Good News for United Natural Foods; More Bad News for Blue Apron

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross, talk about the food sector: The week brought fresh quarterly results from United Natural Foods (UNFI -0.90%), one of the key suppliers to Whole Foods Market. Revenue and profit beat expectations, and its sales to its most important -- and now Amazon.com-owned -- customer jumped by 19.2%. But the news was less pleasant for much-troubled Blue Apron (APRN), which will face intense and direct threats from Walmart (WMT 1.32%) and Kroger (KR 0.94%).

A full transcript follows the video.

This video was recorded on March 9, 2017.

Chris Hill: Strong second-quarter report for United Natural Foods. The food supplier's profit and revenue both came in higher than expected. Jason, the stock got a nice little bump, too.

Jason Moser: Yeah, this was a really important quarter for this company, I think, in the sense that the market gains a little bit more clarity into how the Amazon-Whole Foods deal is playing out. When you look at United Natural Foods' earnings, they refer to that Whole Foods segment, that's the Supernatural segment. I feel like there's probably a Netflix show in there somewhere.

Ron Gross: Double Super Secret Probation Foods.

Moser: Those sales in that segment were up 19.2% from a year ago. That's the highest quarterly growth rate for this company since fourth quarter of 2013, and even that quarter included an extra week. So, all in all, a good quarter for UNFI. And knowing that Whole Foods is responsible for about 35% of their overall sales, I think now we're getting an idea that maybe they're going to benefit from the volume side with this Amazon deal.

Now, the flip side of that, though, is, big customer like Amazon-Whole Foods, they're going to probably command a little bit more on pricing, and this is a razor-thin margin business to begin with. So, a little good, a little bad. I'm not sure I'd be sinking any money into United Food. I think your better bet is to probably just buy shares of Amazon, Ron, and just get on with life.

Gross: The next story cannot contain that word.

Moser: It's worth noting that United Natural Foods' deal is signed through 2025. So, they will be the supplier for Whole Foods and Amazon through 2025, unless Amazon decides to go to table and try to renegotiate.

Hill: Tough week for Blue Apron. This week, Walmart announced that it is launching meal kits in more than 2,000 Walmart locations this year. They've been testing in about 250 so far. Kroger is also testing their own meal kit service. Shares of Blue Apron down nearly 20% this week, Matty.

Matt Argersinger: You mentioned Walmart and Kroger getting into the business. Oprah is also getting into the business with Weight Watchers launching their own meal kits. No doubt these are credible threats to Blue Apron and Hello Fresh and some of the existing legacy meal kit companies. The other side you can take on this, though, is that there is a market here. They're validating this, that meal kits is a thing. Blue Apron has 750,000 customers. Those customers are coming down a little bit, but that's still a lot of customers. My wife and I, for example, love Hello Fresh. We've been doing it for over a year. I feel like Weight Watchers, Walmart, Kroger, and I think Amazon-Whole Foods is doing -- I got it! -- It's validating the market in a lot of ways, saying, meal kits are a real thing, there's demand for them.

The problem is, this is a business with huge fixed costs and even bigger variable costs when it comes to food, labor, packaging, shipping. There has to be consolidation in this market. There can't be a dozen meal kit companies out there, they'll just all be unprofitable and go away. So, at some point, I expect there's going to be consolidation, you're going to have two or three big winners, probably, at some point. And Walmart with distribution, or the A-word with distribution, those are probably your bigger players in the game.

Hill: And you mentioned customer acquisition costs at Blue Apron. Kroger doesn't have those in the same way. Neither does Walmart, for that matter.

Moser: I kind of feel like these meal plans, this is like the new video streaming offering. A year ago, it seemed like everyone was announcing, "We're going to get into streaming video." Now, everybody is like, "We're going to do meal plans." It's neat in theory, maybe, but it's a very cut-throat industry, tough to make a living doing that.

Hill: Could I interest you in the stock if Blue Apron announced that they were adding the word blockchain to their name?

Moser: I would at least take a second look.