It’s the first time in two years—since April 2015 when Etsy Inc. went public—that an online-only retailer has filed for an initial public offering of stock.
That’s why Blue Apron’s IPO today has been closely watched by investors and retailers alike—as its performance is a good indicator of the health of the e-commerce industry as a whole. If the meal kit delivery retailer performed well and traded at the high end of its price target, for example, this would be good news for anyone in e-commerce looking to raise funds from venture capital investors. Strong demand for Blue Apron would mean other merchants could demand a higher valuation for their own company when seeking investment.
Of course, the reverse is also true, as a low stock price would mean other web merchants looking to raise funds or go public anytime soon may have a tough time. Well … it’s the reverse that has happened, meaning bad news for many in e-commerce.
Blue Apron, No. 197 in the Internet Retailer Top 1000, on Wednesday slashed the price of its initial public offering of stock—to about $10 per share, or far below the $15 to $17 price target the retailer disclosed last week. On Thursday, its first day of trading, the company’s stock was up less than 1% in its trading debut. U.S.-listed IPOs bigger than $100 million (Blue Apron’s is $300 million) averaged a 13% jump in share price on the first day of trading, according to data compiled by Bloomberg.
No doubt Blue Apron’s decision to whack its price was in large part spurred by web leader Amazon.com Inc.’s deal to acquire Whole Foods Market—and the ensuing shock waves that news had on the rest of the grocery market, not to mention other sectors.
Blue Apron’s poor IPO performance also is spurred by anxieties about its shaky repeat purchase rates, says Eric Kim, a principal at venture capital investment firm Goodwater Capital. Neither Kim nor Goodwater have a stake in Blue Apron. “Blue Apron’s lowered valuation is being driven by concerns over increased competition from Amazon and lower repeat rates for users,” Kim says.
According to a survey Goodwater conducted in June with 2,607 U.S. participants, consumers are not very loyal to meal kit providers like Blue Apron and its direct competitor HelloFresh—in stark contrast to other food delivery delivery services like Instacart and Grubhub and online sellers of groceries like AmazonFresh.
For each of the below services they had purchased in the past, survey participants were asked which they planned to continue using or use more frequently, as well as which they expect to stop using or use less regularly. Food-related services with the highest expected usage increase were Grubhub (65%), Amazon Fresh (64%) and Instacart (57%). Conversely, services with the highest expected usage decrease were HelloFresh (47%), Blue Apron (44%) and Postmates (44%).
The relatively low repeat rate of Blue Apron, especially in comparison to Amazon.com (No. 1 in the Top 500) and AmazonFresh, highlights the importance of having strong customer retention.
“To be truly differentiated in this ultra-competitive environment, e-tailers need to have strategies to not only acquire significant numbers of customers, but also to continue to engage them through new product offerings and additional services,” Kim says. “Those companies that can retain loyal customers will see even higher valuation multiples than the average e-commerce company. We’ve seen valuation multiples in the 4 to 10 times sales range, but it’s highly dependent on demonstrating profitable growth through strong user cohorts.”
The 4- to 10-times sales range Kim references is the exception, however, mostly represented by two big deals: Wal-Mart Stores Inc.’s 2016 purchase of Jet.com for $3.3 billion, or roughly 4.1 times sales; and Unilever’s 2016 acquisition of Dollar Shave Club (No. 179) for $1.0 billion, or 6.6 times sales. A recent analysis by Internet Retailer, in a report titled Valuing America’s Top E-Retailers, of all e-commerce deals since 2009 finds that web merchants fetched valuations, on average, at 1.56 times online sales up until 2014. Since then, it has declined to 0.77 times sales.