What happened
Shares of meal kit delivery service Blue Apron (APRN) tumbled 29.2% in July, according to data provided by S&P Global Market Intelligence. The company went public on June 29 at a reduced price, and concerns about heavy spending, slowing growth, and intense competition have hammered the stock ever since. Shares fell another 23% during the first 10 days of August, with an abysmal quarterly report and guidance calling for a second-half revenue slump erasing any confidence that remained.
So what
Blue Apron is the first of the meal kit companies to go public. The business model involves boxing up ingredients and recipe cards and shipping them to consumers, allowing them to cook meals without the hassle of shopping at the grocery store and coming up with their own recipes.
Image source: Blue Apron.
Blue Apron has had plenty of success getting people to try their service, but the company's IPO filing made clear that its business model requires a monumental amount of marketing spending. The company poured $60 million, about 25% or revenue, into marketing during the first quarter of 2017. This got people in the door, but the average customer placed just over 4 orders per quarter. Most customers simply aren't sticking around very long, and Blue Apron is posting big losses as a result.
Blue Apron's second-quarter report on August 10 confirmed that the company's growth story is on life support. Blue Apron expects second-half revenue to decline as it pulls back on marketing spending, attempting to save money after having problems transitioning to a new facility. The customer count tumbled 9% sequentially during the second quarter despite the company spending nearly 15% of revenue on marketing.
Another factor in Blue Apron's decline: Amazon. The e-commerce giant, which is in the process of acquiring Whole Foods, filed for a trademark relating to meal kits on July 6. The prospect of intense competition from Amazon, and potentially other grocery chains, added to the stock's woes.
Now what
The biggest problem facing Blue Apron is its flawed business model. The concept of a meal kit isn't a bad one, but the company's service is dramatically overpriced. Ranging from $8.99 to $9.99 per person per meal, Blue Apron charges fast-casual restaurant prices for a box of groceries. It just doesn't make much sense, and it's thus not surprising that customers aren't sticking with the service.
Blue Apron stock has been roughly cut in half since its disappointing IPO. With revenue set to decline during the second half, investors would be wise to take a hard pass on this struggling company.
