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The cautionary tale of Blue Apron's growth strategy

Quartz logo Quartz 8/18/2018 Sarah Kessler

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Home-delivered meal kits are forecasted to have an annual growth rate of 25% to 30% over the next five years and become a $2.2 billion business — but that’s still just a rounding error in the multitrillion-dollar food industry. Blue Apron didn’t invent the ingredient-and-recipe meal kit service industry, but it drove it into the public’s consciousness and took off on an impressive growth run. Unfortunately, that initial success masked a problem with customer defection — churn — that unexpectedly tripped up the company just as it was celebrating early victory.

Blue Apron was founded in August 2012 from a commercial kitchen in Long Island, New York. Working from the notion that the market context was shifting due to the nexus of the internet, fast modern delivery infrastructure, and a growing population of consumers wanting gourmet food at home, the company’s three founders (CEO Matt Salzberg, Ilia Papas, and Matt Wadiak) devised, packaged, and shipped packages of ingredients and suggested recipes that consumers could cook by hand to create superior meals.

Blue Apron took off like wildfire — and within four years the company had shipped 8 million meals. By that point, Blue Apron had grown sufficiently large to open its own fulfillment centers in Richmond, California (to serve the West Coast), Jersey City, New Jersey (the East), and Arlington, Texas (the rest of the United States). A fourth center, in Linden, New Jersey, was announced in early 2017.

Click here to see the latest share price for Blue Apron (APRN)

In November 2014, in a quick shift (and in hindsight, maybe a premature move) to a new growth path, Blue Apron also began to pursue customer and product diversification — opening Blue Apron Market, a cookware, merchandise, and cookbook store, and Blue Apron Wine, a subscription service that delivered to users six bottles of wine per month — to maximize customer acquisition cost by offering its existing base of subscribers more products to purchase—a classic product expansion strategy. But was it too much too fast? As might be expected, there were setbacks: some health and safety violations at the Richmond plant reduced customer (experience) satisfaction because delivery times weren’t met as promised, which could be blamed on the rush of such rapid growth. But all in all, Blue Apron seemed unstoppable.

It came as no surprise when on June 29, 2017, Blue Apron went public — 30 million shares that opened at $10 per share were sold. That made it the first public company dedicated to meal kit delivery — and worth an estimated $3 billion. The future seemed bright indeed.

That’s when the dark clouds appeared. The first clue came in the company’s first IPO quarterly financials. The company reported revenues of $238.1 million, better than market expectations — yes, but it also suffered a loss of $0.47 a share, versus the street’s prediction of a gain of $0.30 a share. Clearly something was wrong. By September, the stock price was off nearly 50% and hovering around $5 per share. Why the plunge? Two reasons: competition and churn. In the words of Techcrunch, investors were “concerned about customer retention and the looming threat of Amazon.” Suddenly Blue Apron found itself hit by a class-action “stock drop” lawsuit—making three main claims:

  1. The company had cut its advertising just before the IPO, damaging revenues;
  2. Problems with the Linden, New Jersey, center had slowed deliveries; and the big one —
  3. The company was suffering diminishing customer retention — that is, greater churn — due to orders arriving late or incomplete.

The first two could either be explained or fixed. But for many, the last was the kiss of death for a subscription-based business. If you lose more customers than you gain each month, you don’t have much of a business at all. According to an analysis, the company could lose 72% of its customers within six months, which puts a tremendous strain on the cost of acquiring new customers (CAC) fast enough and at an appropriate cost, especially in light of number one on that list above. In the second quarter of 2017, it lost (via churn) 9% of its customer base.

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With revenues falling, the company was forced to institute a hiring freeze and, aggravating number one in the class-action suit, further cut back on marketing, customer acquisition, and spending. By August 2017, it had announced that it was cutting over twelve hundred jobs at its New Jersey facility, which represented nearly a quarter of its total staff. Its marketing as a percentage of net revenue decreased as it continued to pull back on marketing. This is a vicious cycle when churn gets out of control. You end up cutting spending in areas such as marketing, sales, and customer service to save on costs, but those decisions will impact the company’s top-line growth and put even further pressure on its stock price. Diversifying and expanding a portfolio of products is a calculated risk, but as is the case in many other examples, often companies forget about the interconnectedness of the decisions it makes to other parts of the business.  

Diversifying and expanding a portfolio of products is a calculated risk, but as is the case in many other examples, often companies forget about the interconnectedness of the decisions it makes to other parts of the business. In Blue Apron’s case, the good news was that it was growing—the bad news was that it was growing so fast that it wasn’t able to ensure that the rest of the company could keep pace. An example was when it announced the rollout of its expanded plan and menu options at the Linden facility it was opening.

At the time, it was only able to offer those new products to half of its customers, which negatively impacted the value of the monthly subscription. Since then, Blue Apron has completed the rollout, and now 100% of its customers have access to the expanded product offering. In Blue Apron’s Q3 2017 Earnings call, Matt Salzberg, CEO, said, “Our initial indications, although early, show improvements in both order rate and retention when comparing customers who received the product expansion to those who had not yet received it.” If products aren’t consistent, if you don’t meet and exceed customer expectations in a subscription business month after month, you will lose customers.

The fact that it had acquired so many customers so quickly should have been a huge competitive advantage. Why? It now had a base of customers that it could learn from. It could use purchasing habits, average sales price and “basket size,” recipe choices, and average revenue per customer to help it design future products. Anticipating what your customers may want next has helped Netflix and Spotify stay ahead of churn and offensively mitigate customer defection. Blue Apron could have done the same thing, but didn’t.

Meanwhile, attracted by Blue Apron’s early success, the market was being flooded with other meal kit companies, including Chef’d, Hello Fresh and Plated — while giants such as Unilever, Anheuser-Busch and Coca-Cola were making investments in food-delivery service companies. Then, in the midst of all of this uproar, the biggest hit of all came: Amazon announced its purchase of Whole Foods.

Had Blue Apron used its early advantage to focus its attention on retaining its current customers, that is, reduced churn by developing a reputation for personalized, prompt, and quality service, instead of capturing new ones as quickly as possible, it might have found itself in a much more defensible position. The latest move from Blue Apron as it tries to navigate its way back to profitability and growth is that it replaced its CEO in December 2017 after its third-quarter earnings.

Excerpted from Growth IQ: Get Smarter About The Choices That Will Make Or Break Your Business.

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