Investors seem optimistic that a new CEO can improve the fortunes of Blue Apron (APRN).
The meal-delivery company announced on Nov. 30 that co-founder Matt Salzberg was stepping down as CEO, and CFO Brad Dickerson was stepping in to replace him. Salzberg will be executive chairman. The news moved shares up 8% the day after the announcement.
Salzberg is the second co-founder to remove himself of executive duties following Blue Apron's June IPO. Matt Wadiak left his COO seat open back in July. Ilia Papas remains the only co-founder involved in day-to-day operations with his position as chief technology officer.
Dickerson is an outsider with lots of experience managing a growth company as the former CFO and COO of Under Armour. But Blue Apron's problems may be bigger than anything he can solve.
"Margin is really the key to unlocking the future"
Dickerson told Bloomberg his focus will be on profitability and margins. "Margin is really the key to unlocking the future," he said.
Blue Apron posted a 22% gross margin in the third quarter, down from 29% in the same quarter a year before. The culprit was a fumbled shift to its new fulfillment center in Linden, New Jersey. Salzberg wrote in a press release announcing the change that "our margins since the end of the third quarter have significantly improved."
With the transition to Linden complete, margins should improve. Dickerson said expanding the margin will give the company more money to spend on marketing. Blue Apron significantly decreased its marketing spend as it struggled to fulfill orders quickly and precisely during the second and third quarters.
Of course, spending more on marketing will put pressure on operating margin, but Blue Apron is still in growth mode. It sees a massive opportunity to take on both the restaurant and grocery markets, and it needs to spend money to attract new customers. When it dropped its marketing spend, it saw quarterly customers decline. Customers fell from 1.04 million in the first quarter to 856,000 in the third quarter.
But focusing on margins may be the wrong metric
During Blue Apron's second-quarter earnings call, Salzberg said the company's main focus right now is to drive lifetime value per customer. While he neglected to provide investors with enough information to determine how the company was doing in that regard, it still makes sense as the metric Blue Apron should strive to improve. Margins are just a component of lifetime value.
There are plenty of other levers for management to pull. It ought to determine ways to improve customer retention before it goes about ramping up marketing again.
It should also find ways to improve average orders per customer and average order size, which have remained remarkably stagnant over the last couple of years. Customers have made between 4 and 4.5 orders per quarter on average (an average of 1 every 3 weeks). Average order value hovers around the upper $50s range.
Improving the margins may be the third or fourth thing on the list of levers to pull to improve lifetime customer value.
That said, Blue Apron has tried to improve retention and order volume. It's expanded the menu and made its subscription more flexible. Those efforts, meanwhile, make fulfillment more complicated, negatively impacting margins.
Perhaps Dickerson sees further efforts to improve those metrics as futile, and he wants to concentrate on the one thing he knows he can take steps to improve.
But there's a limit to how much management can improve margins. There's no limit to how much you can increase order size and volume. If Blue Apron really wants to grow, it needs to focus on really taking on the restaurant and grocery industries -- i.e., get people to replace those habits with Blue Apron's service. Its results so far show that's simply not the case.