Description

Blue Apron is an NYC-based meal-kit delivery service.  The company was founded in 2012 and recently went public back in June 2017.  For $59.99 per week, Blue Apron will mail you pre-portioned ingredients for three meals of two servings each.

http://www.thekitchn.com/blue-apron-product-review-198855

If you squint hard enough…

Blue Apron is touted by sell-side analysts as a growth company with a strong recurring revenue streams.  The company has a recurring subscription model, like Netflix or Amazon Prime, and will supposedly gain scale as it increases the number of loyal subscribers.  Revenue is expected to double to $1.7 billion by 2020, EBITDA is expected to go from a -$184 million loss in 2017 to a 44 million gain in 2020.

But this is wrong.

Investors have been bamboozled into thinking Blue Apron is a scalable tech company.  This is wrong.  At its core, the company is a grocery-delivery business that operates in 30% gross margins.  Marketing and overhead eat up the remaining portion.

While companies like Netflix have a marginal cost per subscriber of virtually nil (so can offer free months of subscription at minimal cost to their business) Blue Apron has no such luxury.  The company gives out $30 for first-time subscribers, and its S-1 filings show a customer acquisition cost of $94/customer between 1Q14 and 1Q17.

As for tech spending?  Besides operating its website, the company has little to differentiate its underlying costs from any other grocery delivery business.

Blue Apron is uneconomical

Several factors suggest the company will never reach scale.

1. The company has an astronomical churn rate

There have been several excellent write-ups of Blue Apron’s churn rate, so I won’t repeat the full calculations here.  Constant churn-rate is estimated at 10% per month; my own analysis comes close, at 11% per month. Cohort churn-rate is estimated at 72% for the first-6-months, i.e. only 28% of customers remain after their first-6 months.

http://www.babakazad.com/blue-apron-customer-acquisition-retention-churn/

https://www.linkedin.com/pulse/detailed-look-blue-aprons-challenging-unit-economics-daniel-mccarthy/

This is a monumentally high rate.  Put in perspective, Netflix has a 5% annual churn rate.  Amazon Prime has a ~8% churn, Costco at 9%.

Blue Apron’s 77% annual churn rate for new customers means the company must keep running just to stand still.  This is NOT the sign of a healthy growth company; business economics look dim if you must replace a full tenth of your customers every month. 

So Blue Apron is adding on plenty of low-quality customers.  Yet things are about to get worse.

2. New customers are becoming less profitable

The company reported average marketing spend of $94 per customer between 2014 and first-quarter 2017.  My calculations suggest this number has been increasing over time at an alarming rate.

Using total marketing costs at APRN, I estimate that cost per acquisition (CPA) has risen from $99 per customer in 2Q16, to $129 in 3Q16, $156 in 4Q16, $138 in 1Q17, to $175 in 2Q17. 

CPA estimates are as high as $400, but I suspect that number is too high

http://www.businessinsider.com/blue-apron-spends-big-for-new-customers-low-return-2017-8

This jump in CPA makes sense, given Blue Apron's impressive churn rate.  The company has added ~2.9 million customers since inception (and lost ~2 million of them through churn).  With 128 million households in the United States, the company is starting to run out of potential customers.  Of course, former customers may re-subscribe to the business, but this is not sustainable.

At the same time, analysis by Daniel McCarthy, assistant professor at Emory, also suggests that LTV has been falling.  Cumulative 6-month revenue per active customer has fallen from $997 in 1Q14 to $729 in 3Q16.

3. The company faces an extremely poor industry structure.

The meal-kit industry faces extremely low barriers to entry.  Any grocer with access to wholesale distributor prices can potentially start a Blue Apron clone.

According to a study by research firm Packaged Facts, there are already well over 100 meal-kit services available in the US.  Offerings range from do-it-yourself meals to pre-cooked microwavable meals

https://www.packagedfacts.com/about/release.asp?id=3892

Amazon has been testing a meal kit service in Seattle as well.

https://www.cnbc.com/2017/07/18/amazons-new-meal-kit-is-already-selling-to-some-prime-members.html

Substitution risk from traditional grocers and quick-service restaurants is also significant.  Blue Apron occupies a narrow market of $10 per meal with is 1) far more expensive than traditional do-it-yourself grocery meals but 2) not much cheaper than eating out.  This keeps Blue Apron’s prices low.  According to sell-side analysts, gross margins are unlikely to top 35%

4. Can anyone spell FAD?  (i.e. don't confuse a hot market with a smart management team)

This is possibly the most egregious error that Blue Apron investors have made.  While meal-kit services have exploded in popularity over the past-3 years, its future is in extreme doubt.  After peaking in search terms in 1Q17, search results for Blue Apron via Google have since been lackluster, save for a temporary bump in its IPO period.

https://trends.google.com/trends/explore?date=today%205-y&q=Blue%20Apron

This is a sign of an unhealthy growth company.  Again, here is Netflix as a comparison.  Search volume has shown a steady, healthy rise over time

https://trends.google.com/trends/explore?date=all&q=Netflix

Food trends tends to come in fads.  Amplify Brands (BETR), the maker of Skinny Pop popcorn is a recent reminder that many food trends are easy-come-easy-go.

They say hold, we say sell…

Blue Apron is currently covered by 13 sell-side analysts.  Twelve of them were Blue Apron bookrunners for the IPO.  This is an alarming number; Alibaba (the largest IPO to date) used just 6 bookrunners.  Even the heavily-promoted Snapchat and Facebook IPOs used 7 and 11 bookrunners respectively.

With such vested interests, sell-side estimates are understandably bullish.  Yet aggregate estimates border on the absurd.  Revenue is estimated to increase 13% in 2018, 23.4% in 2019 and 36.5% in 2020.  Only on Wall Street should revenue growth accelerate from an ever-growing base.  If you can’t project 30% growth for next year without getting laughed out the door, project that it happens 3 years from now!  Who would remember anyway.

Yet 9 of the 13 analysts have a hold rating on Blue Apron’s stock.  Despite the bullishness of estimates, few sell-side analysts are willing to stake a “buy” rating on this flaming wreckage.

Investment risks

Blue Apron is unlikely to get bought out.  The company has a low-quality customer base, a rickety distribution network and significant competition on the horizon.  Yet its shares trade under $6 and its market cap hovers at $1.1 billion.  Though the company is likely worth zero, it could yet be a wild ride down.

Shares are also a little expensive at 15% p/a borrowing cost.  But are still available in sufficient quantity.

Catalyst

Lockup period expires 12/26/2017.  Have a Merry Christmas, investors!