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Technology

Blue Apron is stuck in a dangerous cycle that has nothing to do with Amazon

One of the clouds hanging over Blue Apron since its IPO has been the looming threat of what an AmazonWhole Foods combination could mean for its business.

But when Blue Apron’s stock got hammered on Thursday, falling more than 17 percent by day’s end, that had nothing to do with it; it was the company’s disappointing financial forecast for the back half of the year that was the culprit.

The company is in the midst of a vicious cycle that goes something like this: Blue Apron is experiencing warehouse issues that are causing customer satisfaction issues that are causing retention issues that are causing marketing issues that are causing revenue issues.

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Got that? Let’s go piece by piece, starting at the top.

Blue Apron announced on Thursday that it has encountered “unexpected complexities” with the opening of a new, highly automated warehouse in Linden, N.J., and that the transition from its previous New Jersey warehouse is taking longer than expected. (This probably explains the exit of the company’s co-founder and Chief Operating Officer Matthew Wadiak, which was announced just last month.)

At the same time, Blue Apron has been adding new technology and processes to its other warehouses that require a lot of training.

“[W]e have over 5,000 employees who are all being trained in new processes and new systems that are more advanced than the systems that they are used to working with,” said CEO Matt Salzberg, who will sit for an interview at Recode’s Code Commerce event on September 13, on a call with analysts.

“There is … cost associated with that training of people who are not doing day-to-day proactive work while they’re being trained,” he added, “as well as impact from people who are doing work who are just early in their life cycle of being trained.”

The result has been mistakes that are hurting Blue Apron’s OTIF rates — that is, the percentage of orders that arrive on time and with all the correct ingredients (in full), the company said.

What happens when a new customer tries out Blue Apron for the first time and gets a late delivery or wrong ingredients? Yep, they bail.

And when Blue Apron’s new customers are bailing at a higher rate than before, Blue Apron’s marketing investments become less efficient. Or, said another way, the company wastes marketing dollars.

And when you’re a newly public company spending heavily on marketing as it is, you’re going to reduce marketing spend when you know it’s not going to be as effective as you would like.

But what happens when you plan to aggressively ramp down marketing, from 20 percent of revenue in the first half of the year to around 15 percent in the back half? Your revenue forecasts suffer.

Blue Apron generated $421 million in revenue in the second half of 2016; now, the company is only forecasting $380 million to $400 million for the second half of 2017. Ouch.

When you go from $80 million to $800 million in revenue in two years, stuff is bound to break. And for Blue Apron, it has.

“[W]hen you’re dealing with something like perishable food, it makes it even more complex because perishable food isn’t a widget, right?” Salzberg said on the analyst call. “Quality really matters. The kind of supply chain that you build really matters.”

The good news Blue Apron is trying to pitch to investors is that they believe most of the warehouse hurdles are behind them and that the new facility is taking on more and more of the company’s volume.

That trend will be crucial, since the company’s ability to roll out new product enhancements — like the choice of ordering two meals a week instead of three — is crucial to it building a sustainable business that can retain existing customers and attract new ones affordably.

But if unexpected warehouse issues can so disrupt operations once, how bad would things get if they aren’t fixed or happen again? With a market cap now under $1 billion, Blue Apron doesn’t want to find out.

Source: Tech CNBC
Blue Apron is stuck in a dangerous cycle that has nothing to do with Amazon

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