Blue Apron (NYSE: APRN) has temporarily halted its partnership with Costco (NASDAQ: COST) over the holidays, which suggests the two might not be a good fit. And comments made by CEO Brad Dickerson during the meal-kit service's third-quarter earnings conference call earlier this month indicate there are problems between the two, as well.
Dickerson says Costco wants more shelf space for other food items that sell better than meal kits, which historically are slow movers during the holidays. He also says that this action will give Blue Apron the opportunity to come up with better packaging to reduce waste.
That could indicate that the meal kits aren't a big seller regardless of the season, and could mean Blue Apron won't return to the warehouse club in the new year.
Image source: Blue Apron.
No Christmas feast
Blue Apron understands its subscription-based business model isn't working. It costs too much to acquire new customers and they don't stick around very long after signing up -- meaning the company has to continuously ramp up marketing costs to attract more people.
The company just declared that it will significantly pare back how much it spends on marketing, preferring instead to focus its efforts on the small core group of customers it already has who spend the most on the service. Blue Apron will also try to distribute its meal kits more broadly through partnerships. It recently collaborated with Walmart's (NYSE: WMT) Jet.com to sell meal kits on a special storefront it set up on the e-commerce site.
Removing its meal kits from Costco's refrigerators over the Christmas holiday is just a weird development. An argument could be made that this season is the perfect time to have meal kits available, since people are out shopping for gifts and don't want the added hassle of coming home to prepare dinner. A meal kit with all the ingredients packaged and ready to cook in a short amount of time ought to meet that need, though restaurants do perform better this time of year for that same reason-- and there are no dishes or pans to wash afterward.
Yet Dickerson says Blue Apron's kits are historically a relatively slow-moving item at this time of year, so they will "hit pause" for the holidays and target returning to the store in 2019.
That Blue Apron's subscription meal kits are a challenge to sell because they're a pricey meal alternative may make sense. But they sell at a discount in Costco compared to their subscription price, which means they may be moving even more slowly in-store than anticipated.
Waste not, want not
Supporting that conjecture are other comments made by Dickerson about what Blue Apron needs to achieve when it returns to Costco next year and also tries to expand to other channels.
First, he says, Blue Apron needs some "some pretty decent product innovation... [that provides] a better way to manage shelf life and shrink in ways going forward." That sounds like customers don't particularly care for the assortment of meal kits Blue Apron offers, so Costco ends up having to throw out a lot of food because it's sitting in the refrigerator too long.
Dickerson admits Blue Apron discovered certain meal-kit combinations perform better in certain regions of the country than in others, so it needs to target the menu based on regional taste preferences. That shouldn't have been a revelation, and it may be an expensive option to introduce if the company wants to keep selling in Costco. If it finds other national partners willing to sell its meal kits, Blue Apron will have to tailor the menu to them, as well.
While Dickerson says Blue Apron is "targeting to resume in Costco" in 2019, that actually doesn't sound like it's guaranteed. The companies are taking a break from each other over the holidays and Blue Apron needs to work out how to improve its product's shelf life so its slow-selling kits can hang around the refrigerators longer. Don't be surprised if the pilot program isn't extended.
Online partnerships like the one Blue Apron has with Jet.com may be a better fit as they allow a lower-cost way to offer customers the full breadth of its products. Jet's upscale target demographic means Blue Apron can still charge a premium, though commoditization is driving down meal-kit pricing.
The Costco venture doesn't sound like it's panning out as either company expected, and this pause may turn into a permanent separation come the new year.
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