This is what capitulation looks like. Blue Apron (NYSE:APRN) is throwing in the towel on the idea it can be viable as a broad-based meal-kit company, and is instead embracing its future as a small, niche provider. That's a best case scenario, though. If this strategic pivot doesn't pan out, it could really be the beginning of the end for the one-time leader in meal-kit delivery.

Blue Apron has finally recognized there is a limited market for its service. On its third-quarter earnings conference call with analysts, CFO Tim Bensley said the company will spend less on marketing to acquire new customers "while targeting customers that exhibit the attributes of our best customers." It's a significant admission that its business can't grow much more, because there has been a general correlation between Blue Apron marketing the heck out of its meal kits and the number of customers it's been able to attract.

Blue Apron meal kit from Costco

Image source: Blue Apron.

Customer losses growing 

Net revenue in Q3 fell 28.5% from the year ago period, hitting $150.6 million, mostly as a result of it continuing to lose customers, who now number 646,000. That's down 10% from the 717,000 who were customers in Q2, and 24.5% fewer than the 856,000 it had in Q3 2017. In fact, Blue Apron's metrics were down all across the board.

Metric

Q3 2017

Q2 2018

Q3 2018

Customers

856,000

717,000

646,000

Orders

3,605,000

3,122,000

2,647,000

Average order value

$58.16

$57.34

$56.79

Orders per customer

4.2

4.4

4.1

Average revenue per customer

$245

$250

$233

Data and chart from Blue Apron Q3 2018 SEC filing.

Blue Apron's big problem is that it's expensive to acquire new customers, and recent quarters have shown the payoff often isn't worth it, or worse, actually wasn't having the desired effect. Now, it has given up the pretense it can spend its way to growth -- which means it recognizes that its original business model isn't viable.

Instead, the company is hunkering down and focusing on its best customers -- the top 30% or so who spend the most with it. CEO Brad Dickerson says those households account for 80% of the company's revenues in the year after they join, and it recoups the cost of acquiring them in less than six months.

That may be true, but it means fewer than 200,000 customers will be targeted -- a drastic winnowing that will relegate it to the status of a footnote in the meal-prep segment. It also means the company won't need as many employees, which explains why Blue Apron said it will be firing 4% of its staff "to closely align internal resources with the strategic priorities of the business."

Taking a different path

The company will still try to make its meal kits more widely available. They're appearing in the refrigerator cases at Costco, and it recently made a deal to sell them on Walmart's Jet.com in a special, dedicated storefront. On-demand, non-subscription delivery may be its best bet for survival, but subscription-based services may be all but dead -- and not just for Blue Apron.

Blue Apron still hasn't figured out how to make money from meal kits, despite being in business for six years. It reported net losses of $34 million for Q3, and while that's much narrowed from the $87 million loss it notched a year ago, it remains unprofitable, even though it has a more concentrated customer base.

Management obviously hopes that by focusing on a select group of customers, they'll be able to wring some profits out of them, but as customer attrition remains high, it's possible we'll see those numbers dwindle even more, further diminishing the value of Blue Apron as a meal kit company and certainly as an investment.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.