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Blue Apron's Better Earnings Don't Make It a Buy

By Rich Duprey – May 7, 2019 at 2:27PM

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The meal-kit maker still hasn't found its bottom.

Blue Apron's (APRN 0.68%) plan to purposely shrink its business seems to be on track, as customer defections soared in the first quarter and orders and revenue per customer grew slightly. But just because it reported a smaller net loss than it previously did, and even turned a profit on an adjusted basis, it doesn't mean the meal-kit maker is on the road to recovery.

Hemorrhaging more customers than it is able to offset through higher revenue means Blue Apron is still hurtling toward an ugly end.

Woman holding a pan going up in flames.

Image source: Getty Images.

How low can you go?

Blue Apron is down to 550,000 paying customers, a 30% decline from last year and nearly half the 1 million or so it recorded at its peak two years ago. That is by design, as the meal-kit maker has all but given up on trying to attract new customers and focuses instead on servicing those who remain.

Although only on the job three weeks, CEO Linda Kozlowski seems just as committed to the strategy as was her predecessor, telling analysts on the meal-kit specialist's first-quarter earnings conference call, "Narrowing our focus to our highest-impact opportunities in the business is an important foundational step, and critical as we build our growth strategy in the coming weeks and months."

It also likely means Blue Apron is committed to relegating itself to being a small niche operation.

Customer acquisition costs plunge

Marketing expenses were slashed by 64% to $14.2 million, which represents just 10% of its decidedly lower net revenue of $141.9 million. Last year, marketing expenses accounted for 20% of Blue Apron's $196.7 million.

CFO Tim Bensley was proud of the achievement, saying, "While we knew that this focus would result in lower revenue in the near term, this deliberate decision was centered on our conviction that strengthening our customer base and driving toward profitability are critical steps for building a healthy, sustainable business. We're happy to report that our approach unfolded as planned."

In a way, there is sense to Blue Apron viewing this idea of allowing its customer rolls to dwindle away as a feature, not a bug.

Not giving up

To attract new customers, Blue Apron is forced to spend exorbitant sums of money, only to see them leave en masse after the trial period is over. Any let-up in marketing results in massive losses of paying members, as the current quarter's results bear out. It's simply not sustainable.

Yet not bringing in new customers isn't a really good sustainable business model, either. Certainly, Blue Apron has attempted different ideas to attract more customers, from partnering with Costco and Walmart's to pairing up with Weight Watchers to offer meal kits in alignment with the weight-loss center's dieting plan.

But none of these has really panned out. Costco ended the program ahead of the Christmas holidays with the possibility of it being restarted, but that hasn't happened, and no actual data has been offered to back up Blue Apron's contention there is "strong interest" from Weight Watchers members.

Consumers still want convenience

Meal kits are popular, with Packaged Facts saying U.S. sales reached $3.1 billion in 2018. It forecast sales will rise to $5.5 billion by 2023, a 12.2% compounded annual growth rate. But a subscription service isn't the right vehicle because customers feel it doesn't offer value for the money spent, and they're not as convenient as touted.

Surveys of customers who left subscription meal-kit plans say that despite getting pre-portioned meals, they still require a lot of prep, have too many recipe steps to follow, and take too much time to cook.

Instead, customers are finding meal kits sold in grocery stores are optimal because they don't require being held to a predetermined menu, and they're also more convenient and inexpensive. Bensley told analysts Blue Apron is responding by trialing same-day delivery. It's had a program in New York City and will be launching one in the San Francisco Bay Area. It is hoping it will still be able to charge premium prices for its meal kits, which ultimately undermines the convenience of the delivery.

Key investment takeaway

Meal kits have become commoditized, which doesn't leave much room for the premium experience that Blue Apron seeks to provide. Although its plan to service its loyal customers is starting show some results, it has not proved yet that it is workable long term and indicates it still has much farther to fall.

Investors will only begin to get the full picture of how small Blue Apron needs to be when it laps the start of its decision to forgo trying to attract new customers later this year.

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

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