(Bloomberg) — Each month, Blue Apron delivers about 8 million meal kits to Americans who like to cook but would rather not waste time shopping or searching for recipes. Blue Apron boxes include cooking instructions for meals and suggested wine parings—shiitake mushroom burgers with a Santa Barbara Highlands Vineyard Grenache, for example. The raw ingredients, which include such exotica as romanesco cauliflower and fairy tale eggplants, are sourced from family farms and artisans. Then they’re sorted, chopped and packaged in giant fulfillment centers and delivered to homes around the country.
It’s an enormously complicated operation, and Blue Apron has built sophisticated software to manage the supply chain and wring out costs typically borne by the food industry. The company has been signing up subscribers at an impressive clip and last year generated between $750 million and $1 billion in revenue, according to a person familiar with its finances. That far exceeds the $300- to $400-million goal for 2016 that was pitched to investors a few years back, says this person, who requested anonymity to discuss a private matter. Backed by Bessemer Venture Partners, Fidelity Investments and other venture firms, Blue Apron is the largest company of its kind, with more subscribers than rivals like HelloFresh and Plated. Meanwhile, dozens of other food-related startups have disappeared or are struggling.
In the third quarter of last year, the New York startup edged into the black, according to the person. The milestone only accounted for recurring costs including marketing, but the person says it’s a sign the company can make money in the future. Blue Apron is still investing heavily on new facilities and spent more than $100 million last year, the person says. High costs to acquire customers prompted the company to postpone an initial public offering in December, although executives are pushing ahead with an IPO this year. Blue Apron declined to comment on its finances, but in an interview last fall the company said it makes money on each box and its direct-to-consumer structure generates fatter margins than traditional grocers.
Attracting and keeping customers is Blue Apron’s foremost challenge. It’s not easy persuading people to pay $240 to $560 a month for a service that saves time shopping when there are still faster, cheaper ways to get fed. Plus, to keep existing customers happy, Blue Apron must continually improve its offerings with new recipes and more customization. The bigger Blue Apron gets, the harder it becomes to maintain quality, and the more things can go wrong. Subscribers are always one or two bad experiences—a late arrival, the wrong food, wilted parsley—from canceling.
“If we’re even a day late, that’s a really terrible experience for the customer to not be able to cook dinner that night,” says Chief Technology Officer Ilia Papas. “If you’re buying a toothbrush, and it shows up a day late, you’re not going to stop your relationship with that business. But with us, trust is a big part of it.”
Blue Apron was decidedly low-tech when it got started in a warehouse district of Long Island City, Queens, in August of 2012. The three founders, Matt Salzberg, Matt Wadiak and Papas, crowded into a 150-square-foot cooler in a rented commercial kitchen and packed the first 30 boxes themselves from bins of fresh meat and vegetables. They made sure to double-check every box; getting it right was key if the new, unproven startup was to build trust with subscribers. Blue Apron quickly generated positive feedback, and orders started flowing in. At the time, customers received identical boxes with two portions per recipe.
For the first two years, Blue Apron kept track of progress with whiteboards; managers took photos of the boards at the end of a shift and emailed them around. If someone rubbed up against a board by accident, the information was lost and they’d have no clue how many ingredients had been packed and whether they were on schedule. Everything was done manually and with pen and paper. For a while, a leftover shipping label was one of the few indications that something had gone wrong.
Today Blue Apron is a high-tech operation with more than 4,500 employees in three fulfillment centers around the U.S. Located in a warehouse district in Jersey City, southwest of Manhattan, the biggest facility is mostly refrigerated to a chilly 37 or so degrees and about the size of a Wal-Mart supercenter. Work goes on around the clock in three shifts; up to 500 or so men and women work any given period, garbed in blue latex gloves, smocks and heavy coats. When they arrive for their eight-hour shifts they wade through a trough filled with powdered disinfectant, then take up positions around the facility, which is loud enough to make conversation difficult. A large screen flashes green and red to show which lines are on schedule and which have fallen behind. There is an air of controlled chaos.
Managers are like quarterbacks, directing the day’s game plan based on the number and types of boxes needed and their deadlines, presenting to the workers often only half an hour before the work has to start, according to a former employee who worked at Blue Apron until late last year. While Blue Apron can pretty accurately predict demand even 18 weeks away and start planning everything up to a year in advance, it’s still a complicated process because every week brings new recipes and ingredients. The fresh meat and produce arrive on pallets at the rear entrance, are checked for quality before being separated, bagged and tucked into boxes. By then, the ingredients have gone through at least two stations to be prettied up and packed and traveled through the fulfillment center in almost a u-shaped arc, exiting through the same door to be loaded onto trucks and sent out for delivery.
Blue Apron long ago replaced the whiteboard with software that guides workers every step of the way. Workers use computers throughout the facility to find out where bulk and prepped ingredients are located. Apple iPads tell employees working on lines how much of a given ingredient goes into each portion and how many portions they must complete per minute to stay on schedule. Those running low on ingredients can in a few taps notify a runner to bring over a new pallet without having to interrupt the process.
Not so long ago, switching a line to pack a different kind of box could take hours, leaving workers standing around. “There’s no way we could have reached the scale that we’re at without the custom software,” CTO Papas says. “We’ve been going through everything that’s a manual process and seeing if we can turn it into software.”
Blue Apron is justifiably proud of the technology it has built. But the operation is mostly human-powered. People make mistakes, get tired and fall behind. Packing produce into bags or prepped ingredients into boxes require speed and concentration to keep the line moving at the right pace and maintaining accuracy. Sometimes workers neglect to use portable scanners to check ingredients in and out, meaning the database doesn’t accurately reflect how much food is left in inventory, says another former employee who also left the company last year.
A recipe in August for Neapolitan-style stewed vegetables required about a quarter pound of “summer beans,” equally divided between green and purple ones. Employees had to complete four bags of beans per minute. One person manned each line, grabbing a few of each bean type from two piles and then stuffing them into bags held open on a moving conveyor system resembling a clothes line. A few stations over, another person in an identical set-up was simultaneously packing sprigs of parsley. Put in too much and the ingredients will run out faster than anticipated. Ditto when workers prettying up veggies trim off too much.
The work is grueling; one woman was clocked prepping a record 33,333 ingredient portions in one shift (she was rewarded with a party). Workers spend much of their shifts standing in the cold doing the same task over and over, with at least two 30-minute breaks. The positions pay above minimum wage—about $11 to $13.50 an hour depending on the facility’s location.
Former employees say there is more chaos to the operation than the perfectly packaged meal kit would suggest. Turnover is high, and workers often don’t show up for a shifts or leave early, infractions that often went unpunished because replacements were hard to find; sometimes vegetables don’t pass muster with the quality assurance team, who may reject an entire shipment, or shipments yielded fewer portions than expected, sending the procurement team scrambling to find replacements. The company eats the extra costs, which sometimes includes paying shipping premiums to deliver meals at the last minute.
A Blue Apron spokeswoman says the company has processes to respond to human error and “takes attendance very seriously and handles these issues fairly.” She says these kinds of problems are normal for any large manufacturing operation. Blue Apron’s financial planning accounts for unexpected events in logistics, and the company prioritizes customer satisfaction when issues arise, the spokeswoman says.
Blue Apron claims a 94 to 96 percent customer approval rate. But it’s hard to predict what will bother subscribers. Those summer beans? Some customers couldn’t understand why they were purple, having never seen legumes that color before. Others thought the beans had spoiled. Customer service reps explained the purple beans were intentional and the freshest option. But enough subscribers were confused that Blue Apron re-labeled the bags “green and purple beans” for subsequent shipments.
Leslie Burns, a 52-year-old community volunteer from Boulder, Colorado, tried Blue Apron after a friend recommended the service as a way to try new recipes. She lasted three months. The meals often didn’t resemble the photos, and she found the portions too small. What pushed her over the edge? All the boxes and bags required to keep the food fresh and unblemished. Hers is a sentiment shared by many current and former customers. “I just felt so horrible at the end of the week, taking my stuff down to the curb,” Burns says. “It felt so decadent, a physical reminder of what I was doing. It just seemed not necessary.”
Almost five years after Blue Apron started in that Queens kitchen, it still has to work hard persuading people that make-it-yourself meal kits are worth paying for. Hence all the marketing entreaties and one-month-free offers showing up in mailboxes around the country. And the commercials that air regularly on the Cooking Channel, Food Network and TBS with the tagline: “Food is better when you start from scratch.”
Still, Blue Apron continues to grow. It’s about to open a fourth fulfillment center in New Jersey—more than double the size of the first facility—and has plans for another one in California next year. The company recently started a beta program giving customers more recipe choices and more control over frequency. Even with dozens of meal-kit companies vying for attention and new ones popping up all the time, it’s the unquestioned leader. The company has shown investors it has a path to sustainable profit. And if Blue Apron pulls off an IPO this year, it will become the most high-profile New York startup to test the public market since Etsy’s debut three years ago.
©2017 Bloomberg L.P.