Blue Apron: Bringing economical exotic meal experiences to door-step
How an HBS graduate is disrupting the food industry by building an innovative ~$2Bn valued meal kit business in under 4 years!
“We want[ed] to disrupt the traditional grocery chain model and show consumers that there is a better way to cook with fresh, seasonal ingredients” – Matt Salzberg [HBS 2010], founder and CEO, Blue Apron
Many would know Blue Apron for its innovative business idea in the meals-commerce segment. However, its meteoric rise (valuation of ~$2Bn in <4 years) in the food-tech space has been powered as much, if not more, by its well-aligned operating model as by its business idea.
At the core, Blue apron is in the business of meal kit subscriptions. It offers pre-portioned farm-fresh ingredients delivered to doorstep on-demand, for cooking ‘original’ recipes (it created), all at $10 per meal. More broadly, Blue Apron is an experience of dawning the chef hat and preparing and eating exotic meals conveniently. In October 2015, Blue Apron served 5M+ meal kits, 10x of what it served exactly 18 months back.
Fundamental to Blue Apron’s meteoric rise is its strong operating model focusing on:
- Original non-repeat menu: Blue Apron operates a ‘no-repeat’ menu model to deliver an exotic meal experience. It sources new recipes both in-house and as well as through external partnerships. It recently partnered with Top Chef competition to source exotic, winning recipes. To source recipes in-house, Blue Apron follows a rigorous process. First, the recipe team brainstorms culinary ideas, bringing inspiration from restaurants, cookbooks, etc. Once an idea is shortlisted, it is tested through a simulated cooking experience at a house kitchen. A recipe is picked or dropped depending on the time, skills and tools required to prepare it. This process has generated 800+ original recipes over past 3 years.
- Vertically integrated sourcing: Exotic recipes call for exotic ingredients. To source quality, seasonal ingredients, Blue Apron has integrated vertically to buy directly from farms and family-run purveyors. It ordered 3 million pounds of produce from 100 family-run farms past summer. By by-passing the middlemen, Blue Apron has direct access to better quality and fresher ingredients. Besides, the vertical integration reduces costs (commission paid to middlemen). Blue Apron passes on these savings to customers.
- In-house fulfillment centers: Blue Apron has 3 fulfillment centers, one each at NJ, CA and TX. At these centers, fresh raw materials cultivated at nearby farms are loaded. Using it’s flexing packaging process designed in-house, employees portion and package varying amounts of ingredients depending on the week’s recipe. Once individual ingredients are portioned and packaged, they are paired together by meals in Blue Apron boxes and distributed to nearby cities. Blue Apron attempts to mimic this entire process from farm to consumer as Just-in-Time. The flexible portioned packaging and JIT enables 2 key consumer experiences – fresher ingredients and lesser wastage (cost reduction) – compared to consumers attempting the same process from a nearby grocery story. Further, by keeping fulfillment in-house (against outsourcing), Blue Apron better controls these key end-consumer experiences.
- Use of technology: Blue Apron effectively leverages technology across both front-end and back-end to deliver enhanced consumer experiences. At the front-end, Blue App has a simple app that acts as a user’s cooking companion. A consumer can place order, see detailed recipes, check video tutorials, get tips and use a cooking stopwatch through this app. Additionally, the app has a social media sharing option with Instagram-like filters to enable consumers to share pictures of their meals. Essentially, the app enables end-to-end meal experience, right from cooking, to eating, to photographing, to sharing. Besides, the app provides useful customer data points to understand what recipes worked and allows Blue Apron to close the loop with the customer. At the backend, Blue Apron uses a homegrown warehouse management software to track order flow and productivity, to manage its JIT operation. It has also invested in algorithms that help predict a recipe’s popularity, which can help in making better sourcing decisions.
Conclusion: Blue Apron is tapping the latent demand for convenient meal alternatives through its innovative business model and strong operating fundamentals. It recently extended its offerings beyond meals to wines. If it continues to grow at the same pace and connect consumers more effectively (in quality, cost and convenience) with farms, it can challenge the existence of grocery stores and will be well-positioned to take a significant pie of the huge $1.1Tn food industry!
Student comments on Blue Apron: Bringing economical exotic meal experiences to door-step
Thanks for the Article, Kartik. Can you answer couple of questions:
1. How does the unit economics work? If the average meal cost is $10, how would they make money post delivery?
2. When customers are seeking convenience, why do they not order the food directly but rather, prepare the food at home? Is it mostly cost-driven?
3. Will they ever get economies of scale with 800+ recipes?
Thanks Anish. Here are my thoughts:
1. Unit economics: Not much data is available online, but drawing an analogy to the restaurant cost structure and adding a premium for the exotic ingredients, I would peg their gross margins at ~50% of meal price. Adding ~15% for supply chain (packaging, distribution – comparing with amazon but adding a slight premium given their in-house packaging handling), & ~10% for fixed overheads the margins should be somewhere around ~15-20%. This is before marketing expense. Currently, they might be losing money on meals because of marketing costs, but once the business stabilizes I expect them to see ~15-20% net profits, especially at scale. Their proposition is to reduce costs by pre-portioning and vertical integration.
2. I don’t think Blue Apron can compete with take-out meals on price because take-out meals are typically priced at 10 or lower $. Blue Apron is more for a customer preferring ‘convenient cooking’ rather pure convenience. The exotic offering helps separate it further.
3. So just to clarify, Blue Apron has ‘so far’ created 800+ meals. That doesn’t mean they have all 800+ meals on offer every week. The meals creations from previous weeks are available to browse (in the repository) but a consumer can only order the new creations for the current week. Blue Apron creates ~6 meals every week and consumer purchase 2-4 of them depending on dietary restrictions, order size etc. With less 10 meals every week, there shouldn’t be much problem with economies of scale at level of meals they are serving every month right now.
Great overview about the company. I was wondering what contract type does Blue Apron use for sourcing their produce from their key suppliers whether it’s fixed-price or cost incentive. How does that process work. Also what other materials are procured through Blue Apron.
Great post, Kartik! Blue Apron has always fascinated me – I’ve been meaning to try it out!
One question I had was on Blue Apron’s emphasis on the original, no-repeat menu. It seems as though a lot of resources – both time and money – are being dedicated to this initiative. I imagine it is important to include variety to attract repeat customers. But is this a barrier to economies of scale? Do consumers have the ability to re-order their favorites? A “favorites” feature could be viewed positively by consumers, while saving the company on some of the resources dedicated to the no-repeat menu.
Furthermore, do all consumers get the same meals each week, or is there a variety of meals being shipped out at any given time? And do consumers have the ability to customize their orders (i.e. based on preferences, allergies, etc.)? If there is no uniformity in the fulfillment center, is this a barrier to further high growth?
Thanks Danielle! Here are my thoughts:
1) Reordering favorites: The company does seek feedback from consumers. However, instead of repeating past “most favorited” dish in the menu, it uses the data to create similar dishes. That is what the recipe generation and testing team does in the kitchen based on user data. However, I agree, there is a possibility to repeat dishes after certain lumps of time (every 3 months/6 months). Its just like going to your favorite restaurant once in a while. Having said this, I don’t think it’ll have majestic impact on freeing up resources as their recipe generation team is not that big
2) Meal variety: Yes there is variety every week. Blue Apron creates ~6 meals every week and consumer purchase 2-4 of them depending on dietary restrictions, order size etc. However, as an outlier consumer its not the best scenario of having a lot of options for very niche dietary restrictions. For Blue Apron, its about balancing between depth of offering and scale.
3) Non-Uniformity at fulfillment center: That’s an interesting question. Again it’s a trade-off between the flexibility they offer (pre-portioning) and thereby saving wastage costs vs. incurring higher on labour cost. Maybe upon scale, Blue Apron can look to standardize parts of the packaging process through tech machinery (like packaging standardized amounts of spices, garnishing, etc.). A very radical outcome in future could be when Blue Apron develops these vegetable chopping/packaging technology where Blue Apron inputs raw materials, order size, and # of packages and the machine spews them out 🙂
Awesome overview of the company! I’m currently working with ChefTime for my Field 2 project in Brazil. Their business & operating model mimic Blue Apron. Their pain points at the moment are focused on logistics and customer demand. Seems as though Blue Apron’s focus on establishing an efficient operating model has allowed them to have an effective business model. And people, if the price is right, are attracted to that and willing to give it a shot.
I wonder about how much they spend on logistics. I’m assuming this model required a very large upfront capital investment, which probably deters competitors from entering the market. Blue Apron seems to have “do it yourself” meal delivery service market cornered.
Thanks Keyur! Here are my thoughts:
1. Ful-filment/Logistics costs: Unfortunately not much data is available in the open source. But here’s my opinion based on back-of-envelope.
– Packaging/fulfilment costs – Assuming a meal takes 4-5 means to package completely (all ingredients) and assuming average labour costs of 12-15$, this gets us to $1 incurred on every packaged meal (~10% of meal price)
– Logistics costs: Once the meal is packaged, it is distributed. Applying analogy to Amazon’s cost structure (8-12% cost of logistics), we can assume Blue Apron’s logistical cost to be ~10% of meal price.
This brings the fulfillment + logistics cost to ~20% of meal price. This cost structure can be improved further at scale. Yes, Blue Apron has invested heavily in fulfillment center (they have 3 huge ones geographically spread across USA) and this definitely is a big barrier to entry for new entrants. But, more than the capital investment, its the brand and network effect that Blue Apron has created which will be very difficult to break into.
I did not know about Blue Apron. Its business is really intriguing and it definitely attracts people with fewer family members as it provides time and cost efficiency by improving their logistics and reducing wastes.
JIT really makes sense for this business model as the matrials are perishable. However, it seems it currently relies on labors to do packaging which would incur a fair amount of cost. I also wondered how many recipes that Blue Apron offers. Do they offer the all 800+ recipes? If so, I wonder what is their process (i.e. job shop etc) to manage the packaging process effectively to cope with the vast range of product offerings. In addition, I feel it must be tough to optimize the supply of materials and numbers of labors if they offer a vast range of recipes and apply JIT, and I am curious to know how they are addressing the issues.
Thanks Tomo! Here are my thoughts:
1. So just to clarify, Blue Apron has ‘so far’ created 800+ meals. That doesn’t mean they have all 800+ meals on offer every week. The meals creations from previous weeks are available to browse (in the repository) but a consumer can only order the new creations for the current week. Blue Apron creates ~6 meals every week and consumer purchase 2-4 of them depending on dietary restrictions, order size etc. With less 10 meals every week, there shouldn’t be much problem with economies of scale at level of meals they are serving every month right now.
2. But I agree to your concern about packaging tons of ingredients at scale through costly labor. One potential way out for Blue Apron in future would be to automate parts of the packaging process. Upon scale, Blue Apron can look to standardize parts of the packaging process through tech machinery (like packaging standardized amounts of spices, garnishing, etc.). A very radical outcome in future could be when Blue Apron develops these vegetable chopping/packaging technology where Blue Apron inputs raw materials, order size, and # of packages and the machine spews them out 🙂
Kartik – really great post! I think Blue Apron is an interesting concept, but I worry that the current price point may be unsustainable. Many people who cook at home do so because it is cost prohibitive to dine at a restaurant or order take out. At $10 / meal, Blue Apron is not much lower than many take out options (especially given the wide variety of choices in major cities). Because of this, when I have used this service in the past with friends, it has been more of a ‘special occasion’ treat rather than an everyday convenience. I wonder how successful their subscription model is or if many others feel this is simply too expensive to spend on weekly groceries. Also, there are not a lot of barriers to entry and many other companies have begun offering similar products (Hello Chef, Plated, etc). How does Blue Apron plan to compete and differentiate itself in this increasingly crowded environment?
Thanks Daniella! Here are my thoughts:
1. Price points: Agree that Blue Apron is not that economical. Its not something that can substitute every day meal or could be as frequented as take-outs/eat-outs. However, its definitely something users can order once (subscription of 3) every 1 or 2 months. Online data indicates that their customer retention is quite good. I would foresee value addition along 3 dimensions (when compared with eat-out/take-out) – 1) convenience of cooking (especially for people who like cooking) 2) Exoticness 3) Fair price for exoticness/convenience. Blue Apron would be most suited for customers that have needs along these 3 value addition dimensions. Even if there is a 2-3% population that sees this need, its a massive portion of $700Bn meals market for Blue Apron to capture!
2. Competition: Agree there is significant competition spicing up. However, Blue Apron enjoys a first mover advantage. However, what would differentiate these companies are 1) Meal quality/originality 2) price point. Further, there is definitely room for 2-3 players to exist in the market. It’s like any other meal play (fast food – You have Chipotle, Qdoba both existing side by side in the Mexican fast food space)