Blue Apron Holdings, Inc. Stifel 2018 Cross Sector Insight Conference June 12, 2018

Transcription

1 Blue Apron Holdings, Inc. Stifel 2018 Cross Sector Insight Conference June 12, 2018 So, we're good to go. Great. Thanks for coming. I am Scott Devitt, one of Stifel s Internet analysts and very happy to have Ilia Papas Co-founder and CTO of Blue Apron with us today. Many of you likely heard of Ilia on the Company's year-end earnings call where he provided insight on how Blue Apron s technology, capabilities and advancing ongoing operational improvement throughout its supply chain helping to evolve the customer product experience. Before starting Blue Apron, Ilia was Director and Technical Architect at Optaros, a company that provides technology based digital commerce solutions and a Software Engineer at Molecular a digital marketing agency. Blue Apron was one of the pioneers of the dynamic meal kit category that is continuing to disrupt how consumers think about food retail. The Company fulfilled over 15 million orders and served hundreds of thousands of customers across the U.S. last year. And most recently launched its multi-channel strategy starting with its retail partnership with Costco. So Ilia thanks a lot for joining us. Thank you very much, Scott. So the first question for you is, there has been, certainly been an evolution in the public markets and the Company ran into some growth challenges and is now kind of coming up out of it. So, just to kind of frame where the business is today, how's Blue Apron evolved over time? How do you think about the market opportunity today, to the extent that it's the same or different as you once did?

2 And what do you think differentiates Blue Apron from the competitors in the space. Yes. So, I think we're still very much in the early innings of this business. So, we started the business a little over five years ago in August of And for the first I d say four plus years of the business, it was all about just scaling up to meet demand but focusing on having a very limited skew set, our first offering for customers was just three recipes in Manhattan, once a week. And since then, we ve now developed and expanded to have 12 to 13 recipes that we offer customers, to couple's and family plan, and launched a wine offering. A lot of it has just been about kind of building up this category, establishing and educating customers about what it is. And now, I think we're shifting to a place where we've created this great brand. We have over 80% aided awareness. If you stop someone in the street and ask them if they ve heard of Blue Apron, they should say yes. However, we have made some developments to expand our product offering but historically not that much. And so, a lot of what we focused on in the past is having customers come and meet us on our terms. Coming to our website, kind of deciding four to five days in advance what they want to cook, what they want to eat and now finding that there's a lot more that we can be offering customers and meeting customers on their terms. So we've launched this new Costco retail product, a pilot that we ve been running on the West Coast, and now it's come to the East Coast. And we're finding that has been received incredibly well by customers. It's early days, I think we re only about four or five weeks into it. However, there are kind of people who are familiar with their brand and want to interact with us. However, for whatever reason I had longed to go online, the typical service offering doesn't kind of meet their needs. And so, there are still a lot of people out there who want to interact with the business and or products and this new retail offering even though it's only kind of like one product at the moment, has been incredibly promising. So, the focus on the business now, is there's a focus on innovation, evolution, developing more products that fit different life tastes, different needs, different

3 dietary preferences. So, that's something that we're finding a customer has been asking a lot for and now that we're starting deliver those products, they are being received incredibly well. Okay, and I want to drill more into a few of those areas. But just to kind of define your role at the Company as a CTO. What do you oversee in the business and secondly how do you think of Blue Apron as a technology company in terms of why is it a technology company versus something else, that you expect you do think of it though. Sure, so I'm responsible for our current software engineering teams, information technology analytics and digital product teams. And so that, well when we think about technology in the company, it is kind of split into two arms. There's our operational side of our supply chain software. A lot of that is developed in house because when we started the business, we were really at the intersection of a kind of grocery store, a e-commerce fulfillment engine and a manufacturing practice. I think a lot of people, don't appreciate the manufacturing component that kind of goes into us taking in these raw ingredients about 80 to 120 every week. Turning those into prep ingredients that ultimately are packed into boxes and shipped out to customers. So there wasn t a lot of software at the time that kind of had the [marriage] of all three of those. And so, we had to build a lot of our own software in-house. So that's a big component of that. The other side is on the e-commerce side, we started the business in 2012, there wasn t a lot subscription, weekly e-commerce software where people could go online, pick a handful of products that are automatically delivered to them every week. And so, that's something that we've built in-house and kind of developed into this whole digital suite of mobile apps and other online offerings. And so, those teams focus on developing software that allows us to kind of leverage data both on the operational side, to get more efficient as well as on the customer side. And so, because we've been around for almost six years now we have a lot of behavioral data on what recipes customers like and don't like. And we've been able to use that to kind of have a full circle of informing the recipe development process. We ve actually developed custom software for the culinary team if

4 they're developing recipes. They can get real time feedback from the ingredients that they're using and the complexity that might be introducing downstream whether it's from a supply chain and cost standpoint kind of sourcing with our farm and food to their partners as well as the labor component. So, if you're using something like a cherry tomato. It's taking into account the type of equipment that's going to be going into in the fulfillment centers like a tray sealer, take a bunch of trays of tomatoes and seals them puts a label on top that has a different labor and packaging cost than say in one of our other fulfillment centers. So, it isn t quite as automated but they are going to be doing that on table site. And, so as the culinary team is developing those recipes they can see real-time projected labor and food and packaging costs and use that to balance it. And on try to frame this question as concisely as possible. But the Company, really pioneered the category, right? And you had a initially a very defined offering that resonated with the portion of the U.S. population. You went public and coincident to that you began thinking about ways to kind of diversify the offering with the transition in terms of the fulfillment capabilities that allows you to broaden the offering. Now, you're beginning to think about even furthering that in terms of putting it into physical stores with the Costco arrangement and potentially more, as this has been going on you're like this pioneer and people are aiming the arrow on your back. There's been M&A, retailer isn't picking off on smaller private companies, and so the question in this, which gets to some of these other questions that we're talking about, is how does the management team think about this Company as a company, as a standalone company versus the way that some of the groceries, that are maybe participating in M&A maybe think of it as a product feature component of their overall experience. If you can kind of frame that in terms of how the company thinks about it, because it does seem interesting in terms of you going in there a standalone direction and the industry kind of coming around you, trying to build capabilities that are competitive. Sure, I mean for one it's being incredible just to see the validation of the category and the product offering that these larger grocers and other businesses are kind of taking notice realizing that this is something that they needed as part of their portfolio.

5 And from our standpoint, we're looking to kind of develop a brand that has a full suite of products. And one thing that we have that we don't see a lot of other companies doing is that we've built this. I think if you look back in 2017, we did spend a lot of CapEx building out this Linden, New Jersey automated fulfillment center, a lot of that is behind us now. We don't have any significant CapEx investments for the foreseeable future because we've built out this capability that gives us a pretty impressive cost structure. Some of your team came to see our fulfillment center recently. And so we want to leverage that infrastructure to be able to kind of develop products cost efficiently that we can sell across a variety of channels. It is all about becoming a multi-channel offering. And so for us, our strategy is certainly to build a large standalone company as possible. And to leverage the brand equity that we've spent so much time building. And customers tell us so much that they want to buy more things from us and finding more ways to reach those customers. Whether it's across a brick and mortar or finding either ways to evolve the product offering online with a, we re talking about on demand products. We have this new kind of like brand activation campaigns we re running this summer, where we lost a pop-up store in New York city where people just kind of come in pick a kit and go. As well as different events that we re kind of rolling through throughout the country. We re going to be in LA and Seattle and San Francisco. And so on that topic and weaving back in Costco and the broader strategy. Anecdotally, speaking but thinking through the product offering over time, it initially was somewhat defined in terms you take the product into home and then you had to figure out how to work it into your daily life with the direction that you're going now, thinking about busy families and things like that. The direction that you're going adds more reduces friction really in terms of who can use the product and when they can use the product. How does that, how significant is the store initiative in terms of how broadly you think that becomes as a strategy to the extent that they re properly articulating and in terms of being something that can reduce friction in terms of the used case of the customers and then secondly, is how, if at all how does that alter, change,

6 impact the process of packaging the actual process that you're doing at that fulfillment centers in terms of putting the product into the market. On the kind of pop-up store front, and these brand activations that we're doing it's, it's really a interesting two way street, right? Because we're giving customers a way to experience our product in a more kind of hands on tangible way. It is also a great way for us to educate, I ll just talked sometime earlier about one of the biggest challenges that we face as a company is that when we launch new things because we were that first mover. A lot of people in their first touch point with the brand will establish their perspective of what we are and what our product offering is. And so we had people coming into this pop-up store and even though we've had a wine offering for over two and a half years they say I don't know you had wine or I didn't know that you could choose your recipes because of limitations that we had in the earlier days of products that we didn t have. So, it's really great to be able to educate customers about everything that we offer. The same thing as we re rolling out these faster recipes and to your point different people are looking for different ways to fit this into their lifestyle. So sometimes I might want to just it on the table very quickly and so we have a have a whole suite of recipes that are fit specifically dietary needs. We launched a whole thirty campaign that was very successful at the beginning of the year. We're going to be bring that back. So finding, ways to kind of tell customers what we're all about and all the new things that we've been developing and working on but also it's a great way to hear from customers kind of what they're looking for. Because we serve a customers, our customer service team is talking to people every day, but having people kind of walk-in off the street who are prospective customers and being able to kind of react in real-time and have a dialogue with them. We re learning a lot of that. So, I think less of a distribution channel, like setting up stores all around the nation was more about an opportunity to seize that as a branding tool to kind of educate people and also hear more about what people are looking for.

7 Okay, and then at a point I ll pause at a point and to the extent we have questions just document and then raise your hand, hopefully maybe at the five minute mark-ish. But drilling further into that and correct me where the logic is flawed. But as you diversify the product offering as well it does seem that it has an impact on the way that the fulfillment process works and so the shipping these boxes to the home and in some instances you are putting them into the pop-up shops or sending them to Costco in ways that they are prepared, slightly differently at the point where the customer pick them up. So, can you talk about like how much of the modifications that you made of fulfillment centers were in preparation for this, how much further has to go and as it relates to the three centers I think we have in place now, how much capacity do you have to kind of execute on the new strategy that you have you have as company. So, we have three fulfillment centers in California, Texas and New Jersey and a lot of the CapEx that we spent last year was in preparation for a more diversified product offering. We're able to launch this Costco pilot incredibly quickly because we had a lot of that in place already. So, there are different food safety audits and standards that need to be taken care of to work with Costco. We re able to pass those audits very quickly because our centers are already FDA regulated and so there are only a few additional steps that need to be taken. However, when you think about the logistics of going direct to consumer, we've built a pretty flexible this is part of the reason why we faced challenges last year with this New Jersey center. So, this has this one of the most complicated pieces of equipment is this sort of that will take products coming off lines and assort them into multiple outbound channels, the fulfillment centers. So we have 20 to 30 different types of trucks that will dispatch from our New Jersey fulfillment centre and that's how we're able to reach over 99% of the country from those three centers is that we have all the truck going from New Jersey to Chicago or down to Florida in a refrigerated container. And so we're able to leverage that same exact infrastructure for the more or like point to point distribution hubs, okay, the Costco so we ll dispatch, we started this pilot on the West Coast in our Richmond, California fulfillment center, so we ll able to dispatch to the Costco Depot and then we ll fan out to their stores from

8 there. So we have quite a bit of capacity in the network because all the investment that we made last year. And so the steps that we've been taking that s been adding the capability to each of our fulfillment center starting in California and then move on to Texas There's been a capacity, I don't know at least maybe if you know or Brad, you shared or otherwise in terms of capacity utilization of where the company is now in terms of like how much revenue you could output that you could do before you're at full capacity with the centers that you have in place now? <<Ilia Papas, Co-founder and Chief Technology Officer>> Yeah, I mean we ve done those analyses in the past and at our current levels we have pretty ample headroom to accommodate us for the years to come. Okay, it s a bit early but not specifically in terms of how you think about it. Being first in the market but with a lot of competition that's followed and in some cases either found parents or in the case of like how a fresh grown organically on their own and may penetration in the market like how do you think about the competitive landscape broadly and where Blue Apron sets and what your advantages are now at this point with the way that the market looks from the outside just in terms of us seeing the consolidation, what grocers own, what opportunities the things that Whole Foods doing and also how a fresh s recent success in the U.S. market? Yeah, I mean, we certainly pay attention to the competitive market. While maintaining the perspective that online grocery is still discounted like a microscopic fraction of the total $800 billion grocery market. And then also we look at the $500 billion or so restaurant market as well where we're taking some share of wallet. And I think online grocery penetration is something like $10 billion. There's still a lot of ways to go there. And so we don't necessarily see it as an outsource standpoint but certainly when we pullback our marketing towards the end of last year, when we were waiting to kind of get to stability in our London fulfillment center, which we reset at the end of last year. We certainly saw a little bit of a shift in the dynamic and so we ve

9 resumed marketing at the beginning of this year, we have turned the floodgates on to bring customers back into the business at the rates that we are more comfortable with. But it's not something that we see a ton of as far as hearing about competition. So I think we still have the strength in the brand that we've created as well as I was referencing before that manufacturing automation all that CapEx, we tend to spend last year is something that we continue to see a strategic advantage from a cost standpoint, something that we can continue to leverage versus competition as far as we know hasn't made similar investment. Is the company strategically open to acquiring things into its family or is it organic, strategically do you think about as now the company has the legs back under it and has a vision and a strategy that it can execute against. Do you think that inorganic growth is part of it in terms of that you can be an acquirer of some of the businesses over time? I think anything that can certainly help us serve customers better, I mean our focus is on how do we give customers what they want and meet them on their terms and if there was a partnership or some sort of arrangement that could help us do that better if the opportunity present itself, we would certainly be able to do that. Okay, the pop-up store which is kind of neat, explain that in practice like for example, going in New York City like what you do, you walk where is it, what you do you walk up, you d buy the thing how much does it cost, what is the actual process of these pop-up stores? Yes. So we were fortunate enough to actually find a retail space on a 23rd Street between 5th and 6th, which is only a few doors down from corporate offices. So that made it pretty easy to get down there and set up and keep tabs on it. A woman named Michelle Chiu, is our VP of the brand activation set this up on a incredibly short time. And I think in a couple of months, she was able to set this up to a quite a beautiful kind of makes your retail space a residential kind of kitchen.

10 So we booked it, I think through mid-july and so every day there are different events going on, there are cooking classes. I think we've just sold out in the first few weeks of all the slots for people who kind of come in and do these activations. But if you're walking in off the street, there are different areas of the store that are set up with, you can see our wide offering a lot of sample is there as well as we have this new dinner party kit that customers have asked for wherever they want to throw a dinner party but they don't know how to plan it or they don't want to go through getting ingredients. Now we're running a small pilot in the northeast where you can go on and buy a steak dinner, family dinner to kind of cook for six guests that are coming over and so there's samples of that as well as descriptions of kind of all the product offering as well as cookbook and highlighting the recent partnership that we did with Chrissy Teigen, who also has a cookbook. And we're setting up some of the recipes right now. And there's a like an ice cream sundae station and Apron station. So o if you're a loyal customer or if you re buying sort of promotion you can get kind of like Apron to bring home. I ve got one more somewhat numbers related and to the extent, we have questions after that, just raise your hand and I don't want to get you in trouble with Brad or for Louise. But so answer as you see fit but I think the company's goal has been to achieve double-digit revenue growth in breakeven adjusted EBITDA in And so you talked about some of the underlying drivers how do you think about if you can kind of do some re-level build up of kind of how the company gets to that point in And does it come from the existing customer base buying more, gaining more wallet share, does it come from new customers and re-ramping sales and marketing and beginning to bring customers back into the funnel or some mix of the two? I would say yes to everything really it s we need to develop more products that are better fit for customers. So we have a lot of things that are going to be coming out very shortly in the coming months. They're going to help serve our existing customer base better as well as new customers that are coming into business. So both expansion of our core product offering, continue to roll out the retail offering, continue to come up with new products, that just fit different relocations in customers life. So we have dinner and we talked about the dinner parties,

11 talking about other things that customers have been asking us for years. And so being able to kind of get the momentum to start delivering these things and get the fulfillment capabilities to able to handle that simply that s very exciting. So that is certainly part of the strategy to drive the growth in 2019 as well as this automated cost structure I ve been referencing, not just the automation but also the planning capabilities that we've been developing in this organization. So kind of those tools I was referencing earlier about the culinary team having insight into the downstream cost effect in the menu as they are planning them, months in advance of the recipes actually getting to customers doorsteps. We are getting just end to end much more intelligent about the way that we both planned menus from understanding of what customers want as well as managing our cost throughout the entire supply chain. So I think that automation capability coupled with our strong supply chain partnerships and our ability to plan effectively and take waste out of the equation is going to drive a lot of the cost efficiency that we expect to see towards the end of the year into 2019.