Blue Apron Hasn't Stocked a Better Grocery Shelf Yet

(Bloomberg Gadfly) -- Blue Apron Holdings, the on-demand meal delivery start-up, seems to be struggling with the same real-world problem that has long tormented the grocery business: Rotten food.

On Thursday, Blue Apron filed an S-1, indicating it plans to go public. In the IPO filing, the company said that it had "reimagined" the traditional grocery business model and that it competes not only with supermarkets but restaurants and takeout joints. Conventional grocery stores, Blue Apron said in the filing, have "high inventory counts" and "confront considerable waste." What's more, they seem to face those same problems even when they sell online.

Blue Apron, on the other hand, contends it uses big data to determine customers' tastes and employs a "highly collaborative and multidisciplinary team," including agricultural scientists, software engineers, operations specialists, "customer experience representatives," world-class chefs and photographers. It has proprietary technology, it said, that integrates "collaborative crop management" with labor scheduling and recipe design. There is delivery route optimization, of course. All this seems to imply that Blue Apron's subscription offering -- delivering only the food customers need for a specific meal -- is not only what customers want but a better business mousetrap.

Nonetheless, it appears getting scientists, photographers and chefs in the same conference room, or more likely Slack room, hasn't solved the inventory problem. While Blue Apron's sales have more than doubled in the past 15 months, the food piling up in its warehouses has nearly tripled. In fact, as Blue Apron has grown, the company's inventory-management problem seems to have become worse, not better.

In the first quarter of 2017, Blue Apron's $244 million in sales where nearly a quarter of those of Chipotle Mexican Grill Inc., which has had its own inventory-management issues. Yet Blue Apron had nearly three times as much inventory as Chipotle. At the end of the first quarter, Blue Apron had nearly $50 million of inventory, or 20 percent of its sales that quarter. The company said 85 percent of its inventory was food. 

Even compared with its more direct competitors, Blue Apron doesn't appear to be all that much better at managing its inventory. Whole Foods, for instance, had $3.7 billion in sales in its most recent quarter, and $508 million in inventory, or 14 percent of quarterly sales. Supermarket chain Kroger did have a higher ratio than Blue Apron, at 24 percent of quarterly sales. But at 130 times revenue -- Kroger had $115 billion in sales in the past year compared with Blue Apron's $868 million -- you would expect the former to have a considerably bigger inventory issue.

Inventory is a problem in any business. Clothes go out of style and season. But the freshness problem of the food business makes inventory management even more crucial. Blue Apron's IPO prospectus, which includes the word inventory 38 times, suggests the company gets this, or at least that management gets that convincing others it's good at it is important to attracting investors. Blue Apron's prospectus puffery, however, may indicate where the company still needs improvement.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.