Blue Apron's (APRN 16.20%) latest earnings report had more red flags than a rough day at the beach.
After going through one of the worst IPOs in recent memory, the meal-kit service just gave investors more reasons to head for the hills. Revenue increased by just 18% to $238.1 million after more than doubling last year and jumping 42% in the first quarter.
On the bottom line, a profit of $5.5 million flipped to a loss of $31.6 million, or a loss of $0.47 on a per-share basis.
But the challenges dug deeper than that. Blue Apron cut back on marketing expenses because of operational issues at its new Linden, NJ facility. The company was having problems meeting its current level of demand so it didn't want to bring in new customers only to disappoint and then lose them. As a result, management now expects revenue growth to slow in the second half of the year from the first.
The other key issue is that customer acquisition costs are rising as it spends more than $400 to bring in new customers, yet the average customer spent only $251 on the service in the latest quarter.
In other words, the company has both an operational and a demand problem, which is not a good combination for a recent IPO and supposed growth stock.
Meanwhile, competition is rising as Amazon.com (AMZN 1.12%) is testing different meal kits on its website, and Chef'd recently raised $35 million from Smithfield, Campbell Soup, and Fresh Direct, as more big food companies seek a foothold in the growing market.
Consolidation may be the only way out
Nascent industries often attract a rush of competition, and meal kits are no different. The dawn of the internet led to the dot-com boom with hundreds of companies peddling their wares and services online. Most of them went belly up when the bubble burst, however, and now only a few e-commerce companies remain, with Amazon dominating the field.
Automobiles went through a similar path as at one point early in the 20th century there were more than 1,000 car manufacturers in the U.S. By the end of it, there was just the Big 3 in Detroit.
The meal-kit industry has attracted dozens of start-ups specializing in nearly every kind of diet including vegan, gluten-free, and paleo. But if Blue Apron, the industry leader, isn't making a profit and is seeing growth quickly fade then it's likely that many of its peers are as well. Consolidation will soon become necessary for the industry to survive. Blue Apron would be wise to acquire smaller meal-kit companies or even consider merging with a larger one like Plated or Hello Fresh. By doing so the company would have more customers to leverage operational costs like marketing and management, and could use the additional scale to negotiate lower food prices and shipping costs. It would also serve to eliminate competition.
Blue Apron could also try to sell itself to a larger company like Amazon, or one of a number of supermarket chains that are trying to break into the industry.
Either meal kits are a fad or they're not
That meal kits are just a fad seems like a possibility after Blue Apron's latest report, especially since it called for revenue in the second half of the year to decline from the first half. We've seen this happen before in the food industry. Countertop soda-makers were all the rage when SodaStream International (SODA) stock surged after its 2010 IPO. Its strong growth attracted competition from Primo Water, Cuisinart, and Keurig, but the industry crashed when U.S. demand suddenly faded. SodaStream shares plunged in 2014, but have recovered recently after it pivoted to a sparkling water brand.
Meal kits have some of them same issues that DIY soda did. For instance, it was never really cost-effective to use machines like SodaStream to make soda when you can just buy a 2-liter bottle at your local grocery store for as little as $0.99. Similarly, meal kits, which often cost more than a fast-casual meal, are more expensive than just getting ingredients for dinner at the supermarket.
At this point, it's unclear if meal kits will be a fad, or if the industry will consolidate into a few players who will ultimately thrive. The attention the industry is getting from the likes of Amazon and grocers such as Kroger and Publix certainly seems like a positive for its long-term survival.
If you're Blue Apron, of course you're betting on the industry's continuing existence. But the best way to ensure that is to begin the process of elimination so you can build scale faster and not have to worry about pesky start-ups who don't need to turn a profit because they still have cash to burn.
It's time for Blue Apron management to pull up a seat to the negotiating table. And make sure they bring that checkbook too.