Market Strategies releases new data as the battle over meal kits intensifies
Blue Apron (APRN) is having a really tough 2017. Just as the meal-kit delivery company went public at the end of June, Amazon (AMZN) announced its acquisition of Whole Foods, and the immediate threat of a new, much larger competitor to the Blue Apron brand emerged. Blue Apron slashed its planned issue price from $15 to $10, and as the drip-drip of Amazon/Whole Foods news continued into the fall, investors have fled and the company current trades at barely 50% of its issue price. Not surprisingly, experts are already proclaiming Blue Apron’s IPO as the worst of 2017.
It’s been downhill from there. In August, the company announced that it was cutting over 1,270 jobs at its New Jersey facility, representing nearly a quarter of total staff. And the latest chapter in the Blue Apron saga was a dismal earnings report for the second quarter of 2017, which showed that the company lost $31.6 million and 9% of its customer base. Blue Apron had to adjust its forecasts for the rest of the year, and announced that it would be significantly reducing its marketing spend in the back half of the year, which will have additional impact to the company’s top line growth and put further pressure on its stock price.
Stay out of the kitchen?
Blue Apron’s problems may have started way before it went public. An analysis from ValuePenguin of Blue Apron’s S-1 filing highlights a few critical issues.
For one, you would expect that the lifetime value of Blue Apron customers is theoretically very high, given the cost of the product. Yet the analysis showed that customers have near zero lifetime value. “Blue Apron loses more than 90% of its customers within 12 months of their first purchase, and has to continuously attract new customers to just sustain its revenue,” says ValuePenguin.
A secondary but related issue is the company’s high cost-per-acquisition, which has doubled in recent quarters compared to 2015. Blue Apron spends $175 in marketing costs per new customer, and its per-customer profit is only $15 annually. Small wonder then that as its leadership was looking to reduce costs, marketing was first to take a haircut.
This analysis highlights some deep concerns about Blue Apron’s business model, which is only compounded by the Amazon/Whole Foods tie-up. And Amazon is clearly looking to eat Blue Apron’s lunch: It started trials of meal kits in the Seattle area in June, and then in July filed for a trademark application for prepared food kits.
So what should Blue Apron do to compete with Amazon and get its business back on track? Market Strategies recently conducted an independent research study to examine the challenges facing Blue Apron. The survey was fielded with 2,000 US consumers aged 18+, and provided fascinating insights not just into Blue Apron, but also into the future of prepared meal kit businesses.
A clear leader in a niche market
Blue Apron has become synonymous with prepared meal kits because it is the clear market leader. Our data shows that Blue Apron’s market share is as big as its closest two competitors combined. However, it is worth noting that a large majority of consumers that we interviewed have not subscribed to a recipe delivery service yet, indicating that there is still plenty of greenfield opportunity in the market.
What is also noteworthy is that most of Blue Apron’s customers are new; more than half activated their subscription in the past twelve months, while barely more than one in ten have been using Blue Apron for more than two years.
A not-so-satisfying experience
The data above shows that Blue Apron has plenty of room to grow in terms of attracting new consumers to this market, and that there is potentially space for Blue Apron, Amazon and a number of other competitors. But before it can do that, Blue Apron is going to have to fix some critical issues with its existing customer base.
The first issue is customer satisfaction. Barely half of Blue Apron customers state that they were very or somewhat satisfied with their Blue Apron plans, with more than a quarter saying that they were dissatisfied. This is poor performance compared to other e-businesses such as Uber, Airbnb or indeed Amazon, where satisfaction is typically 90%+, allowing those brands to rely on a steady stream of happy repeat customers.
As a result, Blue Apron customers are also much less likely to spread the word to their family and friends than you might expect. We asked respondents how likely there were to recommend Blue Apron to friends and family, using an 11-point scale, and just 20% were ‘Promoters’ (10 or 9 on the scale), while a full 58% were detractors (0-6 on the scale). The result is that Blue Apron has a Net Promoter® Score of -38, a long way off its looming rival.
Which leads to Blue Apron’s biggest challenge of all: its ongoing battle with customer retention. We found the ValuePenguin statement that “Blue Apron loses more than 90% of its customers within 12 months” to be quite startling, and if true, to be indicative of a severely flawed and potentially doomed business model. So we asked the respondents that had used Blue Apron whether they currently had an active plan, and the results were only marginally better than the ValuePenguin claim. Nearly two thirds (64%) have already cancelled their service, and a further 14% had an active plan that they planned on cancelling. Barely 1 in 5 of the Blue Apron users was actively using as plan.
Respondents cited the cost of Blue Apron plans and the choice of menu items as the top reasons for cancelling their plans, while only 12% said that they left in order to try a competing service.
It was at this point that our study uncovered an insight regarding the meal kit category as a whole, and potentially a first alarm bell for Amazon as it makes its first forays. We found that once Blue Apron customers churn, they tend to leave the category altogether. More than 50% of Blue Apron customers who canceled their service indicated that they are unlikely to try an alternative like Hello Fresh, Home Chef or Plated.
Amazon is a genuine threat
However, this doesn’t mean that Amazon’s plans to join the meal kit business are doomed to fail. In fact, we found the opposite. While just 28% of those that defected from Blue Apron said that they would be likely to try one of its current competitors (Hello Fresh, Plated etc.), this figure nearly doubles when Amazon is added to the mix. What’s more, when we asked the general population how likely they were to try an Amazon meal kit service, nearly three quarters said that they were very or somewhat likely to give it a go.
So why are consumers likely to give Amazon a chance in this market? It’s for the same reasons that Amazon has become ubiquitous in many people’s lives: the company’s Prime membership plays a big part, and like most new Amazon services, consumers are expecting there to be a free trial period.
This is alarming data for Blue Apron, because it has no way of competing with the Amazon Prime service, and is unlikely to be able to go head-to-head with the might of Amazon over free trial periods. But there is a silver lining: A third of respondents said that they are looking for a wider range of pricing plans and healthier menu choices, and having been in the business for a few years, one would think that Blue Apron might have a head start in being able to satisfy those needs.
And then let’s not forget that Amazon’s success in this category is far from guaranteed. As many industry experts were predicting the demise of Blue Apron over the summer, Roger Meiners at Fortune pointed out that “just because something is offered by Amazon doesn’t mean people will rush to it. Remember Amazon Destinations? That was going to take over hotel bookings. Remember Amazon WebPay or Amazon PayPhrase or Amazon Fire Phone? Those and more Amazon efforts failed. Their competitors are still with us.”
So what should Blue Apron do?
Blue Apron (and likely its competitors as well) has spent its founding years focused almost entirely on customer acquisition, burning through the marketing dollars in the relentless desire to satisfy growth numbers. But as our research clearly shows, the vast majority of that acquisition is trickling away in the first year, and Blue Apron has neither the profits nor the scale to maintain the burn. By contrast, its newest competitor is the world leader at succeeding with razor-thin margins on a massive scale.
It’s clear that Blue Apron needs to re-focus some of those marketing dollars on consumer research. It desperately needs insights that it can use to take advantage of the untapped opportunity in the meal kit segment, while simultaneously fending off a big new competitor, and I would argue that the insights need to start from the inside out. The starting point is some in-depth churn research, similar in many ways to the research that wireless operators or airlines carry out on a monthly basis as they try to assess the motivations of fickle customers that leave them for a competitor. Blue Apron needs to understand the major reasons for their customer churn, drill down on the piece parts of those reasons, as well as determine its best opportunities for winning customers back and improving the customer experience. Unless it gathers insights that allows it to plug the holes, the business model is destined to remain as effective as catching raindrops with a tennis racquet.
While the churn research will provide some clear perspective on why customers are leaving and how to prevent it, the next level up is brand research to gain a deeper understanding of customer loyalty in this category. It starts with understanding what motivates customers to sign up in the first place – the wants and needs that they have coming in, and how effectively Blue Apron is satisfying those today. From there, what is most effective at raising KPIs such as satisfaction and likelihood to recommend, and ultimately, what are the key drivers of long-term loyalty to both the brand and its products?
Combined with this is the need for product optimization, and here Blue Apron has a genuine opportunity. Our research shows that consumers are looking for more flexible price plans, menus with more choice, and a wider range of healthy eating options, and all of these factors are well within Blue Apron’s control. A range of choice-based research analyses will allow Blue Apron to optimize the various combinations of menu choice, nutrition and associated costs to provide customers with product offerings that are most appealing, flexible, and which will achieve the greatest reach across the target market.
Only once these insights are gathered should Blue Apron return to focusing on customer acquisition. But before it reignites the marketing burn, it would be well advised to conduct research that allows it to better identify the market segments where its offering is most appealing, and how to be most visible and compelling to those segments. This will be crucial to reducing its customer acquisition cost, which is currently a major constraint on profitability.
Clearly 2017 has been a rough year for Blue Apron, and the challenges will only grow in the months ahead. But the company is still the current market leader, with existing infrastructure and hard-won experience in place, and has an opportunity to be more nimble and focused in building a compelling meal kit service that stems the churn and sets about creating a loyal, lasting customer base. The crucial tipping point will be obtaining the research insights that allow it to transcend pure growth numbers and compete on the unique value that its business model delivers to customers.