Just like people seem to willfully ignore the fact that Tesla Inc (NASDAQ:TSLA) is, first and foremost, a car manufacturing company that competes with auto manufacturers that generate real cash flow, people seem to think that Blue Apron Holdings Inc (NYSE:APRN) is some sort of grand tech company rather than a meal-kit delivery system that competes with ordinary grocers.
A mobile ordering app does not does not a tech company make.
Sure, the IPO timing was not ideal, but the 70% decline in the APRN stock price since the public offering in the middle of this year is not overdone as I see it.
These “fall off a cliff” type declines are warranted in a scenario like the one presented here — where expectation and reality diverge dramatically. Numbers increasingly show a business where growth was a temporary phenomenon.
APRN Churn
At the top of the list of concerns is churn. APRN runs on a subscription model and, with a $30 promotion for first-time users, they need to be able to hold onto customers for a sufficient period of time in order to recoup acquisition costs.
Lots of deep dives into the churn rates are already out there, so there is no need to reinvent the wheel. Constant churn is around 10% per month and the cohort churn comes in at 72% for the first-half-year period. This means that out of 10 initial signups, by the six-month mark, only 2.8 remain paying subscribers. OK, so you can’t have eight-tenths of a person, but you get the idea. It’s shockingly high churn.
Having to replace so much of your customer base while already spending furiously on marketing efforts is not a sustainable business model.
Even more starkly put, according to Food & Wine Magazine, “only 50% of APRN customers stuck with the service after the second week.”
After spending $94 (a blended average from 2014-17 first quarter data per the company prospectus) to acquire a customer, half aren’t even staying long enough for APRN to break even at a revenue level.
Chew on that.
APRN Competes With 100 Meal Kits Services
It’s not exactly the most compelling industry to be in. In economics speak, the barriers to entry are virtually nonexistent, barring some initial outlays for tech, inventory, and working capital.
According to a Packaged Facts study, there are already well over 100 meal-kit services available in the US. Some are the microwavable kind, requiring less work for the consumer who thought it would be fun to cook for two weeks before defecting for an easier, similarly priced option.
And given the sheer number of competitors including regular restaurants with meals priced in the same $10 range, APRN doesn’t have pricing power. So, the income statement structure is quite poor with limitations on the top line and a bottom line damaged by operating and marketing expenditures necessary to prop up the illusion of growth.
Caveat for Short Sellers
As a caveat for the bears out there, there is some acquisition risk. I suspect it’s low, but when borrowing on margin, a transaction of this sort would likely wipe a short seller out completely, so it’s worth factoring in.
Also, in September, Albertsons bought Plated, another meal-kit company. Beyond the aforementioned acquisition risk, from a competitive standpoint, it goes to show how vulnerable a standalone “tech” company like APRN is when in a sea of well-capitalized grocery stores with better infrastructure to leverage toward marketing and operations efforts.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
