Blue Apron's Core Business Is Still Crumbling

Blue Apron (APRN) burned many investors after it went public two years ago. The meal-kit maker made its public debut at $10 per share, but the stock fell below $1 by late 2018 amid concerns about the company's declining revenues, loss of customers, and lack of profits.

To stop the bleeding, Blue Apron hired Etsy's former chief operating officer, Linda Findley Kozlowski, as its new CEO in April. It also approved a reverse 1-for-15 stock split in mid-June to prevent its shares from being delisted. Unfortunately, Blue Apron's second-quarter earnings report released this week indicates that its core business is still crumbling.

Image source: Blue Apron.

Customer losses are still accelerating

Blue Apron's biggest issue is its inability to retain customers. Its customer losses seemed to stabilize in the second half of 2018 but accelerated again in the first half of 2019. As a result, its revenue declines also accelerated.

YOY = Year-over-year. Source: Blue Apron quarterly results.

Blue Apron is losing customers for three main reasons:

First, customers are realizing that meal kits are just overpriced boxes of curated groceries. They might use them as "training wheels" for cooking, but eventually they'll graduate to buying regular groceries themselves.

Second, the barriers for entering the meal kit market are low, and the market is saturated with rivals like HelloFresh, Kroger's Home Chef, Albertson's Plated, and even Chick-fil-A.

Lastly, Blue Apron's meal kits aren't competitively priced against pre-cooked meals from grocery stores or takeout restaurants.

Image source: Blue Apron.

Its turnaround strategy is too slow

Blue Apron has two main turnaround strategies: generating more revenue per customer to offset customer losses and slashing operating expenses to narrow losses. Blue Apron admittedly made progress in increasing the value of each customer over the past three quarters.

YOY = Year-over-year. Source: Blue Apron quarterly results.

Unfortunately, those anemic gains simply aren't offsetting its massive declines in total customers. Kozlowski admitted that Blue Apron needed to grow its "customer base and revenue through both better execution and new initiatives," but claimed that the overall meal kit market was still "growing".

Like her predecessors, Kozlowski is focusing on cutting marketing costs to strengthen Blue Apron's bottom line. As a result, marketing expenses only accounted for 8.2% of its second-quarter sales, compared to 19.2% in the prior-year quarter.

It posted an adjusted EBITDA of $4.5 million for the quarter, compared to a loss of $17.5 million a year ago, as its net loss narrowed from $32.8 million to $7.7 million. Those improvements are encouraging, but slashing its marketing budget also cripples the company's ability to reach new customers and boost its top-line growth.

Gimmicky partnerships aren't the answer

Blue Apron seems to believe that it can replace traditional marketing campaigns with headline-grabbing partnerships with companies like Grubhub (GRUB), Beyond Meat (BYND -0.47%) and Airbnb, and celebrities like Chrissy Teigen.

Yet none of those moves helped it retain customers over the past year. Most Grubhub users probably prefer pre-cooked meals over meal kits. Jumping aboard the Beyond Meat bandwagon probably won't win over more vegetarian customers. And its partnership with Airbnb merely added a few generic overseas recipes to its menu.

As I've previously argued, Blue Apron's best course of action is to bite the bullet, ramp up its marketing spending, and consider taking on more debt to acquire other meal kit makers or expand into adjacent markets. If it doesn't, its revenue will keep falling, and it will eventually run out of ways to cut costs. When that happens, the remaining pillars of Blue Apron's business could finally crumble.