There were already several concerns surrounding Blue Apron (NYSE: APRN) after it filed its S-1 with the SEC in preparation for an initial public offering. Amazon (NASDAQ: AMZN) just added one more, after agreeing to purchase Whole Foods Market (NASDAQ: WFM) for $13.7 billion.
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Blue Apron's S-1 revealed it's facing significant pressure from competition. Customer acquisition costs are rising as gross margin declines. Earlier this month I wrote, "There's very little protection against competing home meal-kit services, and if a big brand comes in to compete, it could cause these weakening trends to accelerate." The combination of Amazon and Whole Foods represents the perfect competitor to challenge Blue Apron on its home turf.
Already dipping their toes in the water
Amazon and Whole Foods are already itching to get into the meal kit market. The former partnered with Martha Stewart and Marley Spoon to offer meal kits in select cities earlier this year. Former Whole Foods co-CEO Walter Robb once said he has "huge interest" in meal kits, and the company has since partnered with Purple Carrot and Salted to bring meal kits to its stores. Whole Foods also offers grab-and-go prepared meals and publishes meal plans and recipes on its website.
Meanwhile, Amazon also has its own grocery delivery service, Amazon Fresh, which operates in several cities. The Whole Foods acquisition is seen as a means of quickly expanding that service to more markets.
The e-commerce leader must see the massive opportunity sitting in front of it with meal kit delivery services. The industry is expected to grow from $1.5 billion last year to as much as $36 billion by 2026. What's more, the potential for higher profit margin is better than the low-margin traditional grocery industry. Blue Apron, for example, generated 33% gross margin last year, though profits still elude the young company.
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Amazon will eat your margin
Amazon would have several advantages if it decides to enter the meal kit market in earnest.
First, it has expertise in logistics and shipping. Getting perishable products to customers' doors quickly is essential to the business. Amazon already has plenty of delivery infrastructure and deals with logistics companies in place. Adding 450-plus Whole Foods Market stores as potential distribution centers can make shipping even less expensive compared to the competition. Blue Apron, meanwhile, operates just three fulfillment centers with plans to open two more this year.
Second, Amazon is a leader in artificial intelligence (AI) and robotics, which will help it automate the measurement and packaging of ingredients for meal kits more quickly. That can drastically reduce overhead, as much of that work is currently done by hand at Blue Apron and its competitors.
Third, Amazon and Whole Foods both have built-in loyal customer bases. That means they have an easy path to market meal kits to customers. Blue Apron's marketing costs per new customer are skyrocketing as customer growth slows.
Fourth, Whole Foods is already buying foodstuffs to stock its shelves. That ought to provide some pricing power for meal kit ingredients.
Amazon is now well-positioned to offer a product similar to Blue Apron's at a much lower price due to its ability to cut significant costs out of the process. Considering Blue Apron is already having trouble balancing its growth and profitability, Amazon entering the space wouldn't bode well for the company
Granted, this is all just speculation -- Amazon hasn't announced any plans to increase its presence in meal kit delivery. But considering the potential size of the market, the combined advantages of the two companies, and management's previous comments, it shouldn't surprise anyone if we see the retail giant start delivering boxes of fresh, high-quality ingredients to customers in the near future.
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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Whole Foods Market. The Motley Fool has a disclosure policy.