Study: Blue Apron Has a ‘Sticky’ Problem—It Struggles to Retain Its Customers

An Emory University professor says the meal-kit company is losing ground, but Wall Street analysts think it’s worth the risk.




An Emory University study estimates that 72% of meal-kit leader Blue Apron’s customers will churn within six months, forcing the company to keep pouring money into advertising.

 

Blue Apron may not pose as much of a threat to restaurants as some industry analysts believe, according to a study by a marketing professor at Emory University.

Leveraging S-1 data disclosed by Blue Apron after its initial public offering in late June, Daniel McCarthy developed a model to assess the company’s ability to acquire and hold onto its customers. His conclusion: “Blue Apron doesn’t retain customers for very long, and the cost to acquire customers has been on the rise lately.”

McCarthy estimates that 72% of Blue Apron’s customers will churn within six months. That means the company must keep spending heavily on advertising to acquire new customers, even though they serve a niche market. “Because Blue Apron cannot retain customers for extended periods of time means that (its Customer Acquisition Cost or CAC) is effectively part of cost of goods sold,” he wrote. “CAC should go down relatively sharply over time as a percentage of sales at healthy businesses, as sales are increasingly derived from loyal customers who have been around for a while. When customers churn out very quickly, that pool of loyal customer revenue remains small, making CAC effectively variable in nature.”

According to McCarthy’s model, Blue Apron also generates less revenue from more recent customers than from customers acquired in the past. “Every new acquisition cohort generates, on average, about $7 less in revenues over the next six months than the cohort which preceded it,” he writes. “In other words, while the cost to acquire new customers is going up, the go-forward value of those newly acquired customers is going down.”

In fact, revenue generated from customers tends to go down over time, not up, meaning longtime customers can’t “bail out” the company. “As these customers get older, they place fewer orders on average,” McCarthy explains, “which is only slightly offset by a marginal increase in spend per order over time. Customers are not ‘sticky.’”

McCarthy concludes that his analysis “spells trouble for Blue Apron, with important measures of customer health in decline.” Meanwhile, Amazon’s purchase of Whole Foods adds another wrinkle and will “likely make it even more difficult to keep those Blue Apron subscribers coming back. I recommend that Blue Apron redouble its efforts (to) make customers ‘sticky’ in the long run.”

Wall Street had not seemed impressed with Blue Apron’s prospects either, as the company saw its stock plunge by more than 25% after its IPO in June. But the future may not be as bleak as McCarthy predicts. The company saw its shares surge by 13% in late July when analysts at Goldman Sachs gave it a “buy” rating and a price target of $11, while two other underwriters, RBC Capital Markets and Oppenheimer, gave it “outperform” ratings and price targets of $10 and $11 respectively, according to CNBC.

RBC’s Mark Mahaney expressed confidence in Blue Apron’s positioning in the meal-kit market, CNBC reported. “We believe Blue Apron is addressing a large multi-billion-dollar market that is nearly all Offline and taking spend away from both traditional grocers and restaurants (take-away and dining-in),” Mahaney said. “Further, based on our work, Blue Apron appears to be the clear leader in the U.S. market and is providing customers with a strong value proposition, particularly as it relates to ‘convenience’ and ‘variety.’”

 

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