Blue Apron Is a Bad Business and a Terrible Stock

Markets Motley Fool

It wasn't a good sign when meal-kit delivery service Blue Apron (NYSE: APRN) was forced to slash its IPO price before going public. The original share-price range of $15 to $17 was reduced to $10 to $11, and the company ultimately went ahead with a $10 offering price. Even with that lower price, Blue Apron is valued at nearly $2 billion.

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Much has already been written about Blue Apron's financials. The company is on pace to generate around $1 billion of revenue this year, but marketing costs are exploding, revenue per customer is in decline, and cash is being burned at an accelerating rate. The financials alone are reason enough to avoid Blue Apron stock like the plague. Blue Apron posted a net loss of $52 million during the first quarter, nearly as much as it lost during the whole of 2016.

If you still find yourself tempted by this trendy company drowning in red ink, there's another reason to stay away from the stock. The business model, mailing ingredients and recipes to customers, just doesn't make all that much sense.

Overpriced groceries by mail

Blue Apron charges $9.99 per person per meal for its standard two-person plan, which comes with three recipes (six total meals) per week. The company sends a box full of ingredients for those meals, as well as instructions on how to prepare them. Much of the prep work -- chopping and slicing -- is left to the customer.

There are two types of people who are drawn to Blue Apron and similar services, in my estimation. The first group are people who never cook and don't really know how. Blue Apron cuts out the process of coming up with recipes and shopping for ingredients, and it's not a bad way to expose people to cooking.

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But these customers will take one of two paths. They'll either confirm that they don't like cooking, or they'll find that they enjoy cooking and want to do more of it. A Blue Apron meal is priced similarly to a meal at a fast-casual restaurant, so it's a hard sell if the customer doesn't genuinely enjoy cooking. If the customer does discover a knack for cooking, that person eventually won't need the hand-holding Blue Apron offers. Given that it's much cheaper to just buy ingredients at the store, these customers will probably drop the service as well.

The second group of people are those who cook regularly but want to save some time. Blue Apron doesn't really deliver on that front, since it doesn't eliminate much of the prep work. After trying a similar service and dropping it after two weeks, I can confirm that the convenience factor just isn't there.

Blue Apron customers placed just 4.1 orders on average during the first quarter, down from 4.5 during the first quarter of 2016. A customer who orders every week would place around 12 orders each quarter, so this number is shockingly low. Blue Apron doesn't disclose customer churn rates, but the only conclusion from the data we do have is that customers aren't sticking around very long.

Research firm 1010data found last year that just 50% of Blue Apron customers place a second order in the week following their first order. It also found that Blue Apron's customer retention rate drops to 20% after 11 months and just 10% after 24 months. In other words, most people who try the service abandon it quickly.

Blue Apron competes with not only the slew of other meal-kit delivery companies, but also fast-casual restaurants that offer meals at comparable price points and grocery stores that sell ingredients at lower prices. Blue Apron has had success getting people to try its service, although the recent explosion of marketing costs suggests that customer acquisition is getting more expensive. Winning customers is meaningless, though, if those customers don't stick around.

I think there's a good chance that meal-kit delivery is a fad. It might work if a grocery chain offered a similar service, where the prep work was already done and the price was more reasonable. I'd be surprised if Whole Foods Market under Amazon.com's ownership doesn't launch something like this down the road. But putting stuff that can be bought at the grocery store in a box and selling it at a premium just doesn't seem like a great business model to me. Blue Apron's financials appear to agree.

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