World Class Faculty & Research / June 23, 2017

Amazon Deal Stirs Things Up for Blue Apron

SMITH BRAIN TRUST – For Blue Apron, Amazon's blockbuster deal to acquire Whole Foods couldn't have come at a worse time, says Jie Zhang, marketing professor at the University of Maryland's Robert H. Smith School of Business.

The New York-based meal-kit delivery service was just beginning the marketing for its initial public offering, in which it hopes to raise more than $500 million, when Amazon announced the $13.7 billion deal that could upend the food-retail industry.

Suddenly, all the talk among analysts and prospective investors has turned to Amazon, the 431 Whole Foods locations, the grocery chain's distribution network, and how CEO Jeff Bezos might reshape how Americans shop for food.

"Whole Foods' reputation for high-quality ready-to-eat meals and Amazon's super efficient logistic systems are a powerful combination in serving the home-meal market," says Zhang, who is also the Harvey Sanders Fellow of Retail Management at the Smith School. She calls the new Amazon Whole Foods business "an imminent threat to meal-kit delivery services."

Amazon already has a meal-kit service, with the Martha Stewart-branded Martha & Marley Spoon line offered through Amazon Fresh. The service has never emerged as a key focus for the online giant, but with the acquisition of Whole Foods, analysts are speculating that it soon could be.

That's a worry for Blue Apron, one of the leaders in meal-kit services, with nearly $800 million in revenue last year. Blue Apron will price its IPO shares between $15 and $17, which would give the company a valuation of up to $3.2 billion.

The meal-kit field is crowded, with Blue Apron and rivals Plated, HelloFresh, Chef'd, Terra's Kitchen, the plant-based Purple Carrot and the organic-focused Sun Basket, which is expected to launch an IPO later this year. There are also kit services from The New York Times, Men's Health magazine, and even from Vice Media, which collaborates on its menu with Toronto chef Matty Matheson, the host of Viceland cable network's "Dead Set on Life" culinary travel program. And there are plenty more, too.

The concept of the meal kit is this: Order online and the meal kits, with pre-portioned, fresh ingredients and detailed recipe cards, are delivered, chilled, to your door, ready to be sliced, chopped and cooked.

"There are a lot of people who have means, but who don't have time, and who don't want to eat out every night," says P.K. Kannan, the Ralph J. Tyser Professor of Marketing Science at the Smith School. "This taps into that."

Meal-kit startups typically spend a lot of money on marketing to recruit and retain customers, which Zhang points out, has been "a major hurdle" for Blue Apron in reaching profitability. The startup, whose IPO is planned for later this month, spent some $141 million on marketing last year alone, roughly 18 percent of its revenue.

About 30 percent of Blue Apron subscribers cancel the service after just a month, Kannan says, quoting a recent research study by Dan McCarthy at the University of Pennsylvania's Wharton School. And another 14 percent cancel after two months. About 70 percent never make it to the one-year mark.

"That's a problem. The retention rate of customers is very important," Kannan says. "Because that is going to give you the cash flow over time."

Zhang points out that "both Amazon and Whole Foods already enjoy great brand reputation and large customer bases."

And that might make it easier and less costly, she says, for Amazon and Whole Foods to recruit and retain customers – both for home-kit delivery and for online grocery shopping.

From a logistics standpoint, the deal also gives Amazon an existing refrigerated and frozen-food supply chain, says Philip T. Evers, an associate professor of logistics, business and public policy at the Smith School.

"Amazon could always compete on the dry goods side, because distributing dry goods is not terribly different distributing books," Evers says. "But refrigerated and frozen, that's something that requires significantly different handling."

And that could make a difference for meal-kit services and as well as for broader at-home grocery delivery, Evers says.

Meanwhile, the network of brick-and-mortar Whole Foods stores also gives Amazon an opportunity to offer "order online, pickup in store" options, which tend to drive additional foot traffic in stores and increase sales.

"In terms of its impact on the grocery retail industry, it will force all the major players to reevaluate and step up their online grocery businesses," Zhang says. The online sector accounts for a small fraction, only about 2%, of total food sales in the U.S. 

"In some ways," Zhang says, "Amazon's acquisition of Whole Foods brings a needed jolt to the industry and will stimulate other food retailers to think deeply about how to revamp or improve their online and delivery operations to adapt to the changing needs and shopping styles of today's consumers."

The key for Blue Apron, as it seeks to hold its ground, Kannan says, will be to iterate, offering more products, more services, more ways to engage with the company. 

"The customers who are staying loyal, they should be buying more and spending more," Kannan says. "That would be one true measure of success."



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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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