Blue Apron vs. HelloFresh – Bloody palms.

HelloFresh looks certain to crush Blue Apron.

• Blue Apron is in real trouble and, when compared to HelloFresh, it serves as a classic example of how important scale is in a network-based business.
• Blue Apron reported Q3 18 revenues / customers of $150.6m / 646,000.
• Q3 18 revenues are down 28% YoY and customers have fallen by 10% since Q2 18.
• To make matters worse, customers are also ordering less as total orders have fallen by 15% over the same period that customer numbers fell by 10%.
• The main reason for this is a desperate need to get to profitability which has meant that the marketing budget has had to be cut meaningfully.
• The fact that this has triggered such a rapid fall-off in customers can only mean that Blue Apron has been trying to buy market share with promotions and discounts rather than focusing on having a great product and service.
• This also shows that it has failed to build any real loyalty as the minute the deals roll-off, the customers head for the hills.
• By contrast, Berlin-based HelloFresh is going from strength to strength seeing a 44% growth in customers and a 40% increase in revenues over the same period.
• HelloFresh is roughly 2.6x the size of Blue Apron, and I suspect has a much stronger management team.
• The proof is in how both stocks have performed since their IPOs in November 2017.
• HelloFresh went public at €10.25 a share and is currently at €10.55 although there has been a lot of volatility, whereas Blue Apron listed $10 per share and is now trading at $1.22 having lost 88% of its value.
• The litany of woe does not end there as Blue Apron is also heavily indebted with $124m in interest-bearing debt and $72m in facility financing obligations.
• This is what has put under a lot of pressure as its financiers have obviously demanded certain profitability covenants in order to roll the debt over, which has led to the cuts seen during Q3 18 and the headcount reduction coming in Q4 18.
• By contrast, HelloFresh is twice Blue Apron’s size and has no debt.
• Consequently, HelloFresh is in a position to take all of Blue Apron’s customers or forcibly acquire the company at some point in the near future.
• This is a classic case of the network effect in action and of the rule of thumb I proposed 3 years ago (see here).
• This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making a profit.
• HelloFresh is clearly not quite there yet when it comes to this segment, but it is gaining share hand over fist in the US, and I expected that it will soon reach the hallowed 60%.
• Hence, I think that HelloFresh’s chances of making it to profitability are much greater than those of Blue Apron and this is the one I would back.
• Blue Apron is a falling knife and anyone who tries to catch it is likely to end up with very bloody palms.