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Feb. 22, 2020, 10:40 a.m. EST

Groupon and Blue Apron’s real problem: Neither business model works, experts say

Groupon stock tumbles 42% and Blue Apron is down 22% as experts say they are unlikely to succeed

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By Ciara Linnane, MarketWatch

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Customers become unhappy when a Groupon service is so popular that suddenly they can’t get an appointment, he said. Merchants are unhappy when dealing with the negative impact of a low-quality customer base, he said. The platform is also vulnerable to changes in the economic cycle, he said.

“To the degree that Groupon is basically dependent on merchants that have excess capacity and want to sell it off, when they are doing better, that capacity goes away,” he said.

Reibstein said he is surprised the company has lasted as long as it has or that so many competing services have sprung up. “Competitors have the same issues and one thing is that they are training customers to wait for the deal, which is not good either.”

Blue Apron’s blues

Blue Apron’s /zigman2/quotes/203710464/composite APRN -4.33%  problems lie in its cost structure, with manufacturing and marketing costs elevated by the basic requirements of a business that delivers fresh food ingredients to customers in expensive packaging. The company has never made a profit, hurt by failed partnerships, that include a deal to sell its meal kits at Costco Wholesale Corp. /zigman2/quotes/201191698/composite COST +1.34% , among other issues.

“From the beginning, Blue Apron failed to put in the necessary manufacturing, supply chain, procurement and logistics that would allow them to manufacture meals with low unit costs and be able to consistently meet customer demand cost efficiently,” said Brittain Ladd , founder and CEO of Six-Page Consulting, which specializes in retail and supply chain management.

The company is operating in a highly competitive business but has high customer acquisition costs and low retention rates. The company’s customer count fell to 351,000 in the December quarter from 557,000 in the year-earlier quarter, according to its latest earnings report.

The company’s cost of goods sold (COGS), excluding depreciation and amortization, as a percentage of net revenue, rose 20 basis points (0.2 percentage points). Marketing expense was $12.1 million, or 12.8% of revenue, in the fourth quarter, compared with 14.4% or revenue a year ago, while product, technology, general and administrative (PTG&A) costs fell 22% to $35.3 million, mostly due to staff cuts.

See now: Opinion: Blue Apron’s new CEO has a thankless task

The company had a net loss of $21.9 million, just a bit lower than the $23.7 million loss posted a year ago, and revenue fell 33% to $94.3 million.

“While we’re confident that Blue Apron will drive leverage in COGS, marketing, and PTG&A expenses in FY:19, we believe visibility into the timing of a potential reacceleration in customer growth remains limited as many of the company’s new initiatives are just beginning to ramp up,” said Stifel analysts led by Scott Devitt, reiterating their hold rating on the stock.

The company’s subscription model is another problem, according to Six-Page Consulting’s Ladd. “They didn’t do enough to offer flexibility, they need more quality food, more recipe options and a better subscription model,” he said. “Customers simply stopped using them as they were underwhelmed.”

The meal-kit business can work, as evidenced by Blue Apron competitors such as Hello Fresh, Home Chef and others who have succeeded, he said. But the trend is slowly being replaced by healthy ready-to-eat meals as consumers clamor for greater convenience.

Read also: Blue Apron to end partnership with Walmart’s Jet.com but continue with Weight Watchers

Blue Apron said it is evaluating its strategic alternatives, including a partnership, a capital raise either through the public of private markets, or a sale of the company. Ladd said its best hope is to be acquired, and named several potential acquirers, including food companies like Kraft Heinz Co. /zigman2/quotes/203625533/composite KHC +0.57% and Campbell Soup Co. /zigman2/quotes/202107764/composite CPB -0.10% , delivery service Instacart and even Starbucks Corp. /zigman2/quotes/207508890/composite SBUX -1.06% .

See: Blue Apron stock soars as news of Beyond Meat menus sparks a round of short covering

Starbucks would acquire a team that has expertise in creating tasty meals and could help bolster the coffee shop chain’s food offering, he said. And Blue Apron is cheap too, after it conducted a reverse stock split that saved it from being delisted but reduced the number of shares available. “It has no capital value so they could buy it for pennies on the dollar,” Ladd said.

Treiber from RevTrax said Blue Apron would be a strong takeover candidate for Walmart Inc. /zigman2/quotes/207374728/composite WMT -1.10% , as it expands in grocery delivery and online grocery, or Target Corp. /zigman2/quotes/207799045/composite TGT -1.45% , which is lagging in food.

“Target doesn’t have a strong online grocery business,” he said. “It could catapult them into being a real player, where over time, they could augment meal delivery with other services.”

Groupon shares have fallen 48% in the past 12 months and are now a full 93% below their IPO issue price of $20. Blue Apron shares are down 85% the past year and about 98% below their IPO price of $10, including the effect of the reverse stock split.

The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.34%  has gained 21% in the last 12 months and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.05%  has gained 14%.

/zigman2/quotes/203710464/composite
US : U.S.: NYSE
$ 11.04
-0.50 -4.33%
Volume: 767,858
June 4, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$154.42 million
Rev. per Employee
$284,934
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/zigman2/quotes/201191698/composite
US : U.S.: Nasdaq
$ 310.75
+4.11 +1.34%
Volume: 4.55M
June 4, 2020 4:00p
P/E Ratio
37.15
Dividend Yield
0.90%
Market Cap
$154.42 million
Rev. per Employee
$600,967
loading...
/zigman2/quotes/203625533/composite
US : U.S.: Nasdaq
$ 31.49
+0.18 +0.57%
Volume: 6.16M
June 4, 2020 4:00p
P/E Ratio
20.19
Dividend Yield
5.08%
Market Cap
$67.19 million
Rev. per Employee
$673,308
loading...
/zigman2/quotes/202107764/composite
US : U.S.: NYSE
$ 48.77
-0.05 -0.10%
Volume: 3.95M
June 4, 2020 4:00p
P/E Ratio
27.27
Dividend Yield
2.87%
Market Cap
$154.42 million
Rev. per Employee
$423,957
loading...
/zigman2/quotes/207508890/composite
US : U.S.: Nasdaq
$ 78.74
-0.84 -1.06%
Volume: 7.66M
June 4, 2020 4:00p
P/E Ratio
28.04
Dividend Yield
2.08%
Market Cap
$92.96 billion
Rev. per Employee
$86,863
loading...
/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 122.11
-1.36 -1.10%
Volume: 8.00M
June 4, 2020 4:00p
P/E Ratio
23.22
Dividend Yield
1.77%
Market Cap
$351.21 billion
Rev. per Employee
$223,654
loading...
/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 119.96
-1.77 -1.45%
Volume: 3.96M
June 4, 2020 4:00p
P/E Ratio
22.23
Dividend Yield
2.20%
Market Cap
$59.43 billion
Rev. per Employee
$209,322
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,112.35
-10.52 -0.34%
Volume: 3.74B
June 4, 2020 5:10p
loading...
/zigman2/quotes/210598065/realtime
US : Dow Jones Global
26,281.82
+11.93 +0.05%
Volume: 375.55M
June 4, 2020 5:10p
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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