In some ways, the meal delivery kit craze was one of the ways people started to notice major disruption happening in our food system. Technology and connectivity are finally starting to penetrate the ways we grow, cook, manage, order and think about our food – so it is fitting that one of the major IPOs of 2017 will also be the first meal kit startup IPO. Blue Apron is just a day away from being a publicly traded company on the NYSE where it will trade under the symbol $APRN. The company has already slashed its valuation ahead of the event, estimating stock prices will open between $10-$11 a share.

There’s been a great deal of speculation about the company’s S-1 filing and what their disclosures about revenue, customer acquisition costs and overall company health mean for interested investors.

We sat down with Daniel McCarthy, co-founder and Chief Statistician at Zodiac, a predictive analytics firm and data scientist at Wharton (aka he’s way smarter than us) to talk about the analysis he’s done on Blue Apron’s filing. He’s about to transition into a new role as a professor at Emory University. Daniel has written several interesting takes about the Blue Apron IPO looking deep into their disclosures and extrapolating additional info using data modelling and we wanted to ask him his thoughts about the company’s path to profitability on the eve of the IPO.

The Spoon: Given the challenge Blue Apron has with customer retention and your finding that retention actually gets worse with customer age, does the company have a path to profitability with the current model?

McCarthy: No, I don’t see a path to profitability if future customers are similar in retention and spend to the customers that Blue Apron has acquired in the past, especially those acquired over the last twelve months. At the same time, Blue Apron is a high-quality business. I would be optimistic that they could be profitable if they adopted a more LTV-centric way of doing business.

In particular, they should refocus and rationalize their customer acquisition spend around prospects similar to their high-value customers. This could (1) substantially reduce their CAC, which has moved up considerably over the past year, and (2) increase the quality of their subscriber base from a retention and spend standpoint. The downside to this strategy is that it will naturally be smaller, so there is less of a “sky is the limit” growth story to tell. Still, that seems better than being structurally unprofitable.

The Spoon: Blue Apron is reporting “active customers” in their filling as opposed to their subscriber base numbers, which you’ve noted is an unusual way for a subscription service to report their users. Do you have a sense of why?

McCarthy: I think they are reporting active customers instead of subscribers for two reasons.

  1. Active customers will always be a bigger number than total subscribers, so it makes them look bigger. Who doesn’t like to look bigger?
  2. I think that a part of them likes to think of themselves as more like a retailer than a subscription offering. If their customers come in and out periodically over time, they could argue that churn doesn’t matter as much, because the churners will come back at some point.There are a few issues with this line of reasoning. For one, churn matters at retailers too, even though we do not get to observe exactly when customers churn. For two, I think many of their periodic customers are strategic, only showing up when they are able to get a new promo discount. Finally, Blue Apron doesn’t provide us with meaningful data points about how periodic behavior (if there is any) affects the unit economics of their business.

The Spoon: You’ve reported that the revenue that Blue Apron is generating from more recently-acquired customers is less than from customers acquired in the past. Why is this?

McCarthy: They introduced the family plan in 2015, which has a lower price point ($8.99/serving versus $9.99/serving). It could be that we saw a mix shift in 2016 towards people with this plan, and that people on family plans are simply not generating as much revenue than the rest of the subscriber base.

The Spoon: Blue Apron turns a profit on 30% of its customers but their break-even point is moving farther away with each cohort due to declining revenue and growing customer aquisition costs (CAC) for newer customers according to your analysis. Can you tell how fast that percentage is declining?

McCarthy: It’s a great question, and it would be pretty risky to do a simple extrapolation off what we’ve seen over the past twelve months, especially since the rise in CAC has been very dramatic lately.

The Spoon: Subscription services for goods is a popular trend right now, both in the food market and outside. Is there an example of another subscription startup that’s getting customer acquisition right?

McCarthy: Dollar Shave Club has wonderful customer retention. While I generally am leery of relying on business intelligence firms to make absolute statements about retention, I think they are a very helpful tool for making relative comparisons across firms. This chart was very striking in that regard. It really highlights how much better customer retention is at DSC relative to Blue Apron. And that Blue Apron’s retention, while not good, is nevertheless better than their competitor, Hello Fresh.

We’re interested to see what happens to the Blue Apron stock tomorrow as it hits NYSE and how the first meal kit delivery IPO will shift the still growing market. Stay tuned.

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  1. Well according to news reports Blue Apron was profitable in Q3 ’16. Dollar Shave was never profitable at any time before or during its insane acquisition by Unilever.

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