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There’s only one way food delivery services like Blue Apron can survive

Melody Hahm
·West Coast Correspondent

Blue Apron (APRN) made a lukewarm debut on the NYSE at $10 per share on Thursday morning, after slashing its IPO pricing by one-third the day prior.

The meal-kit delivery company, valued at $2 billion in the private market, is going public at a time when the food-delivery space has gotten increasingly crowded. This competitive environment may force companies like Blue Apron to diversify their products if they want to survive.

The two types of food-delivery companies

The space has two distinct categories: grocery delivery, which is disrupting the $782 billion market; and the meal and restaurant delivery space that’s shaking up the $540 billion market. Both of these categories operate in primarily urban areas and surrounding suburbs.

Blue Apron falls into the grocery delivery space, as it ships uncooked ingredients. Grocery delivery startups have been attracting increasing investor dollars year-over-year since 2013, amounting to $1.4 billion in funding last year, according to CB Insightsx. Instacart is a stand-out player that raised $400 million in March, boosting its valuation to $3.4 billion.

However, we haven’t seen a massive success story for a prepared-meal delivery company. In fact, we’ve seen a litany of failures — David Chang’s Maple, Spoonrocket, Sprig, Kitchit, Kitchensurfing and Dinner Lab all shut down this year.

The need to diversify

While the meal delivery space has been sexy, the target demographic — wealthy and millennial — is still far too narrow.

“If you think about Maple or Munchery, they are more cult brands and appealed to a niche customer, offering some name brand value, which is not as scalable,” said Eric Kim, partner at Goodwater Capital, a venture firm that invests in consumer tech.

Blue Apron CEO Matt Salzberg addresses company employees outside the New York Stock Exchange before the IPO begins trading, Thursday, June 29, 2017. (AP Photo/Richard Drew)
Blue Apron CEO Matt Salzberg addresses company employees outside the New York Stock Exchange before the IPO begins trading, Thursday, June 29, 2017. (AP Photo/Richard Drew)

Kim points out that these food delivery companies need to broaden their scope, not only in terms of affordability but also in offerings.

“Diversification will be the name of the game, whether it means going into commodity kits, smaller kits or deeper into the grocery stack,” he said. “Amazon has now become the one stop shop for everything and doesn’t want any leakage at all.”

Going mainstream

Earlier this month, healthy meal-delivery startup Freshly raked in a $77 million investment from Nestle (NSRGY), bringing its total funding to $107 million.

In order to incentivize customers to stick around and appease investors, Freshly CEO Michael Wystrach said the company was pressured to lower prices. In fact, before raising the Series C funding from Nestle, Freshly aggressively lowered prices by 16%.

Wystrach said that he wants to reach as many people as possible. The company currently operates across 28 states, including Texas, Arizona, California, Illinois, Colorado, Oregon and Idaho. The company is based in NYC but does not yet operate in the state.

“Freshly struck a broader chord and is targeting the right customer demographic,” Kim said.

In the same way that Amazon (AMZN) is expected to slash prices at Whole Foods (WFM) to appeal to a larger base, Freshly is trying to provide an attractive price point that captures those outside of major urban hubs.

Offerings like veggie fried rice and New England-style cod (that come fully prepared and just need to be microwaved) range from $8.99 to $12.50/meal, depending on how many meals you order per week.

“Our ultimate vision is to be in everyone’s hands. Healthy eating should be for everyone,” he said. “We are big fans of Amazon’s Whole Foods acquisition if that means more people have access to healthy food.”

Pitfalls of the food-delivery model

Wystrach noted that the space is extremely cyclical. “It’s normal behavior to do Blue Apron or Freshly for three weeks when you’re having a super busy time at work…or you might cancel for a few months. We’re seeing customers cycle back depending on where they are in life,” Wystrach said.

While 92% of Blue Apron’s revenue was generated from repeat orders in 2016, it’s pouring money into recruiting new users: the company reported a customer acquisition cost (CAC) of $94.

Kim points out that the 181% increase in its marketing spend indicates that Blue Apron’s CAC will likely increase. Particularly given Blue Apron’s high user churn (with 42% expecting to use the service more and 44% expecting to use the service less), the company will have to do a lot more to hold onto its customers.

The danger of a stock like Blue Apron is that it’s highly sensitive to shifts in the macro environment, he said. If the economy falters, people won’t keep spending money on healthy, organic meals they don’t have to prepare themselves. “Meal kits won’t ever be cheaper than shopping at Costco for a family of family, or at Trader Joe’s or Publix.”

Wystrach said he’s had several conversations with Whole Foods and though he hasn’t connected with Amazon, he’d be open to partnering with the e-commerce behemoth.

“Behind the scenes, we’ve spoken with everyone. Food is a collaborative industry and competition is great for consumers,” he said.

It’s looking increasingly likely that collaboration or acquisition may be the only way these startups can stand the test of time.

Melody Hahm is a writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.

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