Blue Apron Was Never a Growth Story. The Layoffs Prove It.

Meal-kit delivery service Blue Apron (NYSE: APRN) went public in June. Now, less than six months later, the company is laying off 6% of its workforce. A few days after the IPO, I warned that Blue Apron was a bad business that investors should avoid. In August, I said the growth story was dead. These layoffs are yet more evidence Blue Apron's growth story never rang true.

An early restructuring

In a letter to employees, Blue Apron CEO Matt Salzberg announced the layoffs on Thursday. "A companywide realignment, like the one we announced, is always painful, and especially so for a close-knit team like ours," said Salzberg. "Our leadership and Board did not take this decision lightly, and I want to assure you that we believe it was necessary as we focus the company on future growth and achieving profitability."

Blue Apron talked up its growth strategy in its S-1 filing prior to its IPO. It's incredible how quickly those plans were derailed. Blue Apron's first quarterly report as a public company in August, a little more than a month after the IPO, exposed some major issues. The number of customers and orders tumbled compared to the previous quarter, with Blue Apron's strategy of spending excessively on marketing hitting a wall. Blue Apron spent $34.5 million on marketing during the second quarter, nearly 15% of revenue, and still lost customers.

The layoffs will reportedly mostly hit salaried office workers, rather than hourly workers in the fulfillment centers. Blue Apron will take a $3.5 million charge, largely related to severance payments. This move was telegraphed back in August when Blue Apron fired more than a dozen members of its recruiting team and implemented a temporary hiring freeze of salaried workers.

These layoffs will help reduce costs at a time when growth has ground to a halt. Blue Apron posted a net loss of $83.8 million during the first six months of 2017 on $483 million of revenue. Losing money would be acceptable to investors if Blue Apron was putting up impressive growth numbers. But with the company hitting a on wall that front, it needs to make a push toward profitability.

The business model still doesn't make any sense

That push toward profitability is complicated, to put it lightly, by Blue Apron's flawed business model. The company sells meal-kit subscriptions, charging between $9 and $10 per serving. A couple can spend $60 each week for a box containing ingredients for 3 two-serving meals, while a family of four can spend about $108 each week for a box containing ingredients for 3 four-serving meals.

If that seems expensive, it's because it is. Blue Apron's biggest problem is that its product is significantly overpriced compared to buying ingredients at a grocery store for similar meals. If a family of four paid Blue Apron prices for three meals a day, they'd spend almost $40,000 annually on groceries.

The grocery business is brutally low-margin. Meal-kits aren't going to change that. Blue Apron is going to need to get a whole lot more efficient to survive in the long run. Otherwise, it will be overrun by direct competitors and existing grocery chains.

Blue Apron is supposed to be a growth company. Laying off employees six months after going public is not what growth companies do. If you were fooled by Blue Apron's pitch and bought into the IPO, it should be very clear at this point that there is no growth story. Take Warren Buffett's advice: "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.