The Pandemic Gave Blue Apron a Lifeline. Can It Last?
By: Stephen Moore
Tags: Meal Kit, Blue Apron, Economy, Business, Pandemic

The Pandemic Gave Blue Apron a Lifeline. Can It Last?

When shutdowns lift, it’ll be competing against unprecedented pent-up demand for eating outside of the home

Photo: Derek Davis/Portland Portland Press Herald/Getty Images

At its peak in 2015–2016, Blue Apron was delivering over eight million meals per month and raking in over $1 billion in annual sales. Within just five years of its inception, it was employing 4,500 people and was valued at over $2 billion.

It looked set to dominate the meal kit market, helping meal prep delivery overthrow traditional shopping and home cooking. But then the bottom fell out of the box: The market quickly became saturated with competitors like HelloFresh, and in response, Blue Apron overspent to acquire customers and retain them. After a disastrous IPO in 2017 and facing competition from Amazon, the company was at rock bottom. By the beginning of 2020, it looked like the writing was on the wall. But then suddenly, after years of flailing, the arrival of the coronavirus pandemic became Blue Apron’s unlikely savior.

From podcast mainstay to meal kit underdog

In its first few years after launching, Blue Apron spent heavily on advertising and free meal offers to convince people to become customers (if you’re a podcast listener, you’ll likely remember the company’s ubiquitous ad spots and sponsorships). This kind of spending is known as customer acquisition cost (CAC), which is calculated by dividing all the costs spent on acquiring more customers by the number of customers acquired during the period the money was spent.

A staggering 75% of customers canceled their subscription within six months.

During this time, Blue Apron’s CAC sat around $60 — less than the CAC of its main competitor, HelloFresh, which sat around the $80 mark. But even though it had an initial cost advantage over HelloFresh, Blue Apron struggled to hold onto its new customers, who were happy to take the free or discounted boxes that were so heavily promoted but often canceled after their first shipment. A staggering 75% of customers canceled their subscription within six months, meaning that Blue Apron failed to make a profit on them. As more subscribers continued to sign on for its meal kit service only to cancel their subscription in the long term, the company increased its marketing costs to find new potential customers, and its CAC surpassed $120.

Meal Kit Spending. Image: Adam Keesling

Blue Apron was relying on each user ordering more and more meals just to break even per customer. Meeting this increasing quota was proving to be a tough proposition, mainly due to its churn rate continuing to hover around 50%. Despite the increased spending, the company was seeing its dominant position in the market eaten up by HelloFresh.

Taking meal kits public

Blue Apron was hemorrhaging money entering 2017. With finances dwindling, the company had a decision to make: Find a buyer or go public to raise funds. The board decided to go public, setting a date of June 29, 2017. Before the IPO went live, the company ramped up spending in an attempt to bring in new users and boost customer growth, increasing its marketing spend by 200%.

The reality was that the meal kit market wasn’t nearly as big as initial interest in it suggested.

Anticipation for the IPO was high. At the time, meal kit services were thought to be the next big disruptors, ready to transform the way people ate entirely. Instead, the IPO results were underwhelming, raising $300 million — a third of what they had expected. At the end of its first trading day, the stock closed at $10 a share rather than the $15–$17 they had hoped for. And to make matters worse, Amazon announced its purchase of Whole Foods for $13.4 billion just days before Blue Apron’s IPO and then trademarked its own meal kit service, aptly named Amazon Meal Kit. It was a devastating blow to Blue Apron. Its flat IPO had piled the pressure on the company, and now one of the biggest delivery giants in the world — one with infamously advanced infrastructure and delivery, capable of executing food delivery at massive scale — had an entire grocery chain under its wings and was entering the meal kit market.

The problem wasn’t just Amazon stepping on the company’s toes. The reality was that the meal kit market wasn’t nearly as big as initial interest suggested. According to Cara Rasch, a food and beverage analyst for Packaged Facts, only 1% of Americans use a meal kit service. With over 150 meal kit companies competing for that small consumer base — including a behemoth like Amazon — it was a tall order for a startup like Blue Apron to convert a substantial share of the market into long-term subscribers.

In July 2017, with the company still reeling from its disappointing IPO, co-founder and COO Matthew Wadiak stepped down. Just four months later, president and CEO Matt Salzberg stepped down as well after an earnings report showed a 6% drop in customers. The company had already seen its stock price drop to under $3, but after an announcement in early 2018 that Blue Apron had lost over 250,000 customers in the previous year, the share price dropped to under $1.

The pandemic brings a second chance

For most companies, this would have marked the beginning of the end. In February 2020, Blue Apron announced that it was interested in finding a buyer, and new CEO Linda Kozlowski began streamlining the business, focusing on appealing to “core customers” rather than trying to target every single potential new subscriber.

Then suddenly, an unlikely lifeline appeared in the form of a global pandemic. As it took hold, the company found it had a new potential market: the entire shut-down population. In the second quarter of 2020, Blue Apron acquired 20,000 new customers, reaching nearly 396,000 total customers (an improvement but still well short of its 1,000,000 customer peak in 2017).

The company reacted swiftly to the challenges presented by the pandemic. It quickly simplified its recipes to enable it to scale and operate under staffing restrictions while adding temporary staff to fulfillment centers. Blue Apron also responded to the rise in families using the service by expanding the availability of its “premium-style meals,” an option previously only for couples, and allowing customers to order multiple boxes per week. And in a first for Blue Apron, it launched marketing campaigns targeted at singles and empty-nesters. As shelter-in-place was implemented and more of us turned to home cooking, its meal kit sales doubled through mid-April year-over-year. In Q3 this year, the company reported a 13% increase in revenue, and it expects Q4 sales between $108 million and $112 million.

The pandemic is probably the best thing that happened to Blue Apron in the past several years. Its navigation of the difficult environment has been well received by investors, with its stock price enjoying a 400% increase from mid-March to mid-April — a surge of almost 1,100% since its low in 2018. Today, it trades in the $7–$8 mark, an improvement of sorts from its low of $1. The question is: Can it rally and make these changes sustainable?

Once the initial excitement over the box of goodies wears off, you’re left with the same problem — you have to do the cooking when you could put that same money toward visiting a reopened restaurant.

One optimistic sign for the long term is that things look to be improving for the food delivery industry as a whole. HelloFresh has seen its sales double during the pandemic. Amazon finally launched its meal kit service, making it available to Amazon Fresh and Prime Now customers in several states, as well as in certain Whole Foods and Amazon Go locations across America. While reach is currently limited, Amazon has over 150 million Prime users — a potentially huge market to convert to meal kit users. The company also removed the extra fee for grocery delivery, making it free for Prime users, leading to a 30% increase in adoption of the service.

Restaurants have turned to home delivery, and that may become the norm going forward. But home cooking and home delivery are less likely to be so desirable when everyone’s favorite spots reopen and vaccines are distributed. Rasch argues that “when businesses reopen and people return to lifestyles on the go, restaurant carryout, prepared meal delivery, and other similar food options are going to keep winning out over meal kits due to increased convenience and value to the customer.”

That’s the trouble with meal kit delivery services — they aren’t quite home cooking, and they certainly aren’t fast food. Once the initial excitement over the box of goodies wears off, you’re left with the same problem — you have to do the cooking when you could put that same money toward visiting a reopened restaurant. Many newly remote workers suddenly have more time on their hands to cook and a reason to try meal kits while dining out isn’t available, but once they’re able to go back to the office and their favorite diners and bistros, will they still keep their subscriptions?

In an interview with FoodNavigitor, brand strategist Philip Koh argues that the current meal kit uptick probably won’t turn into a long-term trend. “It’s unlikely to become the norm — it’s too much of a commitment, and consumers are too spontaneous and fickle for that,” Koh says. “Once the dust settles, it’s going to be that much harder to encourage trials for new users, and a significant number of recent customers will be in the churn zone.”

For Blue Apron to sustain its newfound momentum, it’s going to have to innovate further, finding new ways to appeal to post-pandemic customers by providing unique offerings that can’t be bought in a grocery store or at restaurants. It’ll also need to reduce waste and packaging to avoid alienating environmentally conscious customers. Its biggest advantage right now besides home delivery is that it offers to do the thinking and prep for people by selecting ingredients, providing recipes, and counting calories.

The pandemic has shown there is a demand for meal kit services, but for that demand to remain going forward, and for Blue Apron to survive, it needs to continue to experiment with new services that aren’t easily replaced by existing companies. With the rise in specialty diets and more sustainable eating choices, it’s likely we will see meal kits niche down into these smaller but more lucrative markets rather than try to compete with bigger grocery chains and supermarkets. Doing so would allow companies to better align with particular customer lifestyles. Somewhat ironically, meal kit services may also want to follow Amazon’s lead and find a way to develop a presence in brick-and-mortar stores.

Blue Apron may well be a pandemic winner. But whether its customers continue to use the service long enough for it to turn a profit depends on having a plan to stay relevant in a post-pandemic world.