{"id":22715,"date":"2017-11-14T19:27:58","date_gmt":"2017-11-15T00:27:58","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/will-digitization-eat-blue-apron-for-lunch\/"},"modified":"2017-11-14T19:27:58","modified_gmt":"2017-11-15T00:27:58","slug":"will-digitization-eat-blue-apron-for-lunch","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/will-digitization-eat-blue-apron-for-lunch\/","title":{"rendered":"Will Digitization Eat Blue Apron for Lunch?"},"content":{"rendered":"

Digitization and the future of fulfillment
\n<\/strong>Blue Apron helped to create the direct to consumer \u201cmeal kit\u201d business, and now faces extreme competition from startups and technology behemoths alike.\u00a0 A core part of the company\u2019s thesis is in realizing significant and rapid operational efficiencies in its fulfillment centers through digitization.<\/p>\n

With the influence of new technologies in automation, prediction, communication, and delivery, supply chains have moved to not only become more efficient but also key levers in driving sales and releasing new products [1][2]. The importance of supply chain effectiveness is enhanced by the nature of Blue Apron\u2019s business, as the margin for error with perishable foods is slim.\u00a0 Getting digitization right <\/em>gives the company a path towards profitability and new product innovations.\u00a0 Indeed, as Amazon\u2019s success has shown, the significant capital investments required for such efforts create an extremely effective moat in deterring would be competitors.<\/p>\n

What is Blue Apron doing about it?
\n<\/strong>Blue Apron\u2019s business model hinges on efficiency gains in its fulfillment centers (see figure 1) [3]. Labor utilization efforts have driven some improvement to margins, but at the cost of labor abuses and PR issues [4][5].<\/p>\n

Figure 1: Blue Apron historical and forecasted COGS and EBITDA (% of Sales) <\/em><\/p>\n

\"\"<\/a><\/p>\n

The management team has shifted its focus to investments in digitization within its fulfillment centers. \u00a0Its short and long-term strategies are effectively the same \u2013 push automation as aggressively and rapidly as possible.\u00a0 In 2Q2017, Blue Apron made a major move towards digitization in a two-pronged effort. First, it opened a new, more automated, distribution center in Linden, NJ, and second, it rolled out new order management systems to 5,000 workers throughout its other warehouses to increase transparency and flexibility [6]. \u00a0Currently, ~50% of their national demand is serviced out of Linden, and Blue Apron has been able to reduce their east coast fulfillment center workforce from ~2,000 to ~800 workers [7].<\/p>\n

While these moves are expected to have long term benefits, they have led to a potentially disastrous immediate situation.\u00a0 The first warning sign was a consistent downtick in their OTIF rate (orders O<\/u>n T<\/u>ime and I<\/u>n F<\/u>ull), which has kicked off a potentially life-threatening death spiral for Blue Apron (see figure 2) [8].<\/p>\n

Figure 2: The Blue Apron death spiral<\/em><\/p>\n

\"\"<\/a><\/p>\n

Blue Apron\u2019s Q3 earnings and revised guidance do not give confidence that the company has figured out how to break this cycle.\u00a0 They have slashed their marketing budget, posted a net subscriber loss <\/em>for the quarter, and don\u2019t forecast a net revenue increase through 2018 (see figure 3) [9][10].\u00a0 These issues have led to potential delays in launching new product and assortment options, and the resignation of Co-Founder and COO Matthew Wadiak [11].<\/p>\n

Figure 3: Blue Apron Revenue and Marketing expectations ($M)
\n\"\"<\/a>
\n<\/em><\/p>\n

So, what should they do now?
\n<\/strong>In retrospect, it is it is easy to diagnose what happened \u2013 Blue Apron bit off more than it could chew with sweeping, system wide changes.\u00a0 A comparison to Amazon illustrates what management got wrong (see figure 4) [12]. Digitization efforts represent a long-term<\/em> company strategy, not short-term <\/em>cost savings, and the company implemented too many radical changes without redundancies. Blue Apron\u2019s management team have backed themselves into a tight corner, particularly with the specter of Amazon\u2019s integration of Whole Foods [13].<\/p>\n

\u00a0<\/strong>Figure 4: Blue Apron and Amazon change in estimated fulfillment costs since IPO (% delta)
\n\"\"<\/a>
\n<\/em><\/p>\n

In the long-term, I believe that Blue Apron needs to be taken off of the public markets in order to operate effectively.\u00a0 Public markets create an excessive amount of short term pressure for the company to realize fulfillment center efficiencies too rapidly, which may have the effect of breaking the company.\u00a0 The company needs a mindset shift from a focus on short term profitability to long term sustainability \u2013 management have already demonstrated that they cannot withstand financial pressures in the manner of Bezos and Amazon. \u00a0Simply put, they need to slow down.<\/p>\n

The short-term prospects for the company are challenging, but there is some light at the end of the tunnel as OTIF rates appear to have hit their nadir [14]. \u00a0They should focus on two areas, which will likely come at the expense of short term profits (feeding in to my long-term recommendation for the company). First, they should delay new product and assortment launches to refocus on improvements to their OTIF rates and double down on investments in training and their employees. Second, once their OTIF rates are back to acceptable levels, they need to ramp up their marketing budget back to 1Q17 levels to regain market share quickly.<\/p>\n

A key question that remains is how Amazon will take advantage of this stumble.\u00a0 They have dipped a toe in the meal kit space, presumably as they have focused on their Whole Foods integration, but this opening may spur further investment.<\/p>\n

 <\/p>\n

Word Count: <\/strong>800<\/p>\n

\u00a0<\/strong><\/p>\n

[1] Knut Alicke, Daniel Rexhausen, and Andreas Seyfert, \u201cSupply Chain 4.0 in Consumer Packaged Goods,\u201d McKinsey & Co., April 2017, https:\/\/www.mckinsey.com\/industries\/consumer-packaged-goods\/our-insights\/supply-chain-4-0-in-consumer-goods<\/a>, accessed November 2017.<\/p>\n

[2] Dale Benton, \u201cSupply Chain 4.0: Adidas and Amazon Re-Write the Rules on Supply Chain Management,\u201d Supply Chain Digital, February 10, 2017, http:\/\/www.supplychaindigital.com\/scm\/supply-chain-40-adidas-and-amazon-re-write-rules-supply-chain-management<\/a>, accessed November 2017.<\/p>\n

[3] Heath Terry, \u201cCreating a Category and the Competition to Go With It; Initiate Buy,\u201d The Goldman Sachs Group, July 24, 2017, page 14, accessed November 2017.<\/p>\n

[4] David Morris, \u201cReport Details Blue Apron\u2019s Violent, Unsafe, High-Pressure Packing Facility,\u201d Fortune.com, October 2, 2016, http:\/\/fortune.com\/2016\/10\/02\/blue-apron-packing-facility\/<\/a>, accessed November 2017.<\/p>\n

[5] Edwin Lopez, \u201cRush to Scale Supply Chain Leads to Warehouse Troubles in CA,\u201d Supply Chain Dive, October 5, 2016, https:\/\/www.supplychaindive.com\/news\/blue-apron-warehouse-mismanagement-ca\/427534\/<\/a>, accessed November 2017.<\/p>\n

[6] Jason Del Ray, \u201cBlue Apron Stuck in Dangerous Cycle that has Nothing to do with Amazon,\u201d recode, August 11, 2017, https:\/\/www.recode.net\/2017\/8\/11\/16127050\/blue-apron-q2-earnings-warehouse-issues-linden-new-jersey-matt-salzberg<\/a>, accessed November 2017.<\/p>\n

[7] Jennifer McKevitt, \u201cBlue Apron Alleviates Supply Chain Angst with Move to Automation,\u201d Supply Chain Dive, August 8, 2017, https:\/\/www.supplychaindive.com\/news\/blue-apron-jersey-city-linden-losses-public-offering\/448800\/<\/a>, accessed November 2017.<\/p>\n

[8] Blue Apron, FQ3 2017 Earnings Call Transcript, page 4, via CapitalIQ, accessed November 2017.<\/p>\n

[9] Heath Terry, \u201cQ3: Growth Slows as Operational Issues Force Marketing Reduction,\u201d The Goldman Sachs Group, November 3, 2017, page 5, accessed November 2017.<\/p>\n

[10] Adam Levy, \u201cBlue Apron\u2019s Failed Execution Just Opened the Door for the Competition,\u201d The Motley Fool, August 15, 2017, https:\/\/www.fool.com\/investing\/2017\/08\/15\/blue-aprons-failed-execution-just-opened-the-door.aspx<\/a>, accessed November 2017.<\/p>\n

[11] Del Ray, \u201cBlue Apron Stuck in Dangerous Cycle that has Nothing to do with Amazon.\u201d<\/p>\n

[12] Amazon, Historical Financial Results, via CapitalIQ, accessed November 2017.<\/p>\n

[13] Levy, \u201cBlue Apron\u2019s Failed Execution Just Opened the Door for the Competition.\u201d<\/p>\n

[14] Blue Apron, FQ3 2017 Earnings Call Transcript, page 4, via CapitalIQ, accessed November 2017.<\/p>\n","protected":false},"excerpt":{"rendered":"

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