Blue Apron's (NYSE:APRN) debut on the public market has gone from one disaster to the next. First, the company was forced to reduce its initial offering price from $15-$17 all the way to $10 after Amazon announced that it would buy Whole Foods Market.
Once the stock went public, it fell almost immediately. Worries about slowing growth and competition plagued the company, and its shaky transition to a new production facility, layoffs , and a pair of disappointing earnings reports have further hammered the stock. Nearly five months after its IPO, the stock trades for just $3, in penny stock territory.
But it's a mistake to assume that Blue Apron's follies are representative of the health of the entire meal kit industry. While Blue Apron is struggling to grow now, other signs indicate promise for the upstart dinner-in-a-box segment. Smaller rival Plated, for instance, sold for $175-$200 million in September to Albertson's, one of the nation's biggest supermarket chains. Then earlier this month, Germany-based Hello Fresh, Blue Apron's biggest competitor, had a successful debut on the Frankfurt stock exchange. Hello Fresh saw its revenue jump 53% in the second quarter, with gross margin ticking up 180 basis points to 59.4%. For comparison, Blue Apron's revenue grew just 18% in the second quarter, and that slowed to 3% in the third quarter as the company deliberately scaled back on marketing while it worked to overcome logistical issues at its new production facility.
It's the competition, not the concept
Start-up industries often attract a wide range of competitors, and meal kits are no different -- dozens of companies are angling to ship you dinner in a box. But as Hello Fresh's strong growth indicates, Blue Apron is rapidly losing market share. According to data from research firm Second Measure, Blue Apron's market share in the U.S. fell from 57% in September 2016 to 40% in September 2017. Meanwhile, Hello Fresh's market share improved ten percentage points to 28.4%, while Sun Basket's market share doubled to 8%.
That underscores a huge problem for Blue Apron. If the company had simply maintained its 57% market share from a year ago, revenue would have grown 46% in the third quarter instead of just 3% as the industry continues to expand. As the market leader, however, Blue Apron has a target on its back, and Hello Fresh told investors in October that it would soon surpass it in market share. "We have huge momentum in the U.S. market and are poised to overtake our biggest competitor in the near term," the company said in an investor presentation. "We have out executed Blue Apron across all dimensions." According to Second Measure, Hello Fresh could actually overtake Blue Apron as soon as the second quarter of next year.
Fortunately -- for both Blue Apron and its investors -- the company has a convenient excuse for its market share losses: it cut back significantly on marketing expenses as it struggled to bring its new production facility on line. After all, attracting new customers simply doesn't make sense if the company can't fulfill the additional orders. Marketing spending dropped 31% in the third quarter, and customer orders actually declined slightly in the period.
The company said it planned to cut back on marketing again in the fourth quarter as the period is seasonally slow and the company is still ramping up operations at the new Linden, N.J. facility. Management also said it was focused on making sure that more orders arrived on time and complete.
The first quarter has historically been Blue Apron's biggest for marketing -- Americans tend to cook at home more in the winter months, people have made New Year's resolutions about cooking and eating healthy, and there are no major holidays to take away attention from cooking at home.
After the company's disappointing guidance for the fourth quarter, the first quarter of 2018 may be its last chance to reinvest in marketing and show that it can grow its market share. Hello Fresh and others are coming after Blue Apron, and they don't have the same operational problems.
The fact that the meal-kit market is still growing is a good sign for Blue Apron, but the opportunity for the company to reassert its leadership is closing quickly.