In this segment of Industry Focus: Consumer Goods, the cast continues their post-IPO discussion of Blue Apron (APRN 5.12%). Already facing major challenges, the company now also has to watch rival HelloFresh make its own own stock market debut.
Find out more about both companies, including caveats you should know when investing in the relatively tiny meal-kit industry.
A full transcript follows the video.
This video was recorded on Oct. 24, 2017.
Vincent Shen: To make matters even more interesting, you have HelloFresh, one of their biggest rivals, gearing up for its own IPO in Germany. If they price where they want to, that will ultimately be a bigger deal than Blue Apron had, and they'll come out of the gates potentially with a stronger valuation than Blue Apron as well. Currently, Blue Apron has a market cap of about $1 billion, whereas HelloFresh would like to come out with a valuation, I think it was €1.8 billion. Did I get that right, Asit?
Asit Sharma: About €1.5 billion, or $1.8 billion.
Shen: Thank you -- so higher valuation. The CEO of HelloFresh, Dominik Richter, he said that his company is poised to surpass Blue Apron by revenue in the coming months. Management has established a very clear goal of becoming the No. 1 meal kit player in the United States by next year. What other details have you seen around them, and what kind of impact do you think this is going to have for Blue Apron?
Sharma: The detail that really stuck out to me, Vince, was if you line up the second quarters between these two companies, HelloFresh had sales -- and I'll convert this to dollars -- $169 million vs. $238 million for Blue Apron. Which is why HelloFresh says it can overtake Blue Apron this year. Now, let's do some math. Blue Apron, as I mentioned earlier, did a little less than $500 million of revenue in the first six months of this year. So, if both companies are at a run rate of about $500 million in half a year's time, that's $1 billion revenue, roughly. Let's fast forward to next year. That's $2 billion of revenue in a year. Now, most of the estimates that I have seen for the meal kit delivery market in North America in total are about $2 billion. These are two companies -- small, fledgling, raising money in the public markets to go against the likes of Amazon-Whole Foods with AmazonFresh, and we know Amazon has taken out some trademarks and patents for its own delivery service. We mentioned Plated, which is now owned by deep-pocketed grocery chain Albertson's. Not to mention Kroger, which also has its own small meal kit delivery service that it's working on. If the whole market for meal kit delivery is $2 billion, and these two companies will have most of that market by some point next year, guess what? They're extremely vulnerable to me.
Shen: Yeah. They might be the biggest players right now, but I think you have to look at the growth overall for this industry. Overall, I'm not all that bullish on the meal kit space in general. I think competition ultimately is going to drive prices down, shake out some of the weaker players. But it's a growing industry. Blue Apron, despite the challenges that it's seen, some of the analyst expectations for the company's revenue, they expect it to grow double digits in the next several years, hitting close to $1.2 billion by 2018. But, on the HelloFresh side, I think they have more active customers than Blue Apron. Management has also indicated that they hope to break even in the next 15 months. So neither company right now is operating profitably, but if they can do that, it definitely helps to legitimize and add some weight to the idea of these being more sustainable businesses. But then, you have the issue in terms of, who owns Whole Foods? With Amazon potentially having taken over that business and deciding to throw its hat into the ring here with the help of the brick-and-mortar infrastructure that Whole Foods includes, the scale and size advantage that they have, and Amazon's logistical prowess, I feel like every single time we talk about some industry on the verge of disruption Amazon has something to do with it and how they can hurt the established players. This is also a case where that's definitely a potential thing. Is there anything else that you think investors need to be following for Blue Apron in the coming months? Key objective from management that I've seen, they've laid it out, they say they want to increase lifetime values of their customers and their revenue per customer, but we haven't gotten as much detail on those lifetime values. Revenue per customer and orders per customer, those metrics, if you look at the latest release, are moving in the wrong direction. So I will definitely be watching for that when they report in early November. So just a little over a week from now. What else are you watching, Asit?
Sharma: Really quick, investors, you'll see this Q3 report that Vince mentioned, and take a look at the balance sheet, because that will have the proceeds of the IPO and how the company has used that cash already. And take a look at the cash flow statement of the operating cash flows, and take a look at what that cash burn looks like. Very important, because, as we said before, the company needs to both invest in its facilities and invest in marketing. We'd like to see the customer numbers improve, as Vince mentioned, but also, how bad does that balance sheet look? And we'll get a really good chance to see that next week, and we'll have some coverage on Fool.com. So you can read one of our articles and get the lowdown.