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NEW YORK (Reuters Breakingviews) - Blue Apron’s $3.2 billion float valuation could be the best dish it will produce. That's what the meal-kit service is proposing for its initial public offering, at the top of the share-price range proposed in a filing on Monday. The company loses money, though, and competition, potentially including the new Amazon.com-Whole Foods Market combo, will be tough.
Delivering healthy, ready-to-prepare meals is a good idea. Hence Blue Apron's robust growth. First-quarter revenue was up over 40 percent from a year earlier to $245 million. The problem is that over a dozen competitors have sprung up, making it costly to attract and hold on to customers. Marketing costs as a percentage of Blue Apron's revenue have been increasing, and the number and size of orders per customer are falling.
Moreover, the company lost $52 million in the first quarter, almost as much as in the whole of 2016. Slashing marketing outlays might allow a miniscule profit, but then the top line could stall or start shrinking. Investors certainly wouldn’t value such a firm at over $3 billion.
Just look at Groupon's experience. That firm offered a similar mix of fast growth, big losses, and an easily copied business model – selling daily deal coupons. It debuted at a $13 billion valuation. As rivals sprouted, the cost of acquiring and retaining customers went through the roof. Six years later, Groupon hasn’t mastered showing a profit while keeping its revenue stable. It is valued at less than $2 billion, or about half its sales.
Now consider Amazon’s $14 billion purchase of Whole Foods, which caught the grocery sector unawares on Friday. Combine the leading internet retailer with a knack for logistics with a company known for selling fresh, up-market food, and one obvious opportunity is selling meal kits to rival Blue Apron's.
Amazon doesn’t win every time. It tried to compete with Groupon through its own daily deals and another firm called LivingSocial. Amazon eventually gave up and wrote down most of what it had paid for its stake, and Groupon bought LivingSocial at a fire-sale price. The problem wasn’t so much Amazon as the overall market wasn’t as big or profitable as pioneers had hoped. Either way, investors might reasonably worry that Blue Apron's spicy IPO valuation could be as tasty as it gets.