The fourth-quarter earnings report from Blue Apron Holdings Inc (NYSE: APRN) makes it appear that everything is going according to plan. Having set out to focus on its best customers , those who spend the most on its meal kits, Blue Apron was able to post increases in several key metrics.
CEO Brad Dickerson said, "As we sharpen our focus on attracting and engaging consumers who represent high value to the business, we are seeing early, encouraging trends in our customer metrics, most notably average revenue per customer, which increased year over year."
Unfortunately for the meal kit service, the more things go its way, the worse it is getting. Because even as Blue Apron saw higher average order value and revenue per customer, it lost a massive swath of its base, with its paying customers plunging 25% to just 577,000, which caused revenues to plunge by a like percentage.
Average order value
Orders per customer
Average revenue per customer
Data source: Blue Apron Q4 2018 SEC filing.
Partnerships may not help
On the one hand, there is some sense to Blue Apron's actions. Because so many people try the service but quickly cancel after their first order -- some estimates put its retention rates at just 15% -- it has to spend a lot of money to keep attracting new ones to take their place. By catering to those who like the service enough to stay with their plan, it can invest its money in those areas that will satisfy them the most.
Moreover, Blue Apron remains confident it will turn profitable in the first quarter on an adjusted basis as deals like the one it made with Weight Watchers International, Inc. (NASDAQ: WTW) (which is rebranding itself as "WW") allow it to reach customers more easily. Instead of having to pay for marketing expenses, Blue Apron will pay a fee to WW for every member who becomes a subscriber.
Yet there's no reason to think WW customers will be any more inclined to subscribe than the general public, and perhaps even less so because the kits are designed to comport with WW's Freestyle program, which eliminates the need for counting points for a broad range of foods.
Further, the kits are reportedly the same price as Blue Apron's regular meal kits, which means they're way overpriced compared to buying the individual items in a grocery store. The meal kit maker can't keep members as it is because of the high costs of its subscription, and though WW members have shown a propensity for subscribing by joining WW, adding another high-cost membership on top is going to be a hard sell.
Add in that a Blue Apron subscription, whether through WW or otherwise, only provides you with a couple of meals out of the two dozen or so you would eat during the week, doesn't really make it cost effective or worthwhile.
The competition offers more convenience
Although Blue Apron popularized the concept of meal kits, customers now have numerous outlets where they can buy a kit, including at the supermarket where prices are much more affordable. Walmart , for example, offers meal kits under its Great Value brand for just a few dollars per serving (Blue Apron has partnered with Walmart's Jet.com to sell its meal kits to attract the site's more upscale clients).
Yet customers still have to go grocery shopping to fill in the meals a kit doesn't cover, so it's still more convenient to simply pick up kits while you're there. And their availability is proliferating.
Kroger , the largest supermarket chain in the U.S. with over 2,800 stores, recently announced it was expanding its Home Chef line of meal kits to 500 more stores, bringing the total number of stores carrying meal kits to 1,200. It also has plans to introduce meal kits to more markets in the future.
Most every major supermarket chain, whether it's an in-house brand or the brand of a partner or acquisition, now offers meal kits. Whatever competitive advantages Blue Apron once held, they've been largely eliminated, particularly as the subscription model has proven unworkable in reaching a mass audience, critical for the business to be sustainable.
Key investment takeaway
Blue Apron's losses narrowed to $23.7 million in the fourth quarter compared to $39.1 million last year, and it believes it can be profitable for the full year as well as the first quarter. That may be, but by that time it may have become such a small, boutique business whose key metrics have withered to such an extent that it will be worth even less as a stand-alone investment than it is today.
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