Blue Apron: ‘Asset-light’ model, layoffs lay the groundwork for return to profitability in a year

10-Aug-2023 - Last updated on 10-Aug-2023 at 13:26 GMT

Source: Blue Apron

Meal kit pioneer Blue Apron expects to return to profitability by the second quarter of next year after a post-pandemic decline in demand caused its revenue and margins to tumble – pushing it to adopt an “asset-light” model in which it handed off manufacturing and significantly cut staff to reduce overhead.

The company simultaneously pulled back on marketing and is testing more efficient consumer engagement strategies, raised prices and began exploring how innovation could help drive growth.

CEO Linda Findley acknowledged the company’s complex strategy to reduce costs, increase marketing efficiency and position the business or long-term sustainable growth made for a “busy second quarter,” but, she told investment analysts during the company’s second quarter earnings call yesterday that early results from the efforts are “remarkable.”

She noted the company has significantly slowed its cash burn by approximately $13.2 million compared to the second quarter of last year, reflecting a 72% year-on-year improvement. She also called out the company’s improved margins with the variable margin reaching 37.9% in the second quarter – its strongest performance since 2020 and a “notable” increase from 35.8% in the first quarter of 2023 and 34.7% in the second quarter of 2022.

“The strong performance was driven by rigorous cost management and productivity improvements,” including the adoption of an asset-light business model following the transfer of Blue Apron’s operational infrastructure to its new fulfilment partner FreshRealm, Findley said.

Under the new arrangement, Blue Apron is no longer directly responsible for fulfilling its meal kits, but it retained its business-to-consumer business, including all aspects of creating and marketing its recipes, along with the data and technology to support the business, Findley said.

“To match our asset-light model” and further streamline the business, Blue Apron last month laid off 20% of its employees – a previously announced move that should save the company an additional $7m annually, Findley said.

The partnership between Blue Apron and FreshRealm should drive additional long-term savings by allowing Blue Apron to leverage FreshRealm’s scale for labor, food, packaging and logistics. Blue Apron can also tap into FreshRealm’s innovation expertise as it expands its product portfolio, added Findley.

“Starting in the first half of 2024, we are introducing even more convenient meals on the menu. These new meal prep options will enhance our current offerings while also allowing us to target a new set of time starved, health-conscious consumers,” she explained.

Price hikes bolster average orders without discouraging consumers

Alongside financial and operational management improvements, Blue Apron reported “record customer engagement metrics,” including an 8% increase in average order value of more than $75 from the first quarter and average revenue per customer “improving significantly” to $397, Findley said.

“Key drivers were a price increase that we implemented in May of 2023, optimization of promotional and marketing spend, and more importantly, strong engagement from our repeat and tenured customers,” she explained.

While the company’s number of active consumers fell in the quarter, Findley said the drop was anticipated and not related to the price increases.

“We are still priced the same or lower than our competitors in the industry with extremely high-quality standards,” which helped maintain “better-than-expected retention after the pricing change,” she said.

“We tend to think about future price increases in terms of value. We want to make sure that we are always staying priced within the correct point for value for the customer. We want to make sure that they feel value from that product going forward. And so, we will keep an eye on any sort of pricing changes that might make sense either based on inflationary pressures or not. But our biggest focus is making sure we drive value for customers, and given the fact that we are priced in line or lower than our competitors, we feel that we do that quite well,” she explained.

Reduced marketing to blame for lower consumer engagement

Blue Apron’s pull back on marketing more likely caused the drop in active consumers, according to Findley.

“We anticipated this decline in customers as we have deliberately reduced our overall marketing spend. In the second quarter, marketing spend was $9.4m, a reduction of 36% sequentially and 57% year-over-year,” she said.

She explained Blue Apron cut back on marketing to test the efficacy of its campaigns and improve its return on investment.

“The goal is that every marketing dollar we invest delivers on our targeted payback period, while also attracting the right customer. With over six months of testing under our belt, we have identified what we believe is the right formula to move to more effectively target the next dollar and all of this is paying off,” she said.

“In Q2, we saw significant improvement in payback periods at levels far less than our one-year target and efficiencies better than Q1. Cost per acquisition also improved by 30%, while conversion rates improved by 25% year-over-year during the second quarter. In addition, our average weekly retention is the strongest it’s been in five quarters, even with the recently implemented price increase,” she explained

Based on this success, she added, the company will increase marketing slightly in the second half of the year and expects the investment to come to fruition in 2024.

By implementing these changes, Blue Apron expects to achieve adjusted Ebitda profitability by the second quarter of next year, and to return to sales growth in 2024.

This year, however, will likely continue at a loss – albeit less and less if all goes well. The company now predicts net revenue of $410m to $415m, down from $458.5m in 2022.