Blue Apron = Dumbest Acquisition of 2023

TLDR;

• Shoutout to the unsung LBAB Hero: Dave!

• Blue Apron + Wonder group wins Dumbest Acquisition of 2023.

LBAB Community: Being the Best Man at My Best Man’s wedding.

I’m writing to you from Pittsburgh today where in a couple hours I’m going to be the Best Man in my Best Man’s wedding. For those of you who don’t know Dave (his wedding), you read his wonderful words every week. Quick story time…

As much as I’m a ‘build in public’ person Dave is a ‘behind the scenes’ kind of guy. So he’s going to hate this, but he deserves praise for all his great contributions to LBAB and he’s too busy today to catch me write any of this.

Back in September, Dave joined the LBAB crew as editor and GIF Keeng. Cleaning up my sporadic style, defining the tone, and clarifying complex ideas for the newsletter + Linkedin. I’ve heard the feedback, thank you everyone.

“Everyone loves the ideas, but they need to be communicated more clearly.” 👈 what Dave does.

I’ve known Dave for a long time. Like a REALLY long time…

Being able to trust someone to be your editor takes a long time. Getting on the same page as them from a philosophical, tone, style, approach, and process takes raw time to build that trust. It’s something I think most people miss when they bring on Content people.

They give writers outlines and say go write, but don’t align on how they want to color within those lines.

Like any deep relationship that deals with your identity there’s raw time you need to put into the relationship to be aligned with not only how you see the world, but also how you want to represent yourself within it.

That is a core philosophy I’d like to see more people take in the space.

• Dave pumped to celebrate with you today.

• For everyone else. My only piece of advice. Find your Dave.

Alright enough mushy stuff. Let’s dive into why Wonder Group acquiring Blue Apron was the dumbest acquisition of 2023.

Let’s Examine This Deal

Blue Apron was DOA as soon as they announced their ‘22 earnings. It was over for them. The rest of the market just hadn’t realized it yet. In typical fire-sale fashion Wonder Group (a Blue Apron clone) stepped into take over the asset.

I have no interest in touching this thing with a 10 foot pole, so I’m going to spend this newsletter trying to figure out why Wonder group would acquire Blue Apron for $103m.

Trading at $12.85/share with a $82m market cap, -99% since its Jan 2017 IPO, this DTC darling is another example of what happens when you pump too much money into a dysfunctional biz.

If you’re wondering why the Market cap is $82m when the acquisition was announced at $103m, that delta represents investors’ confidence in the value of the deal.

Week in and week out we keep seeing the same graphs. I hope we’ve learned the lesson that everyone will remember for the next 10 year cycle.

TLDR Analysis:  All The Trends Investors Don’t Want to See.

Shrinking Sales & Rising COGS + SG&A = a 2-front war. And no one wins a 2-front war.

This pioneer of the Meal Kit delivery market is now a feature of their luxury competitor.

They already sold off their operational infrastructure to FreshRealm, which is best described as a Blue Apron clone, and laid off a large portion of their workforce.

Wonder Group, founded by Marc Lore (Founder of Diapers and Jet.com), started as a food truck to bring popular NYC restaurants to the suburbs. It’s pivoted and now licenses other restaurants’ recipes, selling them in a Food Hall + Delivery Kit model.

Bluntly, I don’t understand why anyone is running any of these biz models. Blue Apron was the pioneer in the space and validated that the biz model doesn’t work. Sure, maybe there was bad leadership or strategy executing this vision.

But that math ain’t mathin’. In any situation, this is a terrible biz model.

It requires $567m in OPEX to drive $458m in Sales at a 35% Gross margin. 🚩🚩🚩

I’m taking today’s LBAB in a different direction.

This isn’t even worth considering an acquisition. Instead, I’m going to break down why this is the dumbest acquisition of the year.

Let’s Discuss This Deal

Here are the 3 reasons this is the dumbest acquisition of the year:

1) This was always a bad biz model.

If we just take a step back here and think about the fundamentals... Blue Apron was never going to work.

The value drivers of this biz are Convenience and Curation.

When they launched, they targeted busy urbanite Young Professionals who wanted to eat healthily and needed the convenience of prepped healthy meals.

The problem: That market sucks. Here are the 7 reasons this model makes no sense:

1. Grocery Margins suck

2. Grocery Stores offer delivery

3. There’s a finite zone of consumer value for the convenience of cooking and grocery shopping that is constantly squeezed.

4. Marginal consumer value between: Expense of (Meal kit delivery + time to cook) vs. just ordering in.

5. The Operational investment to store, prep, and deliver food is enormous.

6. Spoilage (at every stage) is a much greater problem that it seems.

7. Expense of Consumer-level Marketing on razor-thin margins sucks.

I’m all for innovation and pushing the bounds of where society moves next, but can someone sit down with a spreadsheet and show me the math on how this works in the real world?

Where is the margin capture at any point in this experience to validate that this is a sustainable biz model? It’s an interesting test to see if you can navigate around the Grocery market model, but it’s way too easy to underestimate how hard building the supply chain to deliver food to 330m Americans is.

Takeaway:  There was never a way to make real money here.

2) What’s the plan?

Wonder Group’s model is licensing your favorite restaurant's food and making it available in Food Halls + Delivery. Why do they need Blue Apron? They’re already building most of this and leading with a Food Hall model.

Blue Apron already:

• Dumped their operational infrastructure.

• Laid off most of their team.

• Has awful financials.

• Is in debt up to their eyeballs with only $32m in the bank.

What are the asset(s) to buy here?

The brand? The customer list?

Maybe. But Wonder Group could just wait for bankruptcy to acquire those.

I’m truly missing the value of why Wonder did this deal. They say they’re going to leave Blue Apron running as it is, which is good PR fodder for “We don’t have an EBITDA expansion game plan yet.”

But still…

WHY WOULD THEY ACQUIRE IT AT ALL?

This biz isn’t profitable, growing, or solvent. This biz shouldn’t be running on its own. That’s why it put itself up for sale. This is another deal that just leaves you…

Takeaway: This asset doesn’t even justify a $100m acquisition.

3) Blue Apron is an Instacart feature. Not a company.

Blue Apron validated 2 truths in consumer food purchasing behavior:

1. Consumers like Curated meals prepared at home.

2. Merchandising through prepped recipes + education moves units.

I’m not 100% sure that validation was worth torching the $722m combined equity it raised across private and public markets but here we are.

At the end of the day, this was a good marketing strategy. Not a real biz.

Instacart already delivers groceries to customers' doorsteps and has the infrastructure, relationships, and customer base to deliver curated meals locally. (Blue Apron was founded in Aug 2012, Instacart in Jun 2012).

There isn’t a real reason to spin up the operational infrastructure to source, prep, and deliver food to people under the same concept. There isn’t any money in that. Margins in Grocery and Restaurant biz suck as it is. All that operational weight on a biz with such thin margins isn’t going to work until it reaches an Amazonian scale. And again…

Also Instacart is basically advertising company at this point (apparently the only real money in this market), this type of content would crush within their model. Because it’s basically turning daytime cooking shows with ad breaks → digital “I can buy immediately” experience. There’s no need for an “I need to spend more money to subscribe to another service to deliver me food” biz.

Takeaway: Blue Apron’s was a Feature + Marketing strategy. Not a Company.

Final Thought

This deal doesn’t do much for Wonder Group.

Sure, they got more customers, a decent brand, and insights into how they run the delivery biz at scale. But let me give them the most helpful takeaway…

Don’t run one.

Make great food and deliver it through all the other unprofitable delivery services (Looking at you Uber Eats, Doordash, Grubhub). Capture as much money as possible on the already thin margins on arbitraging the outpost-for-famous-food model.

It doesn’t need to do any of those things at this point. But maybe that isn’t the point.

Marc Lore is the king of VC Pump & Dumps. His ability to build an innovative eCommerce biz, scale it aggressively with the growth-at-all-costs playbook, then offload it on the largest player in the space is impressive.

1. In 2005, he founded Diapers.com, scaled it, and exited to Amazon for $545m, which shut down the biz in 2017 due to profitability issues.

2. In 2015, he founded Jet.com, scaled it, and exited to Walmart for $3.3B, which also shut down the biz in 2020, saying their were good learning but ongoing investments are better served on the “core Walmart brand”.

Wonder Group has already raised $350m at a $3.5B valuation. Based on what I’m seeing, it looks like this will get dumped on Yum Brands for $5B in 5 years. They’ll buy this as a Edu-quistion before shutting it down for profitability concerns while taking the learnings to “strengthen the core brand.”

🧠 The Takeaways

Sometimes, certain bizs just don’t need to be built. My greatest question is: would this have been considered in a non-ZIRP environment?

1. Pioneers get shot in the back. Fast followers benefit from drafting.

2. EBITDA expansion is the name of the game. That is always the North star.

3. Know whether you’re a platform or a feature. Platforms scale to the moon. Features get acquired.