Can Supermarkets Save Blue Apron?

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Blue Apron (NYSE: APRN) waved a white flag of sorts last week. The nation's largest meal-kit service said it would begin selling its product in grocery stores, diverting from its traditional model as a subscription-based e-commerce operation. The decision follows a series of missteps and events that have damaged the company less than a year after its IPO last June. Those include operational problems at its new facility, layoffs, and a change in leadership -- all while competition has intensified. Blue Apron's customer count and revenue declined in its most recent quarter, and the company continues to post wide losses on the bottom line.

New CEO Brad Dickerson explained the decision, telling The Wall Street Journal, "The access to consumers is much broader in this avenue than the avenue we've been operating in in the past." Given Blue Apron's struggles to grow its customer base, it makes sense for the company to distribute through grocery stores, but will it be enough to save the company and the stock, which is down nearly 80% since the IPO?

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The benefits

Despite efforts by Blue Apron, Amazon, and others to build out an online grocery business, the vast majority of Americans continue to buy their produce and meat in stores, with less than 5% of the $800 billion in U.S. grocery sales taking place online. Selling in grocery stores will therefore help Blue Apron meet its customers where they are, and it also eliminates many of the hassles associated with its subscription program.

First, shipping perishable food is expensive as the food needs to be kept cool and protected. Industry analysts estimate 20%-30% of the cost of the meals go to shipping alone. Blue Apron makes customers order a minimum of six meals at a time, which are designed to be eaten in a week, meaning the shipping cost alone could be around $15. Selling through the supermarket channel would eliminate much of that cost.

For customers, the subscription plan can also be a headache, as meals can go bad if they're not eaten when they're supposed to be. Making them available in stores also gives customers the opportunity to buy when they need dinner that night, rather than planning ahead.

The challenges

The biggest advantage of selling direct to consumers in the online channel is that Blue Apron eliminates the middleman. Wholesale margins tend to be significantly thinner than those at the retail level, but Blue Apron hopes to make up the difference in volume and by eliminating shipping costs. The company already has struggled to overcome a perception that its prices, which start at $9 a meal, are too high, but in order to avoid losing its subscription customers, the company will have to price its meals the same or nearly the same in stores. This could cause further sticker shock, especially when consumers are already in a supermarket with plenty of options.

Another big question for the company is which company to choose as a distribution partner. Partnering with a budget-minded chain like Walmart or Aldi risks devaluing the brand, which the company sees as a premium product, and spreading across too many retailers risks overexposure and commoditizing the brand. Choosing a single retail partner could help protect margins and the premium nature of the brand.

Target (NYSE: TGT) could be ideal in this regard as the big-box chain is looking to boost its grocery sales, has a national footprint with more than 2,000 locations, many of which are in urban locales where Blue Apron customers tend to be found, and can offer same-day delivery thanks to its recent acquisition of Shipt. Target's "cheap chic" brand, which revolves around style and value, also seems to align well with Blue Apron.

The big question

Ultimately, Blue Apron is only as strong as its brand. There are few barriers to entry in meal kit, as the number of smaller competitors and the recent entry by the likes of Walmart and Weight Watchers has shown, and Blue Apron has no cost advantages. CEO Dickerson believes the brand is still strong, telling the Journal:

The meal-kit service still has its devotees, but it must find a way to grow its customer base or improve margins, the latter of which Dickerson has promised to do. If Blue Apron isn't successful in these measures, it could go out of business if it's not acquired first. Selling in stores is the company's last best option to become a sustainable business, barring a merger or an acquisition. It will be the biggest test of its brand yet.

As competition continues to heat up, passing that test won't be easy.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.