Once in a Blue Apron
After a couple years of talking about Blue Apron in my classes and accelerators I thought I’d write of those thoughts down.
Blue Apron is the meal delivery company that everyone loves to hate. It’s not without good reasons. Their stock price is currently $2.15 (it was $10 on opening day). We’ve seen their high CAC (customer acquisition cost) and customer retention problems. But what are the root causes of some of these issues? And why might Blue Apron have been forced into a position that looks, at least temporarily, as impossible to improve?
A problem faced by many mass market subscription services that deliver physical products (as opposed to digital products) is that costs vary depending on customer location and yet the company cannot easily assign different pricing based on location. Even if costs did not vary, local market desire to pay different prices should be something that a national company could benefit from. In the past, a price difference might have been accommodated by charging more or less in delivery fees, but that is something that consumers have been socialized (by Amazon) to disdain. Further, when the business’s storefront is online (as opposed to a brick and mortar storefront that customers walk into), price comparison is easy. To the consumer, online feels like it should be the same no matter where they are, at least if they are within the same country. But that attitude changes when it comes to physical storefronts. When traveling, customers don’t expect to pay the same in every Starbucks they enter (the Starbucks model is a subject for another post). Different pricing in Blue Apron’s online storefront, even if justified, just feels unfair and it is understandable that the company has avoided changing pricing based on location. The two states reported where Blue Apron customers are a larger proportion of their population are California (15% of customers) and New York (8% of customers). But due to inability to vary prices by location, Blue Apron can’t charge higher prices to this 23% of customers who live in the higher income parts of the US.
Blue Apron’s Net Revenue per Customer in their S-1 deals with paid customers only, not people who tried the service for free and then never converted. Those free trials include real food costs and so are quite different than digital product SaaS companies doing something similar.
Orders per customer per quarter is another issue for the company. Quarterly orders declined from 4.5 Q1 2016 to 4.1 Q1 2017. It would be interesting to know the variation in orders per customer by looking at the raw data, or at least knowing the standard deviation of the repeat orders. That is, does the average of 4.1 orders per quarter mean that most customers center around that number, or is there drastic variation, with some customers ordering 36 times (three times per week) but many ordering just once.
CAC (customer acquisition cost) as reported in the S-1 is $94. That’s pretty close to the the 31% gross margin on the $939 in revenue for the 36-month cohort (which is $291 total or $97 per year straight-lined). Best case and not discounting future cash flows, Blue Apron breaks even on their CAC after one year (not counting any of their other operating costs). More specifically, and again because of coupons and free trials this is the best case since we don’t know how long it took Blue Apron to get the acquired customer to pay. Otherwise, according to the S-1 for the first six months after signup, customers generate $402 in revenue (at 31% gross margin that’s $124) and therefore actually pay off the CAC in nine months. Longer if you factor in the free period. But again, we’re not accounting for all the other costs of running the business when we typically calculate these CAC/LTV ratios and payoff periods. That CAC is also an average. What are the segments that are cheaper? What are the channels that are cheaper? For both, which provide a better LTV to CAC ratio?
Where customer payback period (how long until customer revenue pays back to the company the cost of acquiring the customer) would be a relevant metric to a company without a war chest, to Blue Apron this matters less, at least for a while. Blue Apron can make customer acquisition expensive for everyone else while having the funds to outlast the other companies that can’t afford to lose money for as long. For smaller startups that went into the meal kit business, or for startups thinking about getting into it now (is anyone thinking about getting into meal kits now?) their economics are very different. That is, they have a much smaller capability to last through tough times unless they don’t need to compete on price or if they can focus on a tight customer niche. In other words, the company would need to put tight limits on the overall size that they could grow to but they would also make their internal economics better while operating in that niche. Companies like Blue Apron that have already raised hundreds of millions followed by going public no longer have the option to stay small.
One way you can tell that Blue Apron faces stiff competition is from Google search results. Google Adwords displays the maximum number of paid ads at the top of the search page. When I did a search on the name “Blue Apron,” the first ad was from HelloFresh, then came Blue Apron itself, followed by Plated (acquired by grocery chain Albertsons), and Home Chef. Searching “Blue Apron Alternatives” results in ads from Sunbasket, HelloFresh, Plated, and Green Chef. There’s even a war over who can deliver the biggest discount. Searching “Blue Apron Coupon” shows offers from Blue Apron for $40 off, followed by an offer from Sun Basket for $50 off, HelloFresh for 50% off, and Green Chef for $50 off. You might be surprised to see me spend so much time writing about Google search results, but for this market online search is an important channel both because it leads to new customer acquisition and also because customers churn away when they find other better offers from competitors.
Another way we can see that competition if from recent large entrants to the meal kit business, notably Amazon, Walmart, HelloFresh (entering the US market from Germany), and Weight Watchers (which had previously partnered with Chef’d). Amazon and Walmart already have storefronts scattered throughout the US in different markets, making food preparation and local delivery more effective. Weight Watchers already has the brand and customer base.
Market Share Leader Without Loyalty Is a Position of Weakness
Blue Apron’s position as market share leader in the meal kit delivery market is that since there is low customer loyalty, market share leadership is actually a position of weakness, not of strength. Since meal kit subscription services can generally be thought of as interchangeable (there’s nothing that prevents one from emulating the meals of others), what keeps customers loyal is inertia, laziness, and only occasional price comparisons. The weakness comes from this fact. As market leader without loyalty, when a small rival offers a discount, say based on a “Blue Apron alternatives” search result, Blue Apron needs to make some sort of response. That response costs Blue Apron more than it costs the smaller companies since it is multiplied by a greater number of people. If Blue Apron still commands most of the new account requests and it must match or come close on its smaller competitors’ offers, then Blue Apron must give away discounts to more people than its competitors.
Well, it’s much cheaper than drinking nothing but soylent all week (estimated at $100 – $120).
