almost a question of when, not if, Amazon starts offering a Whole Foods meal kit.
Unfortunately, the company's competitive threats aren't limited to Amazon. Supermarkets from Kroger to Publix are offering meal kits, too, and there's plenty more meal kit subscription services competing for attention, including HelloFresh, Plated, and Sun Basket.
Blue Apron's challenge is to convince consumers and investors it can stay at the front of the pack in an increasingly crowded space. Against such deep pocketed competition, that's a tall order.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.