Meal-kit company Blue Apron slashes IPO valuation expectations

By Lauren Hirsch and Angela Moon

(Reuters) - Blue Apron Holdings Inc slashed its valuation expectations for its initial public offering by a third on Wednesday, as Amazon.com's $13.7 billion deal to buy Whole Foods Market Inc weighed on prospects for the meal-kit industry.

The move came after potential IPO investors pushed back against the New York-based company's valuation expectations, expressing concerns not just about the impact of Amazon's Whole Foods deal, but also about Blue Apron's costly marketing strategy and lack of profitability, people familiar with the matter said.

Blue Apron is the biggest U.S. meal kit company and the first set to go public. Smaller peers and their venture capital investors were hoping it would pave the way for them to also go public or be acquired at rich valuations.

Grocery delivery startups have attracted increasing investment year-over-year since 2013, totaling $1.4 billion in funding in 2016, according to CB Insights.

"Amazon's deal for Whole Foods earlier this month added to concerns, but Blue Apron's high marketing costs were a negative factor. Snap Inc's IPO earlier this year has shown investors that growth at all costs is a mistake," said Kathleen Smith, principal of Renaissance Capital LLC, a manager of IPO-focused exchange-traded funds.

Snap went public in March and surged in its first day of trading, but shares are now just above their IPO price after declining revenue growth raised questions about whether the Snapchat app owner would ever be profitable.

Blue Apron issued new IPO pricing guidance that implied a valuation of up to $2.08 billion, below its previous $3.2 billion estimate as well as a $2.2 billion valuation in its latest private fundraising round two years ago.

Like other meal-kit companies, Blue Apron has spent heavily on marketing to compete for customers who often switch from one service to another, or cancel their subscriptions altogether.

The company spent roughly 18 percent of its $795.4 million revenue in 2016 on marketing, posting a net loss of $54.9 million. It has also faced steep costs of building out delivery infrastructure for fresh food.

While meal kits have not been a focus for Amazon, it started investing in the sector earlier this year and has launched a partnership with Martha Stewart and Marley Spoon to deliver Stewart-designed meals in New York, San Francisco, Dallas and Philadelphia.

Amazon has not specified its plans for Whole Foods stores, but industry insiders believe they could serve as distribution points for fresh food delivery. Amazon's significant investment in automation is also likely to give it a leg-up in managing costs.

"With Amazon as their potential main competitor, this may make that long-term profit target more difficult than before the (Whole Foods) merger," said Eric Kim, co-founder and managing partner of venture capital firm Goodwater Capital.

Among the meal kit delivery companies that were hoping to follow Blue Apron was Sun Basket, which Reuters reported earlier this year had hired banks to prepare for an IPO.

Green Chef and Home Chef are two other meal kit companies reviewing options, including a sale or fundraise, Reuters has reported.

The challenge of balancing marketing and operational costs with affordable pricing has already claimed victims in the food delivery industry. Food delivery startup Maple announced it was shutting down earlier this year, while SpoonRocket made a similar announcement last year.

Shares in the broader consumer sector have shown signs of weakness in the past month. The S&P index of consumer discretionary companies rose 13 percent over the first five months of 2017, but is down about 2.5 percent since its peak on June 2.

VALUED AT A DISCOUNT TO E-COMMERCE FIRMS

Online sales represented only $12 billion, or 2.2 percent, of the U.S. restaurant market in 2016, but are expected to grow about 22.6 percent annually between 2017 and 2020, Blue Apron has said, citing a Euromonitor study it commissioned.

During an IPO road show that launched last week, the company sought to convince investors it was well positioned to benefit from consumers' growing interest in cooking and where their food comes from.

Following the negative investor feedback, Blue Apron said on Wednesday it expected its IPO to be priced between $10 and $11 per share, compared to its previous $15 to $17 range.

That would cut Blue Apron's valuation from about 2.4 times estimated 2017 revenue to 1.6 times, according to Goodwater Capital. While that would represent a discount to e-commerce companies who on average command 3.1 times 2017 revenue, it would still mark a premium to grocery players, which trade at roughly 0.7 times 2017 revenue, Goodwater said.

Bessemer Venture Partners, Stripes Group and Fidelity are among Blue Apron's investors.

The IPO was scheduled to price later on Wednesday, and Blue Apron shares were expected to begin trading on the New York Stock Exchange on Thursday under the symbol APRN.

Goldman Sachs, Morgan Stanley, Citigroup and Barclays are among the underwriters to the IPO.

(Additional reporting By Aparajita Saxena in Bengaluru)