Meal kit service Blue Apron (NYSE:APRN) managed to beat analyst expectations for revenue when it reported its second-quarter results, growing sales by 18% year over year. The good news ended there. Costs exploded, driven by the company's investment in a new facility in New Jersey to support its product expansion initiatives. Gross margin tumbled to 31.3%, down from 36.9% during the same period last year, and operating costs jumped 37% year over year.

Compared to the first quarter, revenue was down slightly, driven by a 9% decline in customers. Each customer placed more orders, but not enough to prevent a 5.6% decline in total orders placed. Seasonality hasn't been a major factor for the company in the past, so the main culprit behind the customer exodus appears to be Blue Apron's attempt to rein in marketing spending. The company slashed its marketing costs, spending $34.5 million compared to $60.6 million during the first quarter.

This lower marketing spending, still 14.5% of revenue, wasn't enough to draw in more customers than the company lost. If you're not gaining customers by spending a double-digit percentage of revenue on marketing, something's wrong.

A Blue Apron box full of ingredients.

Image source: Blue Apron.

Abysmal guidance

Blue Apron expects to spend between 15% and 16% of revenue on marketing during the second half, but it will have nothing to show for it. Total second-half revenue is expected between $380 million and $400 million, down from the $482 million of revenue produced during the first half. In 2016, second-half revenue was $421 million.

The growth story is dead, in other words. On top of the expected revenue decline, problems with the new facility in New Jersey are pushing up costs. Blue Apron management said on the conference call that the company was having issues transferring volume from the old facility, set to close later this year, to the new one. Add in a sprinkling of higher labor costs, and the result is elevated costs at a time when sales just aren't keeping up.

The $278.5 million Blue Apron raised from its initial public offering gives the company some time to figure out how to return to growth. Investors won't be nearly as patient.

A flawed business model

The core problem with Blue Apron, and the reason why customers don't seem to stick around, is price. Blue Apron charges either $8.99 or $9.99 per meal, which is outrageously expensive compared to the grocery store. This added cost doesn't buy much convenience, as much of the prep work still needs to be done by the customer. It shouldn't be all that surprising that charging restaurant prices for a box full of ingredients requires extensive marketing to push on consumers.

I'm having a hard time seeing meal kit services being anything more than a fad if prices don't come down. Grocery stores seem very likely to get in on the act sooner or later, and they'll likely undercut Blue Apron on price. For grocery stores, which run on razor-thin margins, even charging a small premium to package ingredients into a meal kit can boost the bottom line.

Blue Apron is investing in growth, but the company's second-quarter results and guidance show that growth is grinding to a halt. The stock has already tumbled nearly 50% from its reduced IPO price, but that may be just the beginning if the only thing growing at Blue Apron is its costs.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.