Should Blue Apron Be Worried About HelloFresh?

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Blue Apron (NYSE: APRN) is far from alone in the meal kit delivery market. Berlin-based HelloFresh, which operates in the U.S., is grabbing some attention as its fiscal fourth-quarter and full-year 2017 results recently showed it leapfrogging over Blue Apron in sales and customers. Though both are currently unprofitable, HelloFresh is looking to to go from red to black this year.

Meal kits on divergent paths

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According to the HelloFresh earnings report, global revenue surpassed $1.1 billion last year, compared to the $881 million Blue Apron reported. HelloFresh served some 1.45 million customers, up 69% from a year ago and more than twice the number of its New York City-based rival, which saw customer totals shrink 15% from last year.

HelloFresh's adjusted losses before interest, taxes, depreciation, and amortization also narrowed to $7.5 million from $29 million, while Blue Apron's increased nearly fivefold to $138 million. In short, HelloFresh seems like a bigger, better meal-kit delivery company than Blue Apron, but it's not all an apples-to-apples comparison between Blue Apron and the German meal kit company, which doesn't trade on an American stock exchange.

For example, in its customer counts, Blue Apron includes only people who have actually paid for a meal kit; HelloFresh includes users who have received free meal kits as well as those who have paid. Blue Apron also offers free kits to lure users in; it just doesn't view them as customers until they've paid for the service.

So although HelloFresh reported 890,000 active customers in the U.S. at the end of the fourth quarter, which would seemingly place it well ahead of Blue Apron's 746,000 customers, it doesn't say how many of them are paying customers.

And U.S. sales for HelloFresh lag behind those of Blue Apron, despite the supposedly significant customer advantage. HelloFresh reported U.S. revenues of $672 million versus the $881 million of its rival.

But still a HelloFresh edge

Blue Apron and HelloFresh are both having customer-acquisition troubles. As Blue Apron cut back on marketing costs, it suffered a decline in customers. HelloFresh is also experiencing high customer acquisition costs, and customer retention rates have been abysmal. Several analyses over the past year have shown that HelloFresh has a much worse customer churn than does Blue Apron.

So both are seeking new avenues to bring in more customers. Blue Apron is looking to expand into selling its meal kits in grocery stores. HelloFresh is available in stores in international markets but it is concentrating only on delivery here in the U.S. However, it just acquired Green Chef, a meal kit service offering options for customers on paleo, keto, or gluten-free diets.

With the acquisition, HelloFresh expects to offer its customers more choices, but it's not the only meal kit service with specialty offerings. Sun Basket uses organic and sustainable ingredients, as well as offering vegetarian and gluten-free meals; PeachDish offers Southern cuisine; and Terra's Kitchen offers a Mediterranean diet.

Furthermore, Green Chef is a high-priced service. Where most meal kits cost around $50 to $60 for three meals a week for two people, Green Chef is upward of $80 per week. Meal kit delivery is a finite market that is already overcrowded. Beyond the individual kit companies, supermarket chains are offering their own versions, which makes Blue Apron's decision to put its kits on store shelves a smart move.

On a global basis, HelloFresh looks like a healthier company than Blue Apron, but the U.S. is a tough market. Pursuing more expensive kit options, rather than making its offerings more broadly available to more customers, could backfire. And because its data is more opaque than Blue Apron's, it's harder to tell just how well it's really doing.

That doesn't mean I'd bet on Blue Apron to win in the U.S. It just means I don't think HelloFresh is a shoo-in to overtake it.

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Rich Duprey 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.