Blue Apron Holdings, Inc. (APRN) Goes Stale Right Out of the Box

After slashing its IPO price, ARPN stock still only mustered a single-digit gain

When Blue Apron Holdings, Inc. (NYSE:APRN) filed its initial public offering, there was quite a bit of excitement. Investors would get a chance to participate in the new-fangled online delivery industry. But that optimism has fallen flat after some interesting developments in the grocery space.

On Wednesday, the Blue Apron IPO got priced at $10 a share — which was at a steep discount to the original price range of $15 to $17. The lead underwriters on the deal included Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup Inc (NYSE:C) and Barclays PLC (ADR) (NYSE:BCS).

Unfortunately, even with the price cut, there is still not too much enthusiasm for the Blue Apron IPO. As of this writing, APRN stock is only up roughly 6%.

So what’s going on here?

A Blue Apron Primer

Well, to see, let’s first get a backgrounder on the company. Founded in 2012, Blue Apron saw a big opportunity to deliver food kits to consumers. These kits included recipes as well as pre-portioned ingredients. All in all, the goal was to help people eat healthier offerings, but without the drudgery of menu planning and grocery shopping.

From the start, Blue Apron was a hit. From 2014 to 2016, revenues spiked from $77.8 million to $795.4 million. In all, the company has delivered over 159 million meals across the U.S.

Over time, Blue Apron has certainly bolstered its offerings. Just some include Blue Apron Wine, which is a direct-to-consumer wine delivery service, and also the Blue Apron Market, which is an e-commerce marketplace of curated cooking tools and pantry items.

Another key part of the company is the logistics platform. Blue Apron has built a network of over 300 different supplier relationships that have exclusive arrangements. There is also custom-built fulfillment centers that effectively manage perishable inventory.

And what about the business model? Note that Blue Apron has several plans, which range from $60 to $72 per week (this depends on the number of people in a family).

Blue Apron IPO Pros & Cons

Now the market opportunity for Blue Apron is certainly enormous. According to Euromonitor, the U.S. grocery sector generated $781.5 billion in revenues last year — and the foreign market is eight times this amount.

As for the online market, it is relatively small, at about $9.7 billion. Yet, growth is expected to average at about 8.5% until 2020. By comparison, the traditional grocery market is forecasted to grow at only a 1.3% clip.

Despite all this, Blue Apron definitely faces some tough challenges. Perhaps one of the most threatening is the churn of the customer base. Based on the number crunching of Emory University professor Daniel McCarthy, it could be as much as 60%.

This means that Blue Apron will need to continue boosting its marketing spend, which is already at a hefty 25% of revenues. Besides, the heavy churn really casts doubt on the value proposition of the company. Do people really want this kind of service? Or, even if they do, does it have the right pricing or products?

It’s tough to say. But after being in business for about five years, it seems that Blue Apron should have a better handle on such things.

Even worse, the competitive landscape is likely to get even more intense. Amazon.com, Inc.’s (NASDAQ:AMZN) proposed acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) has sent shockwaves across the grocery sector.

For the most part, AMZN will be able to leverage a standout delivery service, which is backed by the ubiquitous Prime service. But at the same time, the traditional grocers like Kroger Co (NYSE:KR) will likely get much more aggressive with their own digital efforts.

In light of all this, it should be no surprise that APRN has pulled off a lackluster offering. Unfortunately, Blue Apron could have even more difficulties sustaining its valuation as the pressures in the grocery sector continue to mount.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About CommoditiesAll About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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