Is Stitch Fix the Role Model Blue Apron Needs for Its Turnaround?

Markets Motley Fool

Blue Apron (NYSE: APRN) has been one of the most-maligned IPOs on the market this year, and it's easy to see why.

Continue Reading Below

Shares of the meal-kit service are down nearly 60% from their $10 IPO price, and were down as much as 70% before the company ushered out CEO and co-founder Matt Salzberg to replace him with CFO Brad Dickerson, who had previously served as CFO and COO at Under Armour.

While the company owes many of its problems to its own mistakes, including a mishandled transition to a new facility in Linden, NJ, the success of Stitch Fix (NASDAQ: SFIX), another -subscription-box service, may shed light on a fundamental flaw in Blue Apron's strategy.

Misjudging the market

Blue Apron sees the market for its meal kits, which are shipped directly to your home, as pretty much anyone who eats food. According to the company's prospectus from earlier this year, "Our market opportunity is broad, as we believe our customers choose to buy Blue Apron meals instead of shopping at grocery stores, ordering takeout, or eating at restaurants."

While there is truth to that statement, at $9.99 per meal for two people, Blue Apron is considerably more expensive than shopping at your local supermarket, as my colleague Tim Green has pointed out. In fact, it simply wouldn't be sustainable for the average American family to rely on Blue Apron as its primary source for meals. Instead, the company would be better off positioning itself as a luxury product and catering to a customer base that finds value in the time saved by ordering meal kits. Luckily, there's a model for this in another industry.

Continue Reading Below

Stitch Fix, a subscription-based clothing service, priced its IPO last month, and the stock has already gained more than 50%. Unlike Blue Apron, Stitch Fix is profitable, proof that the model works despite the company being just six years old. Though Stitch Fix doesn't identify as a luxury company, it has brought on more premium labels this year. And since clothes range widely in price, it only makes sense for the company to expand into the high-end market that comes with better sales and margins.

My own experience trying out Stitch Fix confirms that I should expect to spend more money than I would in a store. Though I chose the budget option for most categories, my recent order ended up costing nearly $300 for five items (which includes a 25% discount for keeping all of them), one of which was socks. And I noticed that the company chose the high end of the price range for nearly every category of clothes. I ended up keeping all the items they sent me as I was mostly happy with the service and selection, but it shouldn't be surprising that I paid more than I normally do at a store. Stitch Fix is a curated service with a stylist and items selected for you, shipped directly to your door. Like Blue Apron, there's a premium involved in saving the customer the time and effort that usually goes with shopping.

A stitch in time

Blue Apron may want to consider adapting its service the way Stitch Fix has. While diners don't need stylists, Blue Apron could make more of an effort to personalize its service for customers, offer premium ingredients, or save the customer time by doing things like including pre-chopped vegetables in each meal kit. I've also tried ordering from Blue Apron and see little advantage in getting a whole onion or stalk of broccoli delivered to me in a box. I could easily buy that at a grocery store.

With a usual price point of $9.99 per person per meal or higher, meal kits are unlikely to become a regular staple for most Americans -- but Blue Apron and its peers have demonstrated that there is a robust market for these services. By focusing on a higher-end customer, Blue Apron should be able to move more quickly to profitability.

10 stocks we like better than Blue Apron
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Blue Apron wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

Jeremy Bowman owns shares of Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.