4 Things DTC Brands Can Learn From Blue Apron’s Entry into the Meal Kit Market

Food

By Karen Tang and Tricia McKinnon

For increasingly time-starved dual-income households and young professionals, meal kits are a trend that are changing the way people buy groceries and make meals. These kits offer consumers fresh ingredients, pre-measured, and conveniently packaged which can be cooked at home to create healthy meals. One of the meal-kit subscription service pioneers, Blue Apron, was among the first to capitalize on this growing segment by delivering these kits directly to customers’ doorsteps.  The company launched its service in 2012 and experienced rapid growth, with sales reaching $881 million in 2017 but it has struggled to become profitable with sales declining to $668 million in 2018 along with a net income loss of $122.1 million within the same year.  Despite the company’s struggles there are a number of lessons that can be learned by other direct-to-consumer brands as well as more established brands planning on entering into new markets.  

1. It can take time to find the right business model and value proposition

The importance of having the right value proposition is often discussed but can be difficult for an upstart to nail especially in a company’s early years when it is trying to figure out which business model is most effective.  Blue Apron’s value proposition was and is to provide time starved consumers with a way to easily prepare and eat a healthy meal.  However Blue Apron’s meals (at $10 per meal under the subscription service) are priced much higher than substitute offerings such as grocery delivery services or even a quick run to the grocery store making the subscription service difficult for customers to afford.  For example, 57.1% of survey respondents said “not receiving enough value for their money was the number one reason” for leaving Blue Apron’s subscription service. The second ranked reason was "portion size" at 12.6%. Customers do not believe that the convenience associated with the service is enough to offset the price premium.  Additionally, consumers do not enjoy planning for meals in advance.  

In response to these issues, Blue Apron’s CFO Tim Bensley has said that he: “views the on-demand opportunity -- which encompasses being both in supermarkets and online -- as far exceeding the existing subscription model”.  This is the option Blue Apron is exploring where customers have the option of buying a meal kit without having to sign up for a subscription service.  Blue Apron had a deal to sell its meal kits at Costco last year but the deal ended after only six months.  With Costco having the ability to offer prepared meals having Blue Apron’s product might not have provided enough additional value to customers.

2. Managing Customer Acquisition Costs Can Be Challenging for a Direct-to-Consumer Brand

Many direct-to-consumer businesses suffer from high marketing costs since they do not have store or street traffic to aid with customer discovery and acquisition.  Blue Apron is no exception to this rule but what is surprising is how rapidly Blue Apron’s marketing costs increased overtime.  Blue Apron’s customer acquisition costs were $94 per customer from 2014 to 2016 but they hit $463 per new customer by 2017.   One of the reasons for the high customer acquisition costs are the high churn rates experienced by the company.  Once the initial trial period and discounts end after signing up for Blue Apron’s service many customers fail to continue with their Blue Apron subscription.  The meal kits seem to serve as “training wheels” for novice cooks who, after a few kits, are able to increase their skills and confidence and then no longer see much value in the service.  

Blue Apron has since stated it is focusing on increasing revenue per remaining customer while cutting operating expenses by 34% annually and marketing expenses by 64% annually. The decision may leave the company in an even more vulnerable position since when Blue Apron reduced its marketing spend in 2018 it experienced a large decline in the number of its active customers.  This occurred due to the fact that it was not acquiring enough new customers to make up for those that were moving on from the service. 

Blue Apron’s Q1 2019 results show a few sparks of hope. Revenue per customer is increasing and is up 3% in the first quarter of this year but total customers and revenue were down in the first quarter by 28% and 30% respectively.  Blue Apron’s CFO Tim Bensley, argues that the decline in customers resulted from a "deliberate decision to prioritize a narrower set of high affinity consumers."  Blue Apron’s new CEO, Linda Findley Kozlowskialso supports the company’s focus on high affinity customers which are customers that order more often, generate more revenue and are more loyal. Blue Apron believes that to differentiate itself from big-box rivals like Amazon or Walmart, reaching a smaller niche of mail-order customerss while also shifting some of its focus to retail to meet customers on their terms will be more successful. 

3. Anticipate that competitors are on their way and plan accordingly 

The success of a new brand or concept can ignite a wave of competition, ask online mattress retailer Casper.   Soon after Blue Apron entered the market many competitors followed suit such as Hello Fresh and Fresh Direct.  Fast food chains also threw their products into the mix with Chick-fil-A introducing its own meal kits sold out of their restaurants.  

While Blue Apron wasn’t the first meal kit subscription service it was the one that created a surge of attention and growth within this market segment.  Without a very differentiated or sustainable value proposition it has been easier for rivals to take market share, especially big box retailers.  Big box retailers are beginning to acquire smaller meal-kit players or offer a large variety of their own meal kits. Recently, Walmart announced its plans to offer 2,000 of its own original meal kits available in store and online. Meanwhile, Kroger purchased the third-largest meal-kit company, Home Chef, at the end of 2018. Additionally, the large grocery retailer Albertsons purchased Plated. Amazon’s investment in Whole Foods and introduction of AmazonFresh also signalled increasing competition by providing more convenient delivery of fresh groceries. Large grocery chains diversifying into the meal kit space bring with them greater buying power, strong logistical capabilities, and a large existing customer base.  

When Warby Parker entered the prescription eye glasses industry it went up against a large incumbent player, Luxottica which essentially owned most of the industry but it has had considerable success.  While Warby Parker doesn’t have to contend with managing perishable items it has done a very effective job of warding off businesses looking to emulate its success by having a simple yet powerful value proposition.  Its glasses are stylish, cheap and for every pair of glasses it sells a pair is donated to a child in need. It’s harder to ascertain what makes Blue Apron unique and special compared to its rivals.

4. Partnerships are often the key to growth

Key for all brands especially direct-to-consumer brands are partnerships with the other organizations that already have an established customer base.  This allows a new market entrant to leverage the creditability and reach of another brand in order to attract more customers.  Seizing on this opportunity Blue Apron recently entered into a partnership with WW (formerly known as Weight Watchers).  Through the partnership customers can order healthy recipes based on one of WW’s programs and they are delivered directly to customers.  Blue Apron pays WW a fee for each subscriber it adds as part of the initiative which will run throughout 2019.  This is a great opportunity for Blue Apron to tap into WW’s base of 2.8 million members.  Blue Apron also entered into a partnership with Walmart’s Jet.com last October to sell meal kits on Jet.com, the first online retailer it has partnered with, with the option for same day or next day delivery within New York City and a subscription is not required to purchase the meal kits.  

Blue Apron’s Future

Like many startups Blue Apron is still trying to determine the best way forward. Will its new CEO who brings experience from Etsy be able to turn the company around? Only time will tell but in the meantime a lot can be learned from Blue Apron’s foray into the meal kit market.