Blue Apron Holdings Inc.’s (NYSE:APRN) days, despite first debuting on the NYSE as recently as June 28th, may be numbered.
Amid rumors of the company having to go public to raise desperately-needed cash, they made their debut exactly when tech stocks were tumbling. As if that wasn’t hard enough, they also collided with the announcement that Amazon.Com Inc. (NASDAQ:AMZN) was buying Whole Foods, knocking the company’s pre-IPO valuation down from $3.2 billion to $1.9 billion.
Since the stock began trading in the open market, it’s down a whopping 36%.
A big chunk of that loss came this week, some might say out of left field.
Left field is, of course, where Amazon lurks before pouncing onto center stage and upending whatever game everyone’s playing. The business that Blue Apron thought it controlled got punched in the gut by what Amazon just did.
Why the Service Left a Bad Taste in My Mouth
I admit I tried Blue Apron – not the stock mind you, I wouldn’t touch that with a ten-foot pool. I tried the meal delivery service.
It wasn’t my idea. A couple who I’m good friends with were telling me they liked following Blue Apron’s recipes and cooking together. They (and their two children) thought the dishes were delicious, so they “gifted” me a box of three meals.
Blue Apron encourages subscribers to gift a box of meals to friends and even strangers. The idea makes sense: you get a box of three different meals complete with every ingredient you’ll need, individually wrapped, with recipes for three meals – in my case, for two people – packed in ice and delivered to your front door.
I opened the box I got about a week later, admired how everything was packed (except for the waste factor), followed the mostly easy recipes and mostly enjoyed the meals.
What happened next was interesting.
Without intentionally signing up for the service, a week later I started getting once-a-week deliveries of Blue Apron boxes. The billing magically showed up on my American Express.
At less than $10 per meal per person, I went with it to see what else they would send me.
The bottom line is this… I’m a decent chef and I like to cook. I found the Blue Apron recipes fairly easy, but the time to make most of the dishes took longer than I would have preferred.
While I could get over that if the meals were interesting and exotic enough, which I will happily say that some were, the fact is many of them ended up being disappointing in the taste department.
And being single, always cooking for two when it was often just me resulted in leftovers, or (who would have guessed) eating more than I should have. Maybe that explains that extra 10 pounds I’m carrying around.
After two months, or about eight deliveries, I cancelled the service. Except I never got confirmation that my cancellation notice was received, and boxes kept coming.
Last week, again, I followed the instructions to cancel the subscription, adding a curt note in the email. Hopefully, this time it sticks.
They won’t get paid because I’ve already notified American Express, who are amazing at taking care of issues like this. So Blue Apron, which is losing money, will be wasting more of their money if they keep sending me gifts.
What’s telling in my little story is that cancelling Blue Apron subscriptions is almost epidemic.
In Wednesday’s article, I listed some frightening retention rates for meal kit deliveries and said that should be a huge concern for Blue Apron and its shareholders.
But what’s a much bigger concern for Blue Apron is what Amazon put out this past weekend.
How to Profit from APRN
An Amazon subsidiary announced it filed a July 6 trademark application for “prepared food kits… ready for cooking and assembly as a meal.” The trademarking move included the slogan, “We do the prep. You be the chef.” Catchy.
While Amazon’s gearing up to sell its own line of meal kits, it’s been selling meal kits from third-party companies via its Amazon Fresh grocery delivery service since last fall.
One product, food behemoth Tyson’s,”Tyson Tastemakers” kits feature dishes like pork belly pad Thai and clock in at $10 per serving, almost exactly what Blue Apron charges. Amazon Fresh customers can also order meal kits from the Martha Stewart-Marley Spoon collaboration.
But the trademarking is a nail in Blue Apron’s coffin, and probably every other wannabe household recipe in a box purveyor. It’s Amazon clearly saying they’re going head-to-head in this new market with their own private label offerings.
The big problem that covers several smaller problems for Blue Apron is that Amazon doesn’t have any of the problems that a start-up would have.
Blue Apron loses money every day. Amazon makes a ton on money every day.
The cost of bringing on new subscribers is killing Blue Apron. Amazon charges new Prime subscribers $99 a year to just be subscribers. Amazon’s retention rate of those paying Prime members isn’t broken out anywhere in Amazon’s filings, but it’s believed to be in the range of 85% or higher.
If Blue Apron thinks just because it’s the largest meal kit delivery company in the U.S. and that gives it any kind of advantage over Amazon, they’re sadly mistaken
Of course, Amazon’s infrastructure is scalable on a massive basis. Their delivery prowess is at the lowest cost for delivery service in the country, given their preferential rates with every carrier where Amazon is their biggest customer. On top of that, they’re building their own delivery service, very quickly.
That’s what Amazon does. It builds scale and drives down costs. That’s why anything Amazon targets and every business Amazon sets its sights on, Amazon will eventually dominate.
The meal delivery kit business is no different.
Blue Apron’s going to get cooked.
It’s not too late to make money on Blue Apron’s stock heading to zero. I was waiting for some volume in the options markets for APRN, and I finally got it.
But the only chance Blue Apron has of surviving is being bought out, and as their stock price keeps falling it is making it cheaper and cheaper to buy them lock, stock, and barrel.
Someone just might make a play for the company.
I say “might” because I don’t see who would want to go face to face in the ring with Amazon. And I doubt Amazon would bother buying Blue Apron when it’s got its own foot already in the door. But I would be crazy to not entertain the possibility.
That’s why we’re going to play Blue Apron wisely.
You’ll remember my lesson on modified straddles from earlier this month, and that’s exactly what we’re going to do here. APRN is under frontal assault and is headed even further downhill; how low they could go is anybody’s guess. That’s why I recommend APRN October 20, 2017 $5 puts (APRN171020P00005000). I would buy them around $0.50 – $0.60, if I could.
To take into account the possibility of getting bought out, I’m also recommending a speculative upside action trade. APRN January 19, 2018 $9 calls (APRN180119C00009000) might also be found for around $0.50 a pop, and they could rocket upwards if there are rumors of a buyout.
Go get ’em.