Somethin’s Cookin’



Topic of the Week: Somethin’s Cookin’

For those that have been following the newsletter, you may recall me using Blue Apron’s rumored IPO as a way to talk about positioning.

As of last week, Groupon’s, er, I mean, Blue Apron’s IPO is no longer a rumor.  It’s official, which makes Blue Apron the first meal delivery unicorn scheduled to go public.  In typical finance nerd fashion, I dug into the S1. Here are the highlights:

Strong Revenue Growth

Revenue grew from $340M to $795M between 2015 and 2016. Q1 2017 revenue was $244M.  Very impressive so far.

Still Unprofitable

Operating losses came in at $54M and $51M in 2016 and Q1 2017, respectively. Like most unicorns, the company is investing meaningfully in infrastructure and growth, which hopefully pays off in the long run.  Let’s look at gross margin’s to give us a good indication of expected future profitability.

Scary Gross Margin Profile

Blue Apron does not include marketing costs in their cost of goods sold (“COGS”), which is a common practice for grocery stores.  If you add in marketing costs, gross margin was only 15% and 6% for 2016 and Q1 2017, respectively.  In other words, for every dollar of revenue they received, only 6 cents went towards funding corporate overhead.  Fun fact – Groupon’s comparable adjusted gross margin was 10%

But this is okay, because it makes sense to spend money to get customers now, if they will be very valuable long-term.

Awful Long Term Customer Value

While customer retention is mentioned as a key driver of future success, the S1 doesn’t tell you what retention is. However, you can determine revenue and order retention for Blue Apron’s most loyal customers.

Per the S1, in the first six months, a customer spends an average $410, representing seven orders or 11% of their dinners during that period. For customers that stick around for another six months, the average spend drops over 50% to $196 or 3 orders.

For customers who have been with the company for three years, the average spend drops to $143 or 2 orders a year.  Said another way, the most loyal and long-term customers are only ordering twice per year on average.  Not exactly the poster child for customer loyalty and retention.  Hopefully, they can acquire new customers cheaply.

Expensive Customer Acquisition Costs

Blue Apron stated a $94 customer acquisition cost and spent $144M on marketing in 2016.  However, buried in the S1, it says that ~92% of revenue is derived from “repeat orders.”  If 92% of your revenue is repeat business, why do you have to spend so much on marketing?

If this true, then one of three things is also true: 1) their customer acquisition costs are much higher than stated, 2) it requires meaningful marketing spend to keep existing customers engaged or 3) a combination of both.  Either way, the customer lifetime value methodology is flawed in the S1.

With the information provided, it’s tough to come up with a true recent CAC, but we can get to a range with some creative math. The CAC looks to be between $133 and $565.

Something doesn’t quite add up here.

Question of the Week

Is Blue Apron more likely to follow Groupon or Amazon?

About the author

Danielle O'Rourke

Recovering Investor. Mom. Wife.

By Danielle O'Rourke

Danielle O'Rourke

Recovering Investor. Mom. Wife.

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