Pauline E. Ranger Blue Apron, which has been around for five years now, is a leader in meal kits and holds a 40% share of the market in the USA. But all is not well; Blue Apron’s financial losses have continued to increase, and it has lost 17% of its share in the last year.
Blue Apron could be predicting the future by buying Whole Foods just before its 2017 IPO. This article examines ways to get the company’s house in order and regain the Millennial Kitchen.
Is it business as usual for supermarkets?
Silicon Valley startups would be well suited to disrupt an industry that generates $650 Billion annually in sales, with leaders earning profit margins of 1-3%. The US grocery industry has not yet felt any major disruption. As of 2017, 96 percent of Americans buy their groceries at shops. Grocers are aware of the frustrations that shoppers face and offer solutions like home delivery, pick-up options, self-checkout aisles, store redesigns, and more. These innovations are still part of the brick-and-mortar model, but they don’t represent disruption as Uber did with the taxi experience.
The remaining 4% of shoppers who accept that they can receive fresh produce without having to smell it or touch it are those who shop online. However, there is still a problem; groceries still need to be prepared after they are delivered.
Enter Meal Kit Service: A Real Grocery Revolution?
In 2012, companies that sell meal kits, mainly Blue Apron and HelloFresh, were launched in Europe. The meal kit services were designed to strike a balance between the convenience of cooking from scratch and the ease of picking up a ready-made meal. By making home cooking easier, they hoped to alleviate the frustrations of grocery shopping and re-ignite the passion of busy people who love to cook. The subscription-based service delivers dinners that are prepared in 30 minutes and cost between $9.99 and $12.99.
The research from Nielsen confirms the popularity of meal kits delivered to your home compared with traditional solutions that are prepared fresh. It also highlights a similar distribution of reasons why people use them.
The future of meal kits is bright
The meal kit industry is less than 0.5% in food-at-home sales. Analysts agree, however, that the majority of growth is yet to happen. Only 3 % of consumers have tried meal kits. 77% made repeat purchases. This indicates both untapped potential and loyalty. It’s not surprising that meal kits are a hot topic in the changing consumer behavior:
81% of consumers believe that meal kits are healthier than take-out or prepared meals.
The Millennials, the most common demographic for meal kits, spend 6,638 dollars a year. They could theoretically afford to pay $1,560 for a 52-week Blue Apron Subscription.
People are living longer as singles. Meal kits are perfect for this demographic, as they do not follow the supermarket’s one-size-fits-all packaging.
Can Blue Apron maintain its leadership position?
The article is about Blue Apron. Blue Apron became public in June 2017, and it is the US leader in meal kits. This leadership position, in my opinion, is vulnerable, and I don’t believe the company will be able to maintain it. The company lost 17% in the last year and had a difficult time after its IPO. HelloFresh has done better than its November debut.
Blue Apron needs a path to cash flow and profitability
Blue Apron, on the other hand, has seen its losses accelerate post-IPO. Blue Apron, on the other side of the spectrum, has seen its losses increase post-IPO. It had a $171 million net loss up to the third quarter of 2017, which is 6x more than the $29 million deficit in 2016.
Amazon has proven that profitability is not a requirement for public companies as long as they have growth potential. Blue Apron has, however, lost 70 since its IPO. Lack of profitability and lack of growth potential will cause the cash position to be under stress. The company raised $278.5 (net of fees), which was less money than originally budgeted, from its IPO after the price dropped from an initial range between $15-17 per share to $10.
Blue Apron’s cash reserves were $62 million before the IPO compared to $70 million of cash losses in the six months prior. The IPO raised sufficient cash to sustain similar losses for at least 12 months. Another $75 million was also available via a revolving line of credit. It has $125m on a 2019 maturity balance at a weighted average interest rate of 3.39%.
Blue Apron will find it hard to service its debt and get more funding if it continues to lose money on its operating cash flows. The stock performance shows that, for now, it’s probably tapped out in the equity markets, so unless a benevolent/opportunistic lender can provide more debt lines, it will need to find rapid means of increasing cash flows from operating activities.
The product has been underpriced
Blue Apron and other meal kit companies underprice their product compared to the raw ingredients. After making a Blue Apron Meal for $9.99, a Forbes Guest Chef said that he would pay $30 at a restaurant for the meal. Time Money discovered that meal kits cost 12 more in stores, but their prices are comparable to those of other freshly prepared meals.
To further investigate the cost of ingredients, I ran my tests using Chefs Plate, a Canadian startup similar to Blue Apron. In September 2017, I visited supermarkets in Toronto to purchase ingredients for its CAD 21,90 “Couples Meals.” The goal was to determine how much it would cost to duplicate the meals under the restrictions of packaged quantities. The average cost of assembling the ingredients for these meals was CAD33.41. This is 52% more than Chefs Plate’s pricing. Below is a comparison of two of these meals:
Chefs Plate may have a small sample, but it still makes a nice profit and probably has access to wholesale pricing. The point I wanted to make was that the consumers were able to reduce their waste by using leftover ingredients. The meal kits are giving single cooks access to economies of scale available to families. I think that this is why the industry leaves money on the kitchen table.
I can understand why the prices are so low. The players are trying to gain market share and convert more customers. In the long run, however, this approach is neither sustainable nor necessary. Nielsen’s study found that consumers did not cite a lower price as a reason to purchase meal kits. Instead, they cited convenience and health.
Blue Apron could increase its prices up to $12.99 per dish by conducting deeper price research. Each $1.00 increase will add about 5% to the gross margin. In Q3 2017, these margins were down to 21,9%, which was a 10% decline over the quarter.
