Why Blue Apron’s low IPO is actually good for the meal-kit company

Blue Apron Inc. is an ingredient-and-recipe subscription mail service for at-home cooking. On Thursday, it closed the day just barely above $10 per share, rounded to just $10.01. The IPO values Blue Apron (the first U.S. meal-kit company to IPO) at $1.89 billion, below the $3.2 billion implied by its previous estimate and below its private valuation of $2 billion. The initial offering price was the bottom of the company’s already reduced price range. Just last week, the company had been aiming to price its shares from $15 to $17 per share. It lowered the estimate after potential investors expressed concerns about Amazon’s deal to buy Whole Foods Market as well as Blue Apron’s marketing costs and lack of profitability.

“Amazon’s deal for Whole Foods earlier this month added to concerns, but Blue Apron’s high marketing costs were a negative factor,” said Kathleen Smith, principal of Renaissance Capital LLC, a manager of IPO-focused exchange-traded funds. In 2014, Blue Apron spent $14 million to ads and promotions to gain new customers; by 2016 that figure was $144 million. It spent roughly 18 percent of its $795.4 million revenue in 2016 on marketing, posting a net loss of $54.9 million.

Blue Apron also faces competition from Amazon’s own meal-kit subscription business. Earlier this year, Amazon launched a partnership with Martha Stewart’s meal kit service, Martha & Marley Spoon, to deliver meals in New York, San Francisco, Dallas and Philadelphia, Boston, Washington, Seattle and Los Angeles.

“With Amazon as their potential main competitor, this may make that long-term profit target more difficult than before the merger [with Whole Foods],” said Eric Kim, co-founder and managing partner of venture capital firm Goodwater Capital.

However, the lower IPO might actually be food for Blue Apron. The IPO market “discovered a much better price for Blue Apron. It needed this discount,” said Smith. With its reduced IPO, Blue Apron no longer needs to pay down existing debt with the proceeds. Instead, the funds will all go toward working capital, capital expenditures and general corporate purposes.