Blue Apron Heavy Media Raises Questions

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Blue Apron published its S-1 report on June 1st, in advance of its Initial Public Offering, and it makes for interesting reading.   In the first three months of  2017, the company spent $61 million in marketing, which is a heavy outlay considering sales were $245 million for the same period.    The company helpfully breaks out the marketing spend as follows:

  • $34 million – offline media
  • $17 million – online media
  • $9 million – customer referral programs

So the “good news” about this breakout is that most of the marketing spending was going towards building awareness of the Blue Apron brand, as opposed to price discounting through customer referral programs.

But the remaining $51 million is a very heavy offline/online media spend for a brand with sales of $245 million in the same time period.  It is worth asking whether word-of-mouth recommendations will help drive the brand’s future growth, similar to what occurred for Uber.   And how does Blue Apron evaluate the return on investment for that level of media spend, considering that average revenue per customer dropped from $265 in the first three months of 2016 to $236 in the first three months of 2017?

One challenge facing Blue Apron is that consumers’ price sensitivity is greatest for items which they purchase frequently, and let’s face it, people have to eat every day, so this price consciousness is likely higher for food purchases, as opposed to rides from Uber, or apartment rentals through Airbnb.

Additionally, although Blue Apron’s offerings are certainly well curated, it falls short of being a disruptive product.   On a personal note, I recently subscribed to FeedFeed, an appealing website “connecting people who love to cook”, and can use their recipes to guide my future shopping trips for fresh produce at a nearby GreenMarket, which in some ways is a simpler and even more “green” approach than buying from Blue Apron.

 

 

National Geographic’s Surprising (and Disappointing) Journey

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When I showed my daughter the American Airlines map on our flight to her freshman year at Washington University in Saint Louis, and asked her if she could name the states surrounding Missouri, she got pretty mad at me.     I’m sure there was a point in her public school education when she was required to learn the names of the 50 states, and identify them based on their shapes and/or placement in a map, but that was a distant footnote in her 12 years of public schooling.  If she wasn’t able to name all eight contiguous states as she headed off to college, I hardly thought it was some failing on the part of the National Geographic Society.

As a long time subscriber of National Geographic, I have come to count on the magazine to whisk me to places I will never visit in my lifetime, and to dazzle me with landscape and nature photographs the likes of which I will never have the access or talent to take myself.    Fifteen years ago, before going on a rafting trip down the Alsek River, I was able to learn about the section of the Yukon that the river crosses by accessing back issues of National Geographic at the NY Public Library.  Today I would probably do the same research on Flickr, and although I am still a National Geographic subscriber, that is part of National Geographic’s dilemma in this digital age.

All that said, it was upsetting to read earlier this month that 21st Century Fox would be buying 73% of the newly formed National Geographic Properties, to become its majority owner, with National Geographic Society becoming the minority owner  (the two organizations will have 50:50 board representation).  I teach financial literacy, and have shown students it is an easy enough thing to go to Guidestar.org to obtain a not-for-profit organization’s 990 report and read about its financial results.  For example, at the end of 2013, National Geographic Society had $72 million in fixed income investments, $64 million in hedge funds, $58 million in money market funds, and nearly $30 million in real estate investments.

The rationale for the sell-out to Fox was that it would allow the National Geographic Society to build this $200+ million endowment to nearly one billion dollars, and “basically double its investment in an array of science, research and education programs.”   But when it comes to funding geographic literacy, how much funding is enough, and was it really necessary to capitalize National Geographic Properties’ future cash flows in this way, to amass one billion dollars of endowment right now?

What is the opportunity for the National Geographic channel to do more to combat geographic illiteracy?  Last night the offerings on National Geographic Channel alternated between “Drugs, Inc.” and “Underworld, Inc”; not a lot being done to teach our youth about geographic literacy going on there.

And what is the role of our schools, in adopting syllabi that focus sufficiently on geographic literacy, instead of letting it fall between the cracks?    If National Geographic Society has a vision of how to improve geographic literacy education in the U.S., has their CEO Gary Knell walked south on 14th Street and across the Mall to share it with U.S. Secretary of Education Arne Duncan?

I went hiking in Glacier National Park the summer of 1979 with friends, and it rained for six straight days.  The weather cleared for the seventh and final day, for our hike down from Swift Current Pass, and we got a great view of the Grinnell Glacier.  I am returning to Glacier next summer, and will check out some of the same trails and views including a much diminished Grinnell Glacier.   Weather goes through cycles, but the gradual disappearance of the Grinnell Glacier is evidence to me (and many scientists) that planet Earth is warming.

Given Fox’s track record for disputing climate change, which of the National Geographic executives will be brave enough to risk their $400,000+ salary to propose that the magazine write a major piece on climate change once the deal with Fox is consummated at year end?  And will future climate change coverage be scientifically sound and objective?  I wish the National Geographic Society had just raised the 2016 subscription price of National Geographic magazine as needed in light of its declining subscribership, and figured out how to make do with their current $200+ million endowment, and not sold out to Fox.

Crumbs to be Quite a Workout for Lemonis

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Crumbs closure and announced bankruptcy last week raises questions on how it got to this point, and what is attracting Marcus Lemonis and the owners of Dippin Dots to buy the chain, subject to bankruptcy court approval.

 

Crumbs always felt to me like a stock offering in search of a strong business concept.   The sterile retail stores made profligate use of 1,000-1,200 square foot of space per unit to sell primarily sweet baked goods.   Many of their stores are on expensive Manhattan avenue addresses, where Gray’s Papaya manages to get by with just a quarter of that square footage to sell hot dogs and papaya juice, and Korean grocery stores get by with approximately half that space.

 

The expense and high calorie count of a single Crumbs cupcake likely reduces the possibility of bulk purchases, and the shops are sadly lacking in any kind of diverse cross-selling product offerings. Ironically, the Crumbs closest to my home is located next to a Modell’s sporting goods store and an Equinox gym, and around the corner from a yoga studio. A strategic alliance with Starbucks which was formed in August 2012 lasted only 13 months.

 

Crumbs achieved public ownership through the creation of 57th Street General Acquisition Corp, a so-called “blank check” company whose pitch to shareholders was basically “there are plenty of risks, but trust us, we’ve done this before, we know what we’re doing.” And while Crumbs management may have been strong at operations, in fact the brand was too narrow a platform, leaving them exposed to the end of the five-year cupcake craze.

 

All of which leads to the interesting question of why Marcus Lemonis (star of CNBC’s “The Profit”) is jumping in to attempt to snatch the chain from bankruptcy, and where exactly does he see the value which make Crumbs worth the risk?   It is probably more about the chance to acquire a distribution system for his growing portfolio of baked goods and sweets than the marketing allure of the Crumbs brand.     As Lemonis told the “Daily News” on 7/11/14, “we know that in order for this business model to succeed it must have a diverse offering. Our hope is to create America’s sweet and snack shop.”     Buying Crumbs out of bankruptcy will afford Lemonis a platform to do the kind of triage he does so well on “The Profit,” only instead of maximizing the selling potential of a single pie shop/wine store/gym, he now gets to do the exercise for a sixty plus unit sweets chain.   Should be quite a workout.

The Long Wait for Food Safety Modernization

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I was recently a “guest-blogger” for my good colleague John Dunham, founder of the economic consulting firm John Dunham & Associates. The topic I chose was the Food Safety Modernization Act, and the implications and reasons for its delayed implementation. Below is the start of my contribution, for the entire blog posting, please go to John Dunham and Associates – Monthly Manifesto.

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President Obama signed the Food Safety Modernization Act (H.R. 2751) into law on January 4, 2011, but two and half years later is our food any safer? A folksy video posted on the FDA website vividly explained the need for the 2011 bill in these terms:

“The last major update to our food safety laws was way back in 1938, and a lot has changed since then. Our food now often travels more than we do. It arrives from farms and facilities across town or around the world, on trains, ships and trucks. At the same time, pathogens are changing, adapting, and sometimes becoming stronger and harder to defeat. At any point from farm to table, pathogens such as Salmonella, E. Coli or Listeria can catch a ride, and spread to virtually any food. And people are living longer, and with chronic disease, making them more susceptible to food-borne illness. For these reasons, we need a Food Safety system for the Twenty-First Century.”

The Food Safety Modernization Act (FSMA) of 2011 was intended to shift the emphasis from reaction to prevention of food safety issues, by requiring mandatory preventive controls for food facilities, mandatory produce safety standards, and protections against the importation of unsafe food products. Further, the FSMA gave the U.S. Food & Drug Administration (FDA) stronger tools in terms of mandated inspection frequency, records access, accreditation of testing laboratories, and when all else fails, authority to mandate recalls of unsafe product. These were all well-conceived policy changes, driven by the highly-regarded FDA head, Dr. Margaret Hamburg. Unfortunately, the FDA has been dragging its heels in creating and implementing the specific new rules needed to gain the desired benefits of the new law, so our food safety has actually not been improved – even 30 months after the law was passed.

Five Strategies that Influence Food Business Valuations

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What are the strategies employed by mid-sized food companies that help improve their valuation?   That is the question I was recently asked to answer by AxialMarket, which is “pioneering how private companies connect with capital.”

My interview served as the catalyst for a blog posting addressing the importance of these strategies:  1.  Product Differentiation, 2. Purchasing Capabilities, 3. Cost Reduction, 4. Channel Management, and 5. International Presence.

To see the entire blog post on the AxialMarket site, click here: “Five Strategies that Boost Agri-Business Valuation.”

And thanks again to Cody Boyte, Marketing Director at AxialMarket, for both the idea and the interview which served as the springboard for this blog posting.