It's no secret that one of the biggest challenges for Blue Apron (NYSE:APRN) and other subscription meal kit services is customer retention. After pulling back on its marketing spend last year, Blue Apron saw a massive drop in active customers, since it wasn't bringing in many new customers to replace those leaving the service. Retention is such a problem, Blue Apron won't even provide a hint as to how many customers leave every quarter.
In a recent survey from Market Force Information, consumers overwhelmingly said they weren't getting enough value for their money to stay subscribed to services like Blue Apron. A whopping 57.1% of respondents said it was a reason for leaving. The next closest reason was "portion size" at just 12.6%.
The question for Blue Apron investors is whether there's anything the company can do to increase the value for its customers' money. If not, poor customer retention will continue to drag down operating profit.
Where Blue Apron currently stands
There's no doubt Blue Apron customers are paying a premium over grocery store prices for the raw ingredients the company offers in its meal kits. But considering Blue Apron takes care of a lot of the prep work and delivers the groceries to customers' doorsteps, it deserves a premium.
Blue Apron's premium isn't really that high. Last quarter, the company reported a gross margin of 34.2%. That implies a 52% markup for raw ingredients, the labor costs to prepare and sort those ingredients, and shipping expenses.
Blue Apron's currently working to improve gross margin through a number of measures, including reducing food waste, improving labor efficiencies through automation, and packaging and shipping efficiencies. Its efforts have paid off, with gross margin increasing 310 basis points year over year last quarter.
Still not profitable
Despite the strong markup on its goods, Blue Apron still isn't able to turn a profit. Management set a goal of reaching profitability on an EBITDA basis by the fourth quarter and for the full-year next year, but it's unclear whether it will get there. In the meantime, Blue Apron reported a loss of $0.17 per share in the first quarter, with a net loss of $31.7 million.
The two big operating expenses are its marketing budget and product, technology, general, and administrative (or PTG&A) expenses. Blue Apron is starting to ramp up its marketing spend again, but marketing remained lower in the first quarter this year than last year. PTG&A was also below last year's levels in the first quarter.
Since Blue Apron can't retain customers very well, it's heavily reliant on marketing. But it could find greater success retaining customers if it reduced its price, and therefore it wouldn't have to spend as much on marketing to bring in new customers and grow the business.
To its credit, Blue Apron is experimenting with pricing to some degree. Its partnership with Costco has the warehouse store selling its meal kits at roughly a 30% discount. Blue Apron can afford that discount because of the bulk shipping and invoicing and the distribution facilitated by Costco's stores. But if Blue Apron sees higher sales and possibly lots of repeat purchasers from its Costco meal kits, it could spread better pricing to its first-party offering.
CEO Brad Dickerson has also said the company will experiment with variable pricing depending on the types of meals customers order. A vegetarian meal shouldn't cost as much as a steak dinner because the cost of ingredients and shipping aren't the same.
Blue Apron shouldn't be focusing on profitability
The meal kit market is becoming increasingly competitive. Major grocery chains including Walmart, Kroger, and Albertson's have all put a ton of resources behind their own meal-kit products, the latter two acquiring established players in the space. All three have considerable resources to provide lower pricing than Blue Apron -- and better value.
If Blue Apron expects to survive, it needs to focus on providing better value for its customers' money. Doing so may actually benefit it long term, since it could reduce the pressure on its marketing budget by improving customer retention. But if Blue Apron focuses on profitability first, it will continue to struggle with customer retention in the long term.