Well, that didn't take long.
Just a few days after agreeing to acquire Whole Foods Market (NASDAQ:WFM), Amazon (NASDAQ:AMZN) filed a trademark with the USPTO for a meal-kit delivery service. There are reports that Amazon is already testing the meal kits with AmazonFresh customers.
This is exactly what Blue Apron (NYSE:APRN) and its underwriters feared when Amazon agreed to buy Whole Foods. Shares of the meal-kit delivery service's stock have been punished as news comes out about Amazon's intentions in the market.
But if investors had been paying attention since Blue Apron filed for its IPO, they could have seen this coming a long way off.
Blue Apron has no moat
There were a couple of big red flags in Blue Apron's financial disclosure that indicated it has little to no competitive advantage.
First, its marketing expenses per new customer skyrocketed over the last few years. This may be caused by Blue Apron saturating the market and having already picked the low-hanging fruit. More likely, however, it's due to increased competition as dozens of new services flood the market. Not only has the new competition made it tougher for Blue Apron to attract new customers, it also has a sizable customer base that it must spend marketing dollars to retain.
Second, Blue Apron is starting to see gross margin pressure. As competition comes in, Blue Apron is being forced to increase its selection and quality, which has increased its cost of sales. It's worth noting overall food prices declined 1.3% in 2016, so Blue Apron's inability to expand gross margin is that much more telling.
And this is all happening without a big behemoth like Amazon entering the space. Big companies have significantly more cash at their disposal to market new services, often have better brand recognition, and may be able to exercise leverage with suppliers to keep prices competitive. Blue Apron is bigger than its small start-up competitors, but it can't compete with a company like Amazon.
What does Amazon bring to the (dinner) table?
Amazon's first meal kits are already available, but you'll have to be both a Prime Member and pay for a monthly subscription to AmazonFresh, its grocery delivery service. AmazonFresh is currently only available in a few markets, mostly in the United States.
That said, Amazon's acquisition of Whole Foods could help it expand AmazonFresh to more markets, as Whole Foods stores could pull double duty as distribution centers. Additionally, Amazon may eventually offer meal kits to people that don't subscribe to Fresh.
The pricing on Amazon's meal kits is generally lower than Blue Apron. Blue Apron has several plans with the lowest being $8.99 per serving. Amazon's meal kits max out at $18.99 for two servings of steak au poivre, with vegetarian options priced lower. Of course, that doesn't include the $14.99 per month for the AmazonFresh subscriptions.
More importantly, customers don't have to subscribe to Amazon's meal kits. Since AmazonFresh offers same-day grocery delivery, customers could potentially pick out a meal kit in the morning and have it at their door by the time they get home from work. That's a huge advantage over Blue Apron, which requires a subscription (and cancellation nearly a week in advance).
Amazon's existing infrastructure and the potential to add in Whole Foods stores to support its efforts in meal kits gives it several pricing advantages over Blue Apron and smaller competitors. Not only will customers benefit from lower prices, but greater flexibility. Amazon could also spend heavily on marketing, which seems to be the only thing necessary to take market share considering Blue Apron's lack of a competitive advantage.
Overall, meal kits could help attract more customers to AmazonFresh, which would support more general grocery purchases through Amazon as well. As such, Amazon may be willing to take lower profit margins on meal kits themselves in order to grow its grocery business, which is a big problem for stand-alone companies like Blue Apron.