Amazon Explores Yet Another Booming Market; Blue Apron Feels The Brunt

Amazon (NASDAQ:AMZN) appears to be entering into yet another market: the meal-kit home delivery business. The company listed fresh, ready-to-cook meal ingredients in a box on its website and trademarked the slogan “We do the prep. You be the chef”. When this news came out, it made ripples in the grocery and food business, with the stock price of newly public company Blue Apron falling by over 10% during the week. This is certainly an interesting development, and we believe that Amazon’s entry into this market can help it cement its dominant position in the consumer market beyond retail.

In this note we take a brief look at the meal-kit delivery business and explore how Amazon’s expanding business fits into its long-term vision. We have an $890 price estimate for Amazon’s stock, which is around 10% lower than the current market price. Amazon’s stock price has risen by 15% in the last three months following a number of positive developments for the company, including the $13.7 billion acquisition of Whole Foods.

See our complete analysis for Amazon

Blue Apron: Business Overview

Blue Apron is a meal-kit deliver service that has been operational for the last five years. The company makes home deliveries of pre-packaged ingredients required to prepare meals including fresh foods, meats and the recipes to cook the meals. The portions of food items delivered are enough for two to four people, which means that customers don’t need to store leftover ingredients. In addition to disrupting grocery chains, meal-kit delivery services also have the potential to cut into the addressable market of food delivery services such as UberEats and GrubHub as well as quick service and casual dining restaurants. This trend has caught on with a lot of people, with the total sales of meal kits in the U.S. totaling $1.5 billion in 2016. This market could further grow to around $2.2 billion this year.

Meal-kit delivery services companies have raised around $650 million from venture capital firms, with Blue Apron raising around $200 million in equity funding. Blue Apron has reported strong growth in the last few years, with net revenues surging from $78 million in 2014 to $341 million in 2015 and further to $795 million in 2016. The company had an estimated 55% share in the meal-kit delivery market in 2016. Blue Apron’s IPO price was close to $10 a share, implying a market capitalization of $1.7 billion.

In its preliminary filings, Blue Apron reported that it has served a total of around 160 million meal kits since it began operations for an aggregate 25 million orders. The company prices meal kits at roughly $10 per serving, which implies that it has generated around $1.6 billion in revenues (assuming all sales from meal kits), of which around 50% were generated in 2016 alone. Moreover, Blue Apron’s gross margins have improved from 7% to 23% and further to 33% from 2014 through 2016. While this signals that the company is on a strong growth trajectory, it has operated at a loss in each of these years. With the announcement that Amazon is likely entering this market, investor confidence was understandably shaken, leading Blue Apron’s stock lower.

Amazon’s Value Proposition

Amazon offers a $15-a-month grocery service Amazon Fresh as an add-on to the existing Amazon Prime membership, for which the company charges $11 a month. A meal kit delivery service could be a valuable complement to this existing offering. Amazon has a huge advantage in this space, given its recently announced $13.7 billion acquisition of Whole Foods. Not only does the company already have scale (an estimated 65-70 million Prime members), Amazon is well equipped to manage logistics and vertical integration with the addition of Whole Foods. This not only signals Amazon’s intent to fortify its presence in the grocery retail segment, it also has the potential to send ripples across the casual dining and quick-service restaurant industry.

Amazon Prime: The Amazon Ecosystem

Amazon is most widely known as a retail e-commerce company, but has expanded its offerings significantly over the years.  Amazon has moved from selling books to electronics to general merchandise, to more recently FMCG products (with Amazon Dash). Additionally, the company has launched Amazon Fresh in some states in the U.S. as well as the U.K, Japan and Germany, and has been testing Amazon Go, an app-based, checkout-free grocery store. More recently, the announcement of the Whole Foods acquisition signaled Amazon’s intent to strengthen its foundation in the grocery space. While Amazon continues to add more products and services to its long list of offerings, the company is also likely looking at the bigger picture, which is building an entire consumer-serving ecosystem that caters to various customer needs.

Amazon charges around $100 per year (or $11 a month) to customers for Amazon Prime memberships. This includes free shipping on Amazon Fulfilled products, same-day delivery in selected areas, Prime Video membership, music streaming services and a number of other services. By adding another $180 per customer per year (or $15 a month) for groceries and food, Amazon intends to further extend the utility of the ecosystem. Since food and groceries form an even more integral part of daily life than, say, purchasing electronics or books, people could be more willing to pay more and justify the additional expense. Meal-kits, fresh foods, and expanded grocery delivery are likely just another step for Amazon to expand its ecosystem and keep customers engaged.

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