Blue Apron: Cooking at Home Away from Home
By: Amy Xu & Adam Motani
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Stirring the Pot
Blue Apron, the New York-based meal kit delivery company, was founded by Wadiak and Ilia Papas in 2012 with only 20 recipes. Six years later, Blue Apron has grown into an industry leader with nearly one million customers and 40.3-per-cent market share as of September 2017. Despite being one of the best-known meal kit brands, Blue Apron is facing severe competition in the industry as retail giants such as Amazon and Walmart diversify into meal kits. Leveraging its existing distribution network, Amazon saw sales in the U.S. grow by 59 per cent in 2017, further boosted by Amazon’s recent Whole Foods acquisition. In addition to large retailers, the market is highly competitive and fragmented with numerous other players including Hello Fresh, Plated, and Home Chef, pressuring Blue Apron to take immediate action. Ultimately, Blue Apron faces significant customer churn and high customer acquisition costs, resulting in a lack of profitability within an increasingly competitive landscape.
Grocery Giants Serving Up Mealkits
Through its acquisition of Whole Foods, Amazon took large strides into the U.S. grocery market, subsequently launching its meal kit delivery service in the Seattle area. Similarly, Walmart started selling approximately 30 meal kits from multiple brands in-store, partnering with Buzzfeed’s Tasty team to integrate cookware purchases into its mobile application, and will soon offer groceries required for recipes as well. The advances of these two retail giants into the meal kit delivery space worsened financial prospects for the already-struggling Blue Apron and the broader meal kit industry. Since its IPO last June, Blue Apron’s stock price has tumbled 71 per cent from the IPO price of $10 to $2.71 in March 2018. The company remains unprofitable, posting a net loss of $39.1 million last quarter. In an effort to reduce operational costs, Blue Apron laid off hundreds of workers last October; however, the company must look towards other margin expansion opportunities to remain sustainable.
Training Wheels for Home Cooking
The financial distress of Blue Apron can be mainly attributed to the nature of its revenue model. Since many customers perceive Blue Apron as “training wheels” that help people learn how to cook, users tend to cancel their subscription shortly after signing up, leading to low retention rates. According to a survey conducted by Cardlytics, out of the 45,000 new subscribers who signed up for Blue Apron in January 2016, 28 per cent canceled within the first month, 52 per cent canceled by the end of June, and 71 per cent canceled by year end.
Consequently, the profit made from an average customer fails to make up for the disproportionately high acquisition cost, leading to a continuous cycle of unprofitability. During the first quarter of 2017, Blue Apron spent $60.6 million on marketing to acquire 157,000 more customers, representing an average acquisition cost of $386 per customer. Given that the average revenue per customer for the same quarter was $236 with a gross margin of 31.2 per cent, the company earned $73.6 of gross profit per customer that quarter. This means that Blue Apron can recoup its customer acquisition cost of $386 in 16 months. As the company experiences an overwhelming 71 per cent of subscription cancellations within 12 months, the meal kit maker can rarely recover its marketing expenditures.
Attempts to Keep Up
Aware of the current headwinds in the market, Blue Apron is making progress towards improving its business model. Since the company’s value proposition is deeply rooted in the freshness and sustainable impact of its products, there is limited pricing flexibility due to higher input costs. Nevertheless, price is one of the most important product characteristics for consumers; a Harris Poll suggested that 46 per cent of people expressed willingness to purchase meal kits if they were less expensive. Given its limited ability to cut prices on meals, Blue Apron has looked to change the consumer perception of its pricing by reducing their minimum order threshold. Decreasing the minimum order threshold by approximately 20 per cent and lowering the number of meals within the minimum order by 33 per cent made the service more accessible to a wider range of customers. Blue Apron has also broadened their product offerings: by introducing wine, cookware, and utensils, the company is transforming into a one-stop-shop for cooking. These new products were introduced with the intention of increasing the potential revenue per customer. However, these initiatives failed to address the core problems of rising customer churn and acquisition costs. Although Blue Apron’s customer acquisition cost increased by 181 per cent in 2016, the number of customers only grew by 105 per cent compared to 2015.
Airbnb Opportunity
To reinvent its operations and drive a new source of customer demand, Blue Apron should expand its target market and provide meal kits to travelers by partnering with Airbnb. People are constantly looking to make travel more affordable; accommodations, transportation, and food costs result in significant expenses for travellers, many of whom are price-sensitive. According to research by the Royal Bank of Canada (RBC), Blue Apron’s offering provides the second cheapest meal solution at restaurant quality, with quick service restaurants being the cheapest. This makes Blue Apron meal kits an attractive alternative to eating out. Moreover, Airbnb is the natural choice for this new initiative, as many rental units in the U.S. provide kitchen amenities, allowing travelers to cook during their trip. Unlike people who typically stay at hotels, Airbnb travelers are more price-conscious and book longer stays on average, making Airbnb an ideal partner for Blue Apron.
Target Market
With the introduction of this new service, Blue Apron should target Airbnb customers visiting the United States and staying at Airbnb rental units for periods between two weeks to one month. Presumably, patrons staying for mid-to-long periods at Airbnb would consider price-conscious options as substitutions for dining out. In terms of demographics, young tech-savvy student travellers between ages 18 to 24, along with families on vacation between ages 24 to 34 make up the primary target market for this new service.
Integration Logistics
After booking their stay on Airbnb, travellers will be directed to a Blue Apron page with meal options for purchase to be delivered to their travel destination. The page can also illustrate potential savings of cooking instead of dining-out, encouraging customers to make purchases. Similar to how movie theatres use concessions to increase revenue per customer, Airbnb can establish an all-encompassing travel ecosystem by partnering with Blue Apron, where customers can find both living and eating recommendations on the same platform.
Implementation of this strategy would be enabled by Blue Apron’s existing nationwide delivery network. By partnering with Airbnb’s existing U.S. listings, no additional infrastructure would be required. Currently, Blue Apron requires a four-day lead time for orders; new orders received through Airbnb would require a similar lead time.
Impact on Blue Apron
Through this partnership, Blue Apron will establish a new revenue stream targeting on-the-go travellers instead of subscribers at home. This new initiative addresses the “training wheels” perception, as travellers view meal kits as a high-quality alternative to eating out at restaurants rather than a learning tool. Additionally, of all Airbnb rooms sold, 29.2 per cent were part of a trip that lasted between seven and 29 days. These longer-than-average stays will provide a sustainable and lengthened source of revenue for Blue Apron, directly combatting the core issue of revenue volatility.
Given that Airbnb has 660,000 rental units available in the United States with an average occupancy rate of 66 per cent, there is a total of 159 million nights booked on the platform each year. Since the average length of stay per customer is approximately three nights, there are 53 million distinct bookings made in the U.S. each year. Due to the larger scale of Airbnb relative to Blue Apron, if only eight per cent of travelers to the U.S. decided to book an average of three meals during their Airbnb stay, Blue Apron would experience a gross profit increase of seven per cent. The target market of customers between ages 18 to 34 represent 60 per cent of Airbnb’s guests, making the eight-per-cent rate of purchase reasonable.
A notable risk is whether there would be a sufficient number of new customers from the partnership to drive the anticipated financial benefits. The projected increase in gross profit of seven per cent represents the worst-case scenario, because the calculations only account for revenue directly generated through Airbnb. It is anticipated that a segment of travelers could also convert to permanent subscribers of Blue Apron, which will further improve the company’s financial condition.
Besides its financial benefits, this initiative will also establish a foundation for future expansions. Currently, the meal kit market has a penetration of around half a per cent of all grocery orders, with approximately 37 per cent of people unaware of what a meal kit is. As consumer awareness increases, there will be a significant growth opportunity for Blue Apron. Additionally, Blue Apron only services consumers in the U.S., while Airbnb has been able to secure around 25 per cent of the overall leisure travel market, with penetration of up to 50 per cent in some regions. Airbnb’s global presence highlights the potential growth that can be realized by Blue Apron through international expansions. If the U.S. partnership is successful, Blue Apron can look to realize revenues from the partnership in other markets as it continues to expand internationally.
Benefits to Airbnb
Hotels do not usually offer kitchens, therefore meal preparation is not always possible. Through the Airbnb and Blue Apron partnership, one of the unique benefits of Airbnb—having additional amenities such as kitchens—is made more valuable to patrons. By using Blue Apron, customers would also save around 50 per cent per meal compared to going to a restaurant, making Airbnb an even more attractive option for customers seeking meal discounts.
In this arrangement, Blue Apron will share part of the revenue generated from this initiative with Airbnb as an incentive to enter into the partnership. If Blue Apron provides nine per cent of generated revenues to Airbnb as royalties, Airbnb’s bottom line is expected to increase by seven per cent, assuming minimal implementation costs. This royalty cost will be offset by a subsequent decrease in Blue Apron’s marketing expenditures. Currently, Blue Apron’s marketing expenditure is highly ineffective, as the company loses money for every new customer recruited. Reallocation of marketing expenditure towards the Airbnb partnership will more effectively bolster sales, promote brand recognition within a new group of target customers, and reduce the cost of customer acquisition.
Historically, Airbnb has also been open to partnering with other organizations that provide complimentary offerings, allowing Airbnb to better compete in the traditional hospitality industry. For example, in late 2017, Airbnb partnered with WeWork to find working spaces for business travellers, an alternative to booking costly business conference centres from hotels. In addition, Airbnb has also partnered with travel management company Trio and apartment company Veritas Investments. Clearly, there is reason to believe that partnering with Airbnb is more than just a pipe dream.
Mixing All the Ingredients Together
Blue Apron lacks a clear competitive advantage against low-cost retail giants and must diversify its revenue model to survive. Through its expansion into the travellers market, Blue Apron can create a new niche for “home cooking away from home” and improve its financial profitability.
Moving forward, Blue Apron can take advantage of its strong infrastructure and high-quality ingredients to compete against global behemoths like Amazon and Walmart. For instance, the company could one day provide healthy meal kits for schools, summer camps, and hospitals, or source ingredients for restaurants. All these potential customers would benefit from nutritious, high-quality ingredients, and as a result, Blue Apron is uniquely positioned to create an ecosystem that rewards all stakeholders in the long term.