The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
NEW YORK, United States — For his wedding anniversary in May, Ari Berkowicz, a Chicago-based nonprofit professional, abandoned the fancy dinner he typically splurges on and instead opted to buy his wife an annual subscription to Beauty Pie, a box of "clean" makeup and skincare products delivered on a monthly basis.
Berkowicz's wife, Zahava, had mentioned Beauty Pie after listening to a podcast featuring its founder, Marcia Kilgore. Berkowicz thought Zahava, an acupuncturist and wellness influencer, would appreciate receiving an assortment of new beauty goodies on the regular. But he also noted that the gift was very of-the-moment.
“This was mostly about convenience because I was not going to a store to buy her anything,” he said. “She’s not going to stores any time soon either, because of Covid, and so a subscription that will keep sending stuff to our homes is the best option now.” He also, of course, couldn't take her to that fancy dinner given the pandemic-related restrictions on restaurant dining.
Since the start of Covid-19 in March, the number of Beauty Pie subscribers has doubled. (Membership costs are tiered: subscribers can pay $10, $20 or $30 a month, or $99 a year.) The number of new members has increased, on average, by 300 percent each week since March. Other subscription box companies have experienced a similar increase in demand. Sales at Ipsy, the beauty box founded by YouTube influencer Michelle Phan that costs around $12 a month, jumped 60 percent in both April and May from a month earlier. Allure, the Condé Nast-owned beauty publication, said sales of its subscription box were up 15 percent between February and May — when most US cities were in lockdown — while GQ's box sales jumped 30 percent. Menlo Club, a Chicago-based menswear box, said its subscription numbers are up 25 percent.
Stitch Fix, the industry's largest subscription service, also reported a 9 percent year-over-year increase in subscribers during its last quarter, while sales were down just 9 percent. Pretty remarkable for an apparel business, given that most reported devastating declines during the lockdown period, sometimes upward of 40 percent. While Stitch Fix reported a loss of $371 million, Gap and Macy's both took billion-dollar hits.
It seems that the pandemic may be a boon for subscription services, many of which had sputtered out after showing early promise. Companies like Birchbox, Trunk Club and Barkbox, inspired by product-month-clubs, raised millions of dollars in funding on the pretence that subscription services all-but-guaranteed repeat purchasing, and in many cases would inspire the consumer to trade up and spend more. Birchbox sold boxes of beauty samples with the hopes that members would then buy their full-sized favourites on its e-commerce site. Trunk Club sent guys an assortment of clothes from different brands, promising to introduce them to new labels and styles. Replenishment subscriptions like Dollar Shave Club, which made the process of stocking up on grooming products easy, also starting popping up.
The subscription box's heyday was around 2014, when Birchbox raised $60 million in funding at a near-$500 million valuation and opened its first store in Manhattan, right around the time Trunk Club was acquired by Nordstrom for $350 million. In the years since, the formula has been tested in nearly every category. Vitamins, wine, kids toys, sex toys, socks, doggie treats; if it can be shipped in the mail, there was a box business for it.
But investor interest around subscription boxes eventually waned. Procuring and shipping products from many different vendors and suppliers is expensive and inefficient, and most people grow tired of the boxes pretty quickly, meaning that monthly memberships are canceled pretty quickly, too. All of this makes it very hard to turn a profit, especially for companies that aren’t selling replenishment products.
While Dollar Shave Club nabbed a $1 billion cash acquisition from Unilever in 2016, Nordstrom took a $200 million loss on Trunk Club in 2016 just two years after buying it. In March, the department store announced it was closing all Trunk Club stores by the end of 2020 and would be folding the website into Nordstrom's. Birchbox found itself struggling to raise money in 2018 and sold a majority stake to Viking Global and Walgreens after acquisitions talks with QVC and Walmart reportedly fell through.
Stitch Fix has been distancing itself from the box model over the years, launching an e-commerce business for its clothes. Sephora abandoned its Play! sample subscription box model it launched in 2015. The beauty giant announced in April it would instead sell customers a box of prestige beauty samples, without any subscription commitment. Many other boxed businesses have gone under.
So, is anything actually different this time around? The pandemic may have once again rendered the concept novel, but the roadblocks are the same. Consumers get bored, especially when sourcing cool, new products on a monthly basis is next-to impossible.
Behind the Comeback
If shopping habits change permanently — or at least semi-permanently — subscription boxes have room to grow. While retailers in the US and Europe have begun to reopen again after government-enforced, pandemic-related lockdowns shut them down for months, it’s going to be a long time before most shoppers are completely comfortable visiting physical stores again.
“Given that it will take some time before everyone is confident enough to go back to stores, there is likely a bit more growth in the subscription box space,” said Neil Saunders, managing director at GlobalData Retail.
Beauty boxes, in particular, are well-positioned to benefit from this, as mega-retailers including Sephora and Ulta, which previously thrived off of a try-before-you-buy model, do away with makeup testers and in-store services for the foreseeable future.
“It’ll be harder to discover at Sephora or Ulta, but subscription boxes can help with that,” said Jessica Ramirez, a retail research analyst with Jane Hali & Associates. “Beauty shoppers want to experiment with new hair or skin products.”
It'll be harder to discover at Sephora or Ulta, but subscription boxes can help with that.
For some, it signals an opportunity. Last month, Novica, a Los Angeles-based digital marketplace that sells home decor, jewellery and hand-crafted fashion, acquired the clean beauty subscription box Love Goodly for an undisclosed sum. Novica Chief Executive Roberto Milk told BoF he plans to apply Love Goodly’s subscription expertise and expand it to other categories that Novica sells, such as jewellery.
“We know people are going to be careful about subscriptions generally because they are looking to cut recurring costs,” Milk said. “But if there is a unique product that shoppers can’t find on their own, that’s a position that can buck the trend.”
Ari Bloom, a Los Angeles-based entrepreneur, recently launched Keeper Soap, where subscribers buy a glass dispenser and soap for $20, opting in for $10 monthly soap refills. Bloom’s strategy is in line with that of Dollar Shave Club: he’s delivering an item that will need to be replenished anyway, making it one less thing the consumer has to remember to do.
“People are now more discerning about what they are spending money on, but if you send them something that they want and need at a monthly rate, they will keep it,” he said.
A Flawed Model
But when it comes to boxes, there’s a big difference between replenishment services like Keeper, personalised selections like Stitch Fix and generic assortments like Birchbox. Even if the current situation makes subscription boxes more attractive to consumers, the underlying challenges remain. For starters, it’s hard to get people to stick around once they sign up when it’s not an essential product. The goods have to be high-performing household staples or really, really cool. Most products do not fit into either box.
“Most churn out because they eventually stop needing the product or don’t like what you are sending,” said Sucharita Kodali, a retail analyst with Forrester. “Covid-19 might have highlighted the need for subscriptions for hand sanitiser, puzzles or brainy kids toys — but is any of that sustainable, long term?”
Most churn out because they eventually stop needing the product or don't like what you are sending.
Subscription boxes only work if the unit economics work. There are several ways to make money. Birchbox, for instance, only charges a monthly fee. (The samples are seen as a marketing opportunity for brands.) For something like Stitch Fix, customers pay a styling fee and if they buy the clothes, it's deducted from their total. If they don’t, they still pay. Replenishment services typically only charge for the product. But costs can climb. Bloom said that after doing research on the cost of package and branding, he elected to save money by sending Keeper Soap subscriptions in soft, utilitarian envelopes over a custom expensive packaging.
“I was thinking about a beautiful box that's artfully executed but with the cost, plus paying first-class mail, and with freight being expensive now, it didn’t make sense,” he said.
For companies like Stitch Fix, which promise a personalised assortment to each customer, there are additional customer service and technology costs. Stitch Fix has a team of over 5,000 stylists who help pick items for each box, not to mention proprietary algorithmic software in which it's constantly investing (the company recently announced it was laying off 1,400 California-based stylists, and would likely rehire the positions in states like Texas, Ohio, and Minnesota, where cost-of-living wages are lower.) Trunk Club heavily relied on its team of stylists — a cost that helped contribute to the company's demise.
Many shoppers also expect free shipping and returns, which cuts into any company's profit margin — but is especially destructive when return rates are high, as they are with clothing subscription services in particular. For instance, in May 2016, menswear subscription box company JackThreads began offering free shipping and returns on a new "try before you buy" product. The shipping costs were insurmountable and were one of the contributing factors in the company closing one year later.
You can't compare Netflix to Birchbox. We know how this movie plays out.
Add customer acquisition costs to the mix, and it’s easy to understand how most of these companies never become profitable.
“There is no mystery about how most companies end up because most can’t deliver an ongoing subscription that people want,” said Kodali. “You can’t compare Netflix to Birchbox. We know how this movie plays out.”
How to Make Subscriptions Work
Bloom admitted that there may be a desire on a company’s end to “fill a box with as much product as possible because you can increase a retail transaction.” He initially was thinking about adding $8 hand sanitiser to soap refill orders, but eventually decided against it. He maintains that sticking to a model where shoppers are fully opting in will track in the long run.
“In interviewing other founders, we found that people were putting too much in boxes and that ultimately is what hurt retention,” Bloom said. “If you are creating an assortment of product that hasn’t been selected or isn’t needed, that’s a recipe for a lost customer.”
If you are creating an assortment of product that hasn't been selected or isn't needed, that's a recipe for a lost customer.
Subscription box companies must also be cautious of falling into patterns that will anger shoppers, like making the cancellation process difficult. Fabletics, the leggings startup owned by TechStyle, was hit with multiple lawsuits years ago from customers who claimed the company "scammed" them into subscriptions by making it difficult to cancel (similar complaints still bubble up on social media). The company scores one star from the Better Business Bureau. Savage x Fenty, the lingerie line from Rihanna that is also owned by TechStyle, has similar complaints regarding mystery charges. (A spokesperson for TechStyle told BoF that the company "has had to address the challenge of educating consumers on how a flexible membership program works and the benefits of the model" and that since 2014 it has "doubled down on customer communication, developing industry-leading practices at explaining the benefits and mechanics of our membership program" and "also invested heavily in customer service, moving to 24/7 customer care, live chat, and adding the ability for members to cancel online.")
Dylan Carden, a research analyst at William Blair, recommends subscription companies look to the pivots of Stitch Fix, which evolved beyond boxes and lets customers shop directly from its e-commerce. (The company’s customer retention rate is 30 percent— higher than the subscription industry’s median churn rate was 13 percent, as recorded by a 2018 survey from KBCM Technology Group).
“Allowing flexibility with purchases removes friction points,” Carden said. “It’s become a much more dynamic model than what you see in subscription services that people have gotten bored with."
Offering a way for subscribers to shop online isn’t enough, though. The product itself must be unique so that customers won’t buy the items elsewhere once they’ve sampled it through their boxes — an issue that plagued Birchbox. This is what brings subscribers back.
Selling private label products is crucial in the beauty subscription space. Beauty Pie’s touts that its makeup is luxury at a drugstore price tag. Ipsy created its own private label, Complex Culture, last year. Birchbox has had its own, Arrow, since 2016, but it wasn’t a priority until February, when the company relaunched it with more enticing packaging.
Allowing flexibility with purchases removes friction points.
Replenishment subscriptions are also better off than monthly boxes of random products. Amazon’s subscription offering, where Prime subscribers can sign up for replenishments of specific products, appeal to members because Amazon often offers products at a lower price.
Kodali said the biggest challenge for subscription boxes will be to send shoppers merchandise that is truly unique enough to warrant signing up for a monthly commitment.
“No one needs these memberships because it’s not that hard to find this stuff elsewhere,” she said. “The challenge is that there’s so much competition.”
Editor's Note: This article was revised on 24 June, 2020 to include a statement from TechStyle Fashion Group.