The forthcoming Blue Apron IPO will raise $100 million for the company and is set to test both Wall Street as a whole and specifically the technology start-up sector. In summary Blue Apron is a subscription-based meal kit delivery company and was the first of its kind in the US. The company has a private valuation of around $2 billion and is seeking to raise an additional $100 million. Even though the company is the leading subscription meal kit delivery company in the US there are many competitors biting at their heels. So, why might the Blue Apron IPO test Wall Street?
Competitive market
There are many competitors in the US and overseas who have very quickly realised that the USA is a prime market for subscription meal kit deliveries. The number of people who want to spend less time cooking and shopping has grown dramatically as the average working day continues to extend leaving less time for leisure activities. If you look back 20 or 30 years ago, many so-called experts believed that we would be working just a few hours a day with more leisure time and time with the family. So, how has that worked out?
While we await the official IPO documents, analysts have already been looking through the company’s marketing expenditure. While the company’s customer base has topped the 1 million, the average expenditure per customer has fallen from $402 down to $387 between 2014 and 2016. Much of this was because of deeply discounted promotional offers which were introduced simply to attract new customers.
Marketing expenditure
As you might have guessed, Blue Apron is not yet a profit-making company due in the main to the cost of running the service and ever-growing marketing expenses. In 2016 the company spent $144 million on marketing, some off-line and some online, which was a significant increase from the $51 million in 2015. However, during this period revenues grew very quickly from $341 million up to a staggering $795 million.
In many ways this business is comparable to Amazon’s relatively new food delivery service which is also likely to be loss-making for some time. The idea with companies such as Blue Apron, where subscriptions and technology are brought together, is to invest heavily in IT systems, marketing and build up the customer base as quickly as possible. As and when research and development costs are reduced this will feed directly into the bottom line and at some point the company will become profitable.
Looking to the future
There is absolutely nothing wrong in reinvesting income and even raising additional capital if there are bona fides reasons for doing so. If you take a step back and look at the development of Blue Apron it really does look like a smaller version of Amazon. A $2 billion private valuation may seem extreme for a loss-making company but if the marketing and the technology expenditure budgets were slashed tomorrow, this would feed straight into the bottom line. However, this switch to profitability by cutting expenditure would lose the momentum the company has built up.
This market is extremely competitive, margins are not excessive and large volumes of business are required to make it work. There are at least 25 competing companies offering the same service although unfortunately it is likely many of these will fall by the wayside as competition grows. It will be interesting to see how Wall Street reacts to the forthcoming Blue Apron IPO and whether indeed the company is able to raise $100 million.
Many investors are scared off when they see a company making losses but the reality is that investing for the future as opposed to reducing investment and showing a short-term profit is the way forward. It is fool’s gold to put the long-term future of the company in danger simply to create a short-term profit – just look at Amazon.