Meal kit company Blue Apron (NYSE:APRN) was up under 1% on Wednesday. This was the first uptick after a tough week for APRN stock. Don’t expect the good news to continue, though.
With intense competition, fading interest in meal kits and an unsustainable business model, Blue Apron stock faces an uphill battle.
Meal Kits: Consumers Like(d) the Idea…
Blue Apron is all about meal kits. Customers subscribe to the service, receiving a weekly box containing fresh ingredients for a meal, along with recipes. Customers then cook the meal themselves. The appeal is convenience (no grocery shopping required) and not having to come up with meal ideas after a long day at work.
Also appealing to consumers is the idea that meal kits are more environmentally friendly than grocery shopping and preparing meals on their own. On the surface, meal kits from companies like Blue Apron may seem to have issues, including plastic packaging. However, professor Shelie Miller at the University of Michigan’s School for Environment and Sustainability points out:
When we’re talking about meal kits, we tend to focus on plastic and packaging. We need to take a much larger, system-level view to really look at everything, from when things are produced all the way to when they’re disposed. When you take that view, the environmental impacts often are surprising.
Professor Miller’s research shows that through more efficient delivery (a truck loaded with meal kits on an optimized route) and lack of waste through pre-measured ingredients, a meal kit results in 33% less greenhouse gas emissions than a similar meal cooked from ingredients from a grocery store.
Given the appeal, it’s probably not surprising that APRN stock was in high demand after its 2017 initial public offering. However, interest in meal kits has faded after the initial rush of popularity. The recent announcement that Plated would end its meal kit subscription service was seen as another sign that consumers are losing interest. This also resulted in a 7% drop for Blue Apron stock.
Questionable Business Model
Scratch beneath the surface and the business model for meal kits reveals many areas of concern.
APRN faces fixed costs for ingredients, packaging and shipping. There’s not a lot of room for cost reduction there. Because it’s food that’s being handled, Blue Apron can’t afford to make any mistakes, further reducing any opportunity for cost cutting. At best, missing an ingredient could cost them a customer. At worst, a damaged box could result in cross-contamination of ingredients and subsequent serious illnesses.
With increased competition, Blue Apron faces high expenditures on marketing and promotions, yet customers don’t always stick around. Daniel McCarthy, an assistant professor of marketing at Emory University told CNBC that roughly 50% of Blue Apron customers stay onboard for the first month at the discounted rate. Later, they quit the meal kit service when they have to pay full price.
Surging Competition
When a new market starts to show signs of taking off, early entrants are quickly fending off competition. And that is the case with Blue Apron.
According to data from Pitchbook, in 2011 (Blue Apron was founded in 2012), interest had begun to develop in meal kits. But globally, just one venture capital firm invested in a meal kit company. Just four years later VC firms had invested over $440 million, backing 16 different meal kit companies.
Revenue for the meal kit industry hit $2.5 billion in 2017, with estimates it would reach $8.94 billion by 2025. And that brought out the big competition. In addition to competition from other meal kit startups, grocery stores began acquiring meal kit companies and selling their own private label meal kits. The shoe really dropped in 2017, when Amazon (NASDAQ:AMZN) launched its own meal kit service. When that news was announced, APRN stock immediately took an 11% hit.
Making the situation even more difficult, meal kits are competing against even more convenient, home delivered restaurant meals courtesy of services like Uber’s (NYSE:UBER) Uber Eats.
Bottom Line for APRN Stock
Blue Apron is in a tough position. It arrived early in a wave of meal kit companies that promised to make dinners more convenient for busy consumers. That promise and Blue Apron’s early lead meant APRN stock was valued highly.
However, initial success brought intense competition, including huge companies like Amazon. Attracting and keeping customers became increasingly expensive, while the cost of ingredients and shipping were essentially fixed. At the same time, companies like Uber Eats have been pushing convenience to the next level, by delivering ready-prepared meals from favorite restaurants, on demand.
As InvestorPlace contributor Will Healy points out, this has left Blue Apron without any discernible competitive advantage.
Not surprisingly, given the situation, Blue Apron stock has plummeted in the two years since its IPO. And there are few positives on the horizon. Even though it’s cheap at $7.28, APRN is definitely not a stock to buy. That’s unless you really enjoy the rush of risk.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.