The latest victim to have fallen prey to the current trend of disappointing U.S technology IPOs is Blue Apron. Blue Apron is a delivery service company that delivers recipes alongside required ingredients to the consumer’s doorstep.
The company went public on June 28th at a share price of $10 with a market valuation of $1.9bn. Just three weeks later, the share price is down 35% and trading at around $6.52 with the market valuation slashed to $1.3bn. Blue Apron’s downfall can be attributed to a single competitor – Amazon.
Amazon’s Death Sentence
Just prior to Blue Apron’s IPO, Amazon announced its $13.7bn acquisition of Whole Foods, the American supermarket company, signalling its intention to increase its presence in the grocery industry. Armed with a history of aggressive pricing strategies and a massive existing consumer base, the mere announcement of the deal posed an existential threat for grocers.
Underneath its proclamations of pioneering a new, sustainable form of dining, Blue Apron is ultimately a company that delivers ingredients to customers’ doorstep – a grocery company. Hence, its valuation and growth prospects were severely affected by the Amazon’s acquisition. The company was unable to attain the projected $15-$17 share price that it set out to achieve prior to the announcement and eventually went public at only $10 per share.
However, Blue Apron’s troubles with Jeff Bezos’ technology behemoth were far from over. On July 6th, just eight days after the IPO, Amazon filed a trademark application for “prepared food kits composed of meat, poultry, fish, seafood, fruit and/or vegetables . . . ready for cooking and assembly as a meal.” Blue Apron’s stock price plummeted 12% the very same day. Amazon’s direct competition bears grave consequences as it can now do the same thing as Blue Apron for less, with superior delivery infrastructure and a more trusted brand image.
Roadshows are a critical component to the success of a company’s IPO as it influences the investing decision of potential investors by laying the foundation for future business plans and increasing brand awareness. The narrative of high-quality, sustainable and healthy ingredients that the founders of Blue Apron had chosen to market the company with completely fell apart after the Whole Foods acquisition.
Faced with dispirited and skeptical investors, the narrative was promptly substituted with one delineating the company’s marked differentiation in its consumer acquisition strategies and business model from existing grocery companies. The sudden shift in marketing enhanced investor uncertainty and fostered a poor reputation for the company’s management.
Unable to alleviate the fall in investor confidence, Blue Apron was forced to resort to reducing the share price to convince investors to buy it. Apart from having a proclivity to result in higher stock prices, roadshows are often used as a gauge for future growth and investor optimism. The company’s mediocre performance enhanced the self-perpetuating downtrend in its share price and left investors feeling uncertain about the company.
High Private Valuation
Companies which promise revolutionary methods of engaging consumers that build on existing technologies often attract significant interest from venture capitalists, especially due to the current ‘Silicon Valley effect’. As a result, they tend to be overvalued during the private funding rounds, before the public gains access.
When the company is eventually listed on the stock market and releases financial information, investors who are more critical of the tech industry tend to bid against the stock after analysing its financials. Snap Inc. suffered the same outcome when it went public, which raises the question of whether venture capitalists are so captivated by the allure of such companies that they disregard their fundamentals.
Another prominent factor could be the rapid burgeoning of capital inflows from retail investors into index funds, leaving the stock-picking to savvy investors. They would be less enamoured by empty promises from visionary founders and more interested in the practical nature of the business model.
Flawed Business Model
Ultimately, when one blocks out market forces, Blue Apron’s business model is not an impressive one. Its meals cost $10 on average, eliminating a significant portion of the consumer market, leaving it vulnerable to companies that can operate with lesser margins.
Furthermore, its acquired customers can easily switch to purchasing their own food once they learn the recipes and realize shopping locally is much cheaper. Blue Apron lost $52 million in Q1 2017 compared to losing $55 million in the entire 2016, much of which was attributed to marketing costs. In its prospectus, the company’s average customer acquisition cost was listed at $94, so potential customers would have to purchase 10 meal kits for the company to realize a profit from them.
Amazon has been the main cause of Blue Apron’s downfall with a series of strategic moves that essentially destroyed Blue Apron’s unique business model and shattered investor’s confidence in its ability to differentiate itself. Blue Apron’s failure, as well as Snap Inc’s at the hands of Facebook’s Instagram, may have larger implications for Silicon Valley as well as the tech industry itself.
An oligopoly made up of Facebook, Amazon, Netflix and Google is emerging in technology, especially in platforms that interact directly with consumers. The market dominance and aggressive tactics of these companies against upstarts such as Blue Apron could curb innovation and adversely affect the prominent startup ethos in America.
For Blue Apron to salvage itself from its current debacle, possible solutions could be getting acquired by large companies like Wal-Mart, aggressively driving down costs or appealing to a larger consumer base by increasing dietary options and specialization of meal-kits. However, regardless of the direction the company chooses to pursue, it may never be able to achieve its previous valuation and struggle to make a significant impact in the grocery industry.