Blue Apron shares make bland debut

By Aparajita Saxena and Angela Moon

(Reuters) - Blue Apron Holdings Inc's (:APRN.N) shares were up about 1 percent in their market debut on Thursday following the meal-kit delivery company's watered down IPO in the shadow of Amazon.com's (NasdaqGS:AMZN - News) deal to buy Whole Foods Market (NasdaqGS:WFM - News).

Blue Apron's IPO, the first for a U.S. meal-kit company, was expected to create a buzz around smaller peers, which are either looking to go public or be acquired at rich valuations.

However, Amazon's $13.7 billion deal to buy Whole Foods has left potential investors worried about the prospects of the meal-kit industry.

Industry insiders say that buying Whole Foods would bolster Amazon's distribution system for food delivery in the form of brick-and-mortar grocery stores.

There are also concerns about Blue Apron's lack of profitability and marketing costs.

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

Blue Apron 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.

The challenge of balancing marketing and operational costs with affordable pricing has already claimed victims in the industry.

Startup Maple said it was shutting down earlier this year, while SpoonRocket made a similar announcement last year.

Blue Apron's 30-million share offering was priced at $10 per share late on Wednesday, after the company slashed its valuation expectations by a third.

Some analysts say even after the valuation cut, Blue Apron's stock is over-valued considering the immense pressure on its ability to turn a profit and retain customers.

According to the company's IPO filing, 90 percent of the meal-kit delivery service's customers abandon the service within a year of their first purchase.

The company is only making about 5 percent of profit margin per customer even before considering other fixed costs like R&D, spending around $175 to acquire a customer that yields only $190 of gross profit on $600 of revenue, consumer research firm ValuePenguin said.

"Assuming this trend continues, Blue Apron will have to acquire more than 4 million new customers, which is about 3 percent of American households, every year, just to break even," said DJ Kang, senior vice president at ValuePenguin.

Kang also said Matthew Salzberg, the founder and chief executive of Blue Apron, has been selling his shares since 2014 even as his sale prices have been declining.

Salzberg sold his shares at $16.66 per share in 2014, and again in October 2015 at $13.33 per share, according to the filing.

The stock touched a high of $11 momentarily, giving the company a market capitalization of about $2 billion, before paring gains to trade at $10.12.

(Reporting by Aparajita Saxena in Bengaluru and Angela Moon in New York; Writing by Sweta Singh; Editing by Anil D'Silva and Shounak Dasgupta)