On the Margin
Blue Apron filed for an initial public offering on June 1

Wall Street bets against the meal kit business

Blog: Blue Apron’s stock falls, amid concerns about Amazon and the company's business model

This post is part of the On the Margin blog.

A month ago, we wondered whether Blue Apron would be a major restaurant competitor or a flash in the pan.

So far, Wall Street appears to be betting on the latter.

Blue Apron’s stock has fallen more than 25 percent since its initial public offering late last month — an offering that priced well below the range it had originally hoped for when it filed earlier this year. Indeed, the stock is priced at half of the bottom end of its originally planned pricing range of $15 to $17 per share.

Some of the problem with Blue Apron’s IPO can be blamed on Amazon, which bought Whole Foods and essentially changed the landscape of the entire retail food market in one fell swoop. The prospect of a competitor like Amazon likely gave investors cold feet about the long-term prospects of the meal kit business. 

But the business itself has generated plenty of questions. Those questions have grown louder and more numerous since the IPO.

To be sure, plenty of people believe the meal kit business has found a niche, an in-between state between restaurants and grocers for people with a lot of money and less time, but enough time to apparently clean and do the dishes. One study we wrote about suggested the service could take business away from casual-dining restaurants, as if they need any more competition.

But other studies have so far exposed flaws in Blue Apron’s ability to retain customers. And that is influencing investors’ views of the company.

One analysis, by Daniel McCarthy, an assistant professor of marketing at Emory University, suggested that Blue Apron loses money on 70 percent of its customers and struggles with customer retention. McCarthy estimated that 72 percent of the company’s customers will churn within six months.

Blue Apron loses a lot of money, because it spends a lot of it on advertising to get new customers in a bid for “first mover advantage” in the growing meal kit delivery service. And because it is losing so many customers, it has to keep advertising. 

The problem with such services is they cater to a specific niche.

Consumers pay about $10 per person to have a meal kit delivered to their house. They still must buy some of the groceries, and fix the meals themselves and then do the dishes. 

It is more convenient than, say, shopping for groceries yourself. But it is also more expensive. And while it is cheaper than a visit to a restaurant, it is a lot less convenient. 

That’s a narrow opening for a company to fly into. It gives Blue Apron a more limited market, and makes them less of a competitor to the restaurant business than it appeared just a few months ago.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at jonathan.maze@penton.com

Follow him on Twitter: @jonathanmaze

TAGS: Finance
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