HelloFresh Is Now Bigger Than Blue Apron in the U.S.

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It's no secret Blue Apron (NYSE: APRN) has been struggling for the past year or so. A difficult transition to a new fulfillment center in New Jersey resulted in many customers receiving incorrect items or late orders. The difficulties ultimately led the company to pull back on marketing and retool. Since the end of the first quarter last year, Blue Apron has seen its customer base fall 28% to 746,000.

Seeing an opportunity, German rival HelloFresh has made a big push into the United States during the last year. It managed to more than double its U.S. customer base from 430,000 to 890,000, surpassing Blue Apron's customer count by the end of the year.

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Blue Apron's management is planning to turn things around in 2018, ramping up its marketing. But with HelloFresh's momentum in the market, it might be too little, too late.

HelloFresh's marketing machine

HelloFresh more than doubled its U.S. marketing budget in 2017 from 73.2 million euros to 153.4 million euros (about $190 million at today's rate). On a constant-currency basis, marketing spend grew even more since the euro has strengthened versus the dollar over the past year.

For reference, Blue Apron spent $154.5 million on marketing in 2017 and $144.1 million in 2016. Even with an ad budget nearly as large as HelloFresh's in the U.S., Blue Apron started seeing a decline in customers. That speaks to the operational challenges it faced in 2017.

As a percentage of revenue, HelloFresh plowed 28% of its U.S. sales back into marketing the product and expanding its customer base. That's well above the 17.5% Blue Apron spent on marketing during the year. Blue Apron's marketing as a percentage of revenue fell to just 13.4% in the fourth quarter.

Blue Apron has shown a willingness to spend heavily on marketing in the past, but new CEO Brad Dickerson plans to break even by the end of the year and slowly ramp up marketing expense as the customer base grows. It might take a while before Blue Apron reaches the same level of marketing spend as HelloFresh, if it ever gets there.

HelloFresh's customers are more loyal

While HelloFresh is ramping up its marketing expenditures in the U.S., it didn't increase its marketing expense in its other markets. International marketing expense was exactly the same in 2017 as it was in 2016 -- 82 million euros.

Even without an increase in marketing, HelloFresh managed to increase its international customer base 31% year over year. As mentioned, Blue Apron's customer base did just the opposite when it kept its marketing budget relatively flat for the full year of 2017. So, either HelloFresh is much more effective at marketing, or it's better at keeping more of its existing customers. (Maybe both.)

Importantly, HelloFresh didn't sacrifice order volume or pricing. Orders per international customer fluctuated down 1.3% from 4.33 to 4.27 for its international customers. That's right in line with Blue Apron's 4.3 order per customer. Average order value increased 1.7% on a constant currency basis.

HelloFresh hasn't replicated that consistency in the U.S., but the numbers are still trending well. Average orders per customer increased, but average value per order decreased to partially offset higher order volume per customer. HelloFresh is more focused on growing customers and engagement in the U.S. right now, and its efforts appear to be working.

All of this adds up to trouble for Blue Apron

Combining HelloFresh's significant marketing efforts in the U.S. with its strong loyalty levels seen internationally means Blue Apron might have a hard time winning back customers in the U.S. as it goes back to ramp up its marketing efforts. That's compounded by the fact that many customers may have already tried Blue Apron and had a bad experience thanks to its challenges.

For a company that had question marks surrounding its marketing efficiency even before its IPO, that doesn't bode well for Blue Apron's 2018.

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Adam Levy 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.