Photographer: Daniel Acker/Bloomberg

How Blue Apron Wooed Then Disappointed Wall Street

Even as executives talked up the meal-kit business, they were battling operational issues.

Earlier this year, Blue Apron Holdings Inc. executives traveled the U.S. selling potential investors on the meal kit company’s coming initial public offering. They talked up triple-digit growth and plans to expand the business to millions more people who like to cook but would rather not shop. Blue Apron's IPO was going to be a moment to celebrate—validation for the mushrooming food delivery industry.

Behind the scenes, however, all was not well. A new fulfillment center was months behind schedule and still wasn’t ready for prime time six weeks before the IPO. The company had already postponed the listing once in case high marketing costs spooked potential investors. Losing money, Blue Apron was struggling to attract customers amid rising competition, risks it highlighted in a filing. Still, executives and their advisers, led by Goldman Sachs, Morgan Stanley, Citigroup and Barclays, decided to proceed with an IPO.

Photographer: Michael Nagle/Bloomberg

Today Blue Apron shares are trading at less than $4, down more than 60 percent from the IPO. Capital World Investors, once the company’s second-largest institutional investor, has bolted. And two of the founders, including the chief executive officer, have stepped down. Less than six months after becoming a public company, Blue Apron is widely seen as a venture-fattened startup that wasn’t ready for adulthood.

“If they had the chance again, they may have changed the timing,” says Kerry Rice, an analyst at Needham & Co. “The cautionary tale to other companies is really, can you get all the things you need done before you go public so you mitigate the risk?” 

There are three oft-repeated adages in the IPO game: Sell investors on a story you can stick to. Don't disappoint shareholders in the maiden earnings report. Remember that going public isn’t the finish line—you have to keep impressing investors quarter after quarter.

Blue Apron has disappointed on all three. It had to delay expansion plans and failed to fulfill a promise to get closer to profitability. In the first two earnings reports as a public company, Blue Apron acknowledged losing customers and said revenue would decline in the fourth quarter. The fulfillment center troubles led to more order errors and delays—an ominous sign when subscribers are often one or two bad experiences away from canceling.

Matt Salzberg, center, rings a ceremonial bell during the Blue Apron’s IPO on the floor of the New York Stock Exchange on June 29.
Photographer: Michael Nagle/Bloomberg

It was time for new thinking at the top. During a board meeting last month at Blue Apron’s Manhattan headquarters, Matt Salzberg told fellow directors he was ready to step aside as CEO, according to a person familiar with the matter. Seeking an operations expert, this person says, Salzberg and the board settled quickly on CFO Brad Dickerson, who before joining Blue Apron last year had spent a decade at Under Armour Inc. 

“The market has expressed a lot of displeasure since the company's gone public, and somebody needs to be held accountable,” says Keybanc Capital Markets analyst Ed Yruma. “The accountability stops at the CEO.”

Now it falls to Dickerson to right Blue Apron and reassure investors the meal kit company has a future. That won’t be easy, thanks not just to internal challenges but to mounting competition as well. Amazon.com Inc., whose purchase of Whole Foods Market overshadowed Blue Apron's IPO, is delivering meal kits in some cities. Meanwhile, Rocket Internet-backed HelloFresh has said it will surpass Blue Apron this year as the No. 1 meal kit company in the U.S.

Blue Apron bills itself as a tech company, touting sophisticated software that manages inventory and workflow in its sprawling fulfillment centers. In truth, the technology supports a mostly human-powered operation: thousands of men and women chopping veggies, placing ingredients in baggies and packing boxes. Getting the right ingredients into the correct carton is an enormously complicated undertaking and will grow ever more so as the company adds more meals and dietary choices to keep customers happy.

A key part of the pitch to Wall Street was the new fulfillment facility in Linden, New Jersey. Equipped with automated machinery that can get boxes out the door more quickly and reduce human error, the facility was supposed to handle more than half of all production. But because it took longer to train workers than expected, boxes weren’t packed quickly or accurately enough. The delays hurt margins and pushed back new product plans. In hindsight, says Needham & Co.’s Rice, Blue Apron should have fixed the bugs before going public.

During Salzberg's final months, the operational snafus were largely rectified, margins improved and quality control at Linden ticked up. But one fundamental challenge persists: how to attract and keep customers loyal to a service they don't really need. It's not easy persuading people to pay as much as $200 to $560 a month when there are faster and cheaper ways to get fed. To get customers in the door, the company spent heavily on marketing, including one-month-free offers and TV commercials. Dickerson slashed the marketing budget this year in part because declining service made it all that much harder to retain customers. 

It’s hard to justify a big outlay when cash is tight. Blue Apron spent more than $100 million in the first nine months of this year just on its facilities. Before the IPO, executives sought additional available credit, according to people familiar with the matter. Some firms declined to lend the company money because it was seen as too risky; others were unwilling to extend as much as was requested, they said. And while Blue Apron originally wanted the IPO to raise as much as $510 million at a valuation of $3.2 billion it settled instead for less than $300 million at a $1.9 billion valuation.

Analysts largely agree that Dickerson's appointment is a positive sign. His Under Armour stints as CFO and COO show he understands how to grow a low-margin business profitably. Plus, he already has a good relationship with Wall Street, which may be inclined to grant him time to make improvements.

Hanging over his efforts is a question Blue Apron has never satisfactorily answered: Will meal kits ever become a mass-market phenomenon?

Kurt Schnaubelt, of AlixPartners, suspects they’ll always be a niche business because meal kits lack “stickiness and repeat customers.” Not even Blue Apron's most loyal customers order a box every week, Rice says. Though the company has said it wants to expand beyond the meal kits, it can't do that until it fixes the existing business. And that might take years—assuming Blue Apron survives that long.

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