Blue Apron Holdings, Inc. Canaccord Genuity 38th Annual Growth Conference August 9, 2018

Transcription

1 Blue Apron Holdings, Inc. Canaccord Genuity 38th Annual Growth Conference August 9, 2018 Welcome to Day 2, of the conference. I m Michael Graham, I m Internet analyst here at Canaccord. Thanks everyone for being here. Really, excited to have Blue Apron here with us. We have Tim Bensley who is Chief Financial Officer, relatively new CFO to Blue Apron. So, thanks for being here Tim. And we have Brad Dickerson, who is a former CFO and now CEO. And, really grateful to you both for coming, so thank you. Thank you. Let's just start out Brad and maybe just set the stage. It s been an eventful amount of time since your IPO. You had some logistics difficulties right when you became public. Talk us through sort of what's being going on at the Company up until now. The big focus for us right now is now that we're getting into the other side of the operational challenges we had last year and we're feeling good about where our margins are, and our efficiency is and we still obviously have room for improvement there. But in a much better place than we were a year ago. Now, we're really focused on building, building a great business going forward around how do we get back to revenue growth and how do we get to EBITDA neutral. EBITDA breakeven in the near term time frame. So, we're really focused as an organization on that in 2019, can we get back to a growth mode and be a EBITDA breakeven at least in 2019.

2 And the focus around that is, how do we do those things that bodes to continue to improve our operational performance which will help get us to EBITDA breakeven. And how do we get back to a growth mode, which will obviously also help going down the bottom line getting back to a growth mode. And the growth mode really the things we're focused on right now is some of the things that while we're focused on operations, we weren't necessarily as focused on things like new products, rolling out new products, product innovation. And also things like just the overall end-to-end experience with the customer, the digital experience, the signing up, and ordering products from us in a regular basis and the experience you have and not just with the product but the digital experience at Blue Apron. So, a lot of focus on those types of things and the real focus there is specifically, how do we use new products, expansion of products, and how do we use a more frictionless experience with the customer in our model to help us and in what's been an obviously an increasingly competitive environment. And, we talked about this in our earnings call last week is that the, good news about our Company, our brand, even though we haven't been focused a lot on product innovation so forth is that our brand still remains very strong in this space. And as we spend marketing dollars, our customers are coming to our site. It's intriguing customers to come to our site, they have heard of our brand. They know of our brand, they are intrigued. Where we're seeing a little bit of challenge is is getting those customers once they come to our site to actually convert to a paying customer. And again we attribute a lot of that to the fact that, with a lot more choice out there in their environment today and in Meal-Kit, not just online but also in physical retail, that we have to have a more expanded product offering. We have to have more variety and more choice to our customers. The experience of just signing up has to evolve and change. So that it's a seamless experience in

3 they being able to shop and see what they're getting into, need to educate them on our process and our products and our service. All those things are really important, we believe as we work our way through them this year in focusing on getting new products out. And we can talk a little bit about what some of those products are. Focus on the digital experience that that should help the conversion rate, again our brand is strong, people are intrigued to coming to our site. We, think those things will help increase conversion rates. Increasing conversion rate obviously just helps the efficiency of marketing going forward, which should help us get back to hopefully a growth mode beginning in And help also get to EBITDA breakeven. So, that's been the big focus on the organization. In addition, to that the one thing that we also been very focused on is an on-demand product. And the belief there is that as we survey customers, who come on board with our products and they some customers that leave, we survey them and get some response from them. Is a big friction point for a lot of customers is the subscription business itself. And managing the subscription business, so although we are flexible subscription, where you can skip one week or two weeks and order the other week whatever. There's a process of managing that. That sometimes is little challenging for some folks and they might get some food piling up in their refrigerator. They might get a surprise box, if they are not managing it. And this is like, okay, this takes a little bit more effort. A lot of our server is also in the way our customer is saying that description business in general is kind of keeping me away from this. It is just too much work and I don't, I have a busy lifestyle. And I m not sure how to fit this into my lifestyle. So this, the whole idea of on-demand is there is as we believe is a vastly large part of the population who wants to shy away from a subscription Meal-Kit business but love the idea of having a great culinary experience in cooking a great meal at home.

4 And this on-demand product we believe gives them the opportunity to access our brand, access our product in a non-subscription, on-demand fashion. And our first entry into this was earlier this year, our relationship with Costco, which we are now selling this on-demand kit in Costco. And also we've talked in our earnings call last week about we're going to test our own same day on-demand in our platform direct-to-consumer online in an East Coast to West Coast city TBD to be named later, sometime in the back half of this year. So, that we believe is starting to access customers that we don't see a lot of cannibalization this. We see more, a core customer who has a consistent ordering pattern that wants multiple meals per week to put in their refrigerator and cook when they want. And we see another customer who wants to access all the great things about our brand our product that wants to do it more on their terms of when they feel like it and where they feel like it. And that's where our focus is right now. So, that s a really great overview. So thanks for that. Couple questions fall out of it. One is have you had to as you shift a little bit more towards product innovation maybe a little bit of a different marketing message, have you had to make any new senior strategic hires to sort of change the mentality of the organization or are you planning on doing that? I mean we've hired some great executive talent in the last few months. Tim was one of them coming on board about three months ago. We hired a new Chief Supply Chain Officer also Alan Blake who started five, six weeks ago. And what Alan brings to the table is taking the great work our teams have ready done and getting our operational efficiency to where it's at and taking it to the next level. A lot of this stuff we have done is a little bit of low-hanging fruit. Now as some of the stuff gets a little bit more strategic and more challenging and Alan brings that experience to be able to do that. So we've got great hiring, we've

5 done we've brought a person into run our retail business Camilla Morais, she came from Kraft Heinz. She's running our kind of on-demand retail product right now. So that's been great too. As we look going forward, the teams are in place from a product innovation perspective, from a culinary perspective. Like the teams are there and these are players, especially in the culinary side have been there for quite a while with our Company. So it's more executing now with efficiencies where they're at executing on getting these products out in the market. Executing on the digital experience side of things, again the engineers, in-house to support, they have been with us for quite a while. The execution of that, we believe will have a positive impact to marketing and that's where our focus is right now. And then the other sort of big picture question might be a tough one to answer, but such a big part of the marketing message from Blue Apron at the IPO was around the cooking experience as opposed to like getting dinner on the table in an efficient way. I guess is that going to change from Blue Apron or is it going to be more of a multifaceted marketing method. Yeah, one of that is as part of the product offering one of the things that we've been a little bit behind in that we're going to you re going to your start to see a lot more from us here in the next few months. These are quicker prep recipes, so a lot of times the Blue Apron is considered to be obviously a great culinary experience but a little bit more effort. The perception out there is as little more effort in our prep times to cook times tend to be a little bit longer. And that s been great for our enthusiast customer who loves that experience of cooking. We do in our house, but I know sometimes it's get little tough.

6 Well here's the deal but sometimes with customers, you know on a Tuesday you might want something quick. And on a Saturday you're more willing to take something a bit longer and more of a experience. But you want the same quality, you want a great meal either way. So, that the great thing about this is taking the same Blue Apron culinary experience, the same quality of food. Everything is the same, it's just can we make it in a way that is a quicker prep recipe because a lot of our customers are asking for that. And competitively also we re seeing a lot more of that too. So you're going to assess, one of things you're going to see the next few months is a bigger portion of our offerings being quick prep 20 to 25 minute recipes. Without taking away from the Blue Apron quality and experience. It is one of the things that you can say. So when we think about the product cadence, we've already got the Costco product out in the marketplace, any early take on how it's doing? But then what should we think about in terms of the timing of some of these things like as most of the innovation that you're talking about, going to be in place by the end of the year, just maybe give us some highlights of how different will the product look say on January 1. I guess the focus. There are two key areas of focus for us in product innovation. One is the core product itself and that is a higher proportion of quicker prep recipes. That's the first thing, you're going to see from us. As we work our way through the back half of the year, there is others things that you're going to start to see more around expanding choice and recipes. So, more recipes to choose from that always starts to it more intriguing to customers, more choice means you can you can meet their tastes and their dietary preferences better in doing that.

7 That s something you'll see as you start to get towards the end of the year and into early next year. A couple of other things, we're working on, I do want to get into too much detail on but the continued evolution of the thought of how an ondemand product could work with Blue Apron and their customers. And so that in evolution of that. And how that could look in physical retail or online. And then also, I think that along that kind of menu expansion, can we start to offer some different dietary preferences to folks also. Again, I think the brand, and the credibility and authority we have in this space enables us to do things like quick prep recipes like dietary preference. All the while reminding customers, like we are the authority in this space. We have the culinary talent, we have the operational capabilities. So, we have high quality standards. We don't talk about our brand or standards enough. And that is another thing you're going to see in the back half of this year, is we're talking about expanding recipes and doing quicker prep. We re going to balance that with the fact, is our quality standards are the highest in our space. And that's another benefit you get from Blue Apron in the years of experience that we ve been doing this. I think part of the driver of the quality of the ingredients is your supplier relationships. And I think, you re really important to most of your suppliers. And you can have a lot of influence and partnership with them about what they're producing and when. Does this change in products accentuate that, does it make it more challenging? Always adding product offerings adds sourcing needs and adds deeper relationships and broader relationships with supply which we are we will do and we are embarking on. The biggest change for this in a lot of the sources we have can help us with expansion of menus and dietary preference. So that's not really

8 an issue. The biggest change is to move to pick up recipes, the big products like prep recipes is doing some of the work for the customer. Chopping. Yes for the time consuming part is right, and so in that, leaning on maybe some co-packing relationships, some suppliers that can do some of that up front. So that when it gets to our fulfillment center, it's more dropping into a box. And that is obviously a add to our customer, because it removes prep time and cook time. And it also is a value add to us because it removes the labor in our fulfillment centers. I would have appreciated that at your IPO analyst did it, when I cut my finger chopping carrots. You did and that requires us bringing new suppliers on-board because the produce maybe coming from the same supplier. We have this great relationship with but they're not going chop and pre-bag it for us and now we got to bring in some a little more of a co-pack relationship with some people as well which we re out developing. And by the way I'm proud, you mentioned Alan Blake coming out about six weeks ago, he's got a vast amount of experience both in internal and co-packs that was great guy to be coming in right now to help us with that. Okay, super that is great. So shift gears little bit and talk about the customer dynamics and you had mentioned a couple times that the top of the funnel looks fairly strong and even without a lot of marketing, it seems like because I know you ve pulled back on marketing just maybe, start out with in your base, like

9 describe the different components of your base. Do you have like a loyal following that hasn t churned in a long-time, what's been going on in sort of the gross ad churn level, and then we'll talk about marketing and in a minute. I think there is in our business, there's the typical retention curve of many people come in. They try the product and it's about fit. Obviously, it's also about quality of product and the good news with Blue Apron is that as people leave it's not about the quality or the quality of the services product it's more about is this fit in my lifestyle, whether it's a dietary preference, whether it's just the time it takes, whether it's subscription, whatever it might be. So from that perspective, the retention curve kind of it drops pretty quickly when it gets to this kind of solid base that you're talking about. These are the folks that are very sticky and they order very frequently on a more consistent basis. So a lot of that is again its more of a lifestyle fit, as long as we are supplying that customer the great service and great product. So the idea of going forward this for us is how do we understand the attributes of that sticky customer who has been with us for a year, two years, three years, orders a lot, a high LTV customer. How do we understand what the attributes are of those customers in the common attributes? And how do we start to focus more of our marketing dollars towards that type of customer for the subscription business to come in and hopefully be sticky and order a lot. How do we now that we have an on-demand choice in an increasingly ondemand choice, in the future whether it's through physical retail partners or whether it's through our online platform or other partners, how do we make sure that we point the customer who's most likely to be that part of the early drop off on the retention curve. And maybe shouldn't be a subscriber, how do we point them to that offering and not spend a lot of money on them at the top of the funnel because those are the ones that are really expensive, right. They come in and they come out.

10 So that's a lot of the focus that Tim and his team has right now is how do we start to really look at that. Let's point that sticky let's get the sticky customers at the top of the funnel with our marketing dollars and let's avoid spending money there with customers are more likely to be an on-demand type customer. Tim Bensley (Chief Financial Officer, Blue Apron): And then I think the other part of that, as a part of it is exactly what Brad said, which is we know what a customer looks like today in our current model and the more we can identify prospective customers that they looks like, we can marketed them as much more efficient. But the second thing is as the universe, you have to go to a bigger and bigger pool of potential customers. The other things that Brad was talking about around the improvement to the product offering, improvement to the overall digital experience, it's going to create a broader pool of sticky customers because the things that would cause them to come in and say, I'm going to drop out of the service. They won t drop out anymore because we picks those things, we ve given the choice, we ve given the dietary kind of choices they want, we ve given the quick prep meals they want. And as importantly we've made a subscription model much more easier to manage through a number of things either flexibility of your ability to switch between meals and various different offerings around a week but also just things like for instance now or in the time between when you have to order and when you get the meals, just things that make it easier for you to go do. So both go after customers it looks like they d be more sticky to begin with and also make more customers sticky because of those changes. Okay, that sounds good. So we've talked a little bit about marketing being heaviest in Q1 in a normal year. And that's probably accentuated even more in a year like this when you're sort of being a little more conservative with your ad

11 spend. It sounds like the key things that need to be in place in order to kind of step up your marketing or blend-in or it seems likes it's all under control. Maybe a little bit more in terms of product development, so talk about sort of the difference in magnitude, generally we should expect to see in terms of advertising and marketing spend as we roll out of this year into the beginning of next year? Yes, I m not going to throw out a specific number of what expect our Q1 media spend to be. But you hit the nail on the head, everything that we're doing right now in terms of the improvements of the model both on the product and on the digital experience and on e-commerce side. In combination with a fact that the first quarter is the best time for acquiring new customers in our category anyway or in our model, people coming off the holidays and it's either, I'm going to be healthier, I m going to cook better meals, I want to sign up for a services company. You just sign up more people in the first quarter. So the first quarter is the time to go fishing with a little bit more on marketing dollars. So as we had in previous years, you can definitely expect that we're going to have a higher marketing spend in Q1 and the other quarters. There's a couple other smaller little time to be your own, we can do that as well. I'm a few weeks you're on back to schools with another time period, what that works but clearly you'll see another step up and in marketing versus our run rate right now. But it's the right time for us to do for all those reasons. We have a reason to basically be out there spending more because we're spending it again I m going to improve product offering, it's the right time of the year to do it. Just and not to mention the fact that we're actually more efficient added now with some learnings that we've had as well. So Q1 seems like the time to lean a little bit more but we leaned in more on Q1 of this year as well. We leaned in a lot more in Q1 of 2017 and that obviously didn't work as well for us. So we're being a lot more deliberate and then a lot more disciplined in how we do it. But yeah, we will definitely step it up in Q1.

12 And focusing on on-demand for a minute, would this be sold through other channels or are strictly through Blue Apron and any retail partners you have? Yeah, so we are actively talking to other retail partners out there in the space. And we are probably being a little bit more deliberate on who we partner with. The list is pretty short of who we'd like to partner with truthfully so brand and brand match is really important to us. We hold our quality standards very near and dear to our heart and we expect something similar from our partners. So it has to be a good match relative to how our partners look at quality also, and that s the great thing with Costco as their standards are very high in the industry also. So we're talking to other partners, we would expect to again have some more relationships, timing of which obviously it's more in their control, they got to fit our type of product into their seasonal planning process to it. It s not just like go put in there tomorrow, they've got to make sure they slotted in the right time, the right place, manage that also. So yeah, from a physical retail perspective expecting more partnerships from us, as a product evolves, also I think is going to give us the ability to do some different things there. In retail which I think could be interesting and beyond just what we're doing today. And the second thing is on the online side of on-demand, but this is going to be something relatively small for us the back half of this year. I think it's more testing to see what is the demand for a cooking product, same day on-demand, surveys show that most people start thinking about what's for dinner tonight between three and five o'clock in the afternoon. And then can we create some demand in that timeframe for folks that says listen, cooking is an option for you when you like the attributes of cooking and you want to have a great experience or need a healthy meal, you can do that. You can choose right

13 now, at this time we are thinking about it and you can have that product at your door when you're eight o'clock. We want to basically see what demand is like in a test environment, we're going to partner with a third-party to deliver. So we're going to test a small geographic market on the East Coast and also on the West Coast and it's more this year like is there good demand there, if there's good demand then I think there is going to the ability to expand that into more cities. So this is like ordered at three o'clock get it by six o clock This is going to be a little bit logistically interesting. I think it's more about for now it's more about is there demand for this. And once we figure out, yes, there is good demand for this, now how the logistics going to work. That's the piece we're going to have to figure out. But I want to see the demands at first and it would be something like that you can order in that time frame where people start thinking about dinner and have it in a couple hours deliver it to you. So you can imagine the geographic scope of this so the test ones going to be a pretty limited but it's going to be interesting to see the demand on it. So maybe just last question, just take a minute and talk about the competitive landscape. Has it changed much since you came public and is it giving more difficult or less difficult to kind of find the right message in the rates or spot in the marketplace? Yeah, I think it's really important for us to take advantage and leverage the assets and the strength that we bring to the table in this space because it has gotten much more competitive. There s direct competitor to us on the online business.

14 There's an announcement pretty much every single week that somebody else is getting into this space in the physical retail, in the recent weeks on this. So I think that's a validation of space, this is a dynamic, it's a big space. And it's very dynamic and it's a validation that this is a place that people want to play. Because of that it's more important than ever that we take advantage of the strength of our brand, the strength of our relationship with our customer, the strength of our culinary team, our products team, putting new products out, leveraging our brand. And now a year later are now starting to leverage our operational capability which is becoming an asset for us now, where a year goes it s a challenge, now it s an asset. All those things line up to where we have a unique proposition in a highly competitive environment, people are trying to figure things out, not only doesn t mean that we can leverage strength of our assets like brand into doing things like our own on-demand. But even more important leveraging those assets and strengths and trying to partner with other folks who are trying to do this also. And that goes back to the brand match, we have strong brand in our space, other people have strong capabilities and things that are complementary what we're trying to do. And the more we can kind of get together and work together. I think the more powerful it can be in our space and then that kind of partnership I think will go a long way to combat a more competitive environment. Okay, well, thanks so much. I really appreciate that. And thanks for coming. Thanks Michael.