Blue Apron is a lesson to meal kit companies that it's time to head to the grocery store

Key Points
  • Blue Apron has struggled to hold onto customers amid growing competition and distribution issues.
  • Meal kit companies need to adapt and offer a wider variety of options, including being able to pick up a meal at a grocery store.
  • These companies have struggled to grow their customer base and keep marketing costs low.
Blue Apron delivery service.
Source: Blue Apron

The old meal kit model is dead, and Blue Apron is proof that meal delivery companies need more than just an online presence to survive.

Blue Apron has struggled to hold onto customers amid growing competition and distribution issues. While it was able to grow subscribers by 5 percent from last quarter, the number of customers buying from the brand is down 24 percent from the prior year.

Meal kit users are notorious for ditching their subscriptions within six months of starting them and either jumping to another brand or returning to their old grocery habits. Meal kit companies have taken to heavily discounting their products to lure in new diners or rewarding current members for turning their friends onto the program.

However, the days of ordering three meals online and waiting a week for them to arrive at your doorstep could be coming to an end. Meal kit companies need to adapt and offer a wider variety of options, including being able to pick up a meal at a grocery store, food industry expert Phil Lempert told CNBC.

"It's not a sustainable business if you've got to be constantly giving away $30 or $40 worth of meals to get customers," Lempert said. "I do think what Hello Fresh and Blue Apron are doing, where they are starting to sell in supermarkets, that's the opportunity."

Blue Apron has struggled to grow its base and build loyalty so that the company can spend less on marketing. While the company was able to shave its marketing budget in the first quarter to 20 percent of its revenue, down from the 24.8 percent of revenue in the fourth quarter, customer acquisition remains elusive.

Convenience and choice are key reasons that customers love meal kits, but bulky packaging, high delivery costs and competitive discounting across the industry are leading users to bounce from brand to brand without staying for long.

Having meal kits in supermarkets decreases the amount of packaging, and customers no longer have to pay to have the food shipped. And it offers consumers the convenience of spontaneously deciding they want to purchase a kit, rather than planning a week ahead.

Blue Apron currently has a pilot program with Costco. It is also testing out pop-up stores to better engage with customers.

Blue Apron

"We want to meet customers on their terms," CEO Brad Dickerson said on an earnings call Thursday.

Of course, as more meal kits arrive at grocery stores, these companies will have to differentiate their product from competitors.

Grocers like Albertsons and Kroger have already acquired smaller meal-kit services to bring into their stores and Walmart and Amazon announced plans to bring meal kits to supermarkets.

Even Weight Watchers is set to launch a line of quick prep meal kits at grocery stores.

Lempert said meal kit-services need to find a way to stand out and that the most successful ones will likely be those that cater to the health conscious. In particular, he said they can create kits for people with medical issues like diabetes or heart diseases.

Blue Apron has already tested the waters by offering specialized meal plans to customers and it has paid off. Dickerson said the company saw the number of customer sign-ups jump after it introduced a partnership with Whole30 at the beginning of the year.

Whole30 was a 30-day diet plan that was available through February and focused on "whole" foods such as fresh fruits and vegetables and eliminated items like sugar, alcohol, grains, soy and dairy.

The company has also expanded the types of meals it offers, including providing meals that could be made within 30 minutes, meals that require less cleanup and bringing back some of its customers' favorite recipes.

On Blue Apron's earnings conference call Thursday, Dickerson also said the company is set to launch several new meals and recipes that cater to larger group occasions as well as providing customers with options for appetizers and desserts.

Dickerson said that customers were using multiple Blue Apron meals to create a larger spread for parties and special events, inspiring the company to create a multicourse box. The special occasion kit includes an appetizer, two sides and a choice of protein for the main dish.

But the pressure is still on in the crowded field. Blue Apron expects it will once again ramp up how much it spends on advertisements.

Ultimately, Lempert foresees more acquisitions of meal kit companies by grocers or grocery chains simply creating their own kits in-store.

"For the supermarkets who are making the meal kits right in the store, it's a lot more efficient because you can make 20 and if you need more, somebody can make another five," Lempert said. "It's a scaleability issue from an operation standpoint that I don't think [meal kit companies] have solved yet."