Article by: Deborah Weinswig
Online subscription services have disrupted traditional retail for the past few years, peeling off billions of dollars previously captured by conventional retailers. These innovators provide ongoing “retail as a service,” regularly delivering subscribers new surprises or replenishing consumer staples monthly or quarterly, all while achieving the holy grail of retail—recurring revenue. That said, these services represent a large niche in which most players have yet to achieve profitability, and they are now facing disruptions of their own.
The two primary subscription categories are curated and replenishment offerings:
- Curated subscriptions bring new products to shoppers. Examples of these include Stitch Fix in apparel and Birchbox in beauty.
- Replenishment subscriptions deliver everyday, consumable products, providing subscribers with a convenient way to ensure that they never run out of the items they use daily. Dollar Shave Club and Amazon Subscribe & Save are well-known examples of replenishment subscription services.
A November 2017 McKinsey & Company survey segmented the market by number of subscribers, as shown below.
Breakdown of US Subscriptions, November 2017
Sizing the Market
Food and beauty products represent the two largest subscription spending categories. My company Coresight Research estimates that meal kit subscriptions will capture about $3 billion in sales in 2018 and that beauty and personal care subscriptions will capture about $1.9 billion. We expect apparel rentals, including non-subscription rental models, to capture about $575 million in spending this year.
Subscription Services: Consumer Overview
McKinsey & Company’s November 2017 consumer survey found that Amazon Subscribe & Save was the most popular subscription service in the U.S., although the consultancy did not put a figure on the number of subscribers. Beauty and personal care subscriptions and meal kit services were also well represented in McKinsey’s list.
Leading U.S. Online Subscription Retailers, Ranked by Number of Subscribers, November 2017
Coresight Research’s U.S. online grocery consumer survey, conducted in March 2018, found that almost 22% of online grocery shoppers who had bought groceries from Amazon in the past 12 months had used the company’s Subscribe & Save option; the figure translates to approximately 3% of all U.S. consumers.
Disruptors Being Disrupted
Two of the most significant U.S. subscription commerce disruptors are now facing disruption themselves. Meal kit firm Blue Apron and beauty box service Birchbox are facing strong headwinds. Blue Apron seems to have already reached its apex, with topline sales declining and losses mounting. Meanwhile, Birchbox’s site visits are down, and the company spent much of the past year seeking an acquirer.
Two strong forces are putting the brakes on growth for these and other subscription services. First, high customer acquisition costs, coupled with high churn, make the cost of acquiring customers higher than their lifetime value. And players cannot make up this deficit with higher volume. Second, competition between incumbents and a steady stream of new entrants is chipping away at the leaders, just as the leaders once chipped away at traditional retailers.
1. High Customer Acquisition Costs and High Churn
Acquisition and retention costs are high with subscription services because consumers must be convinced to sample a new purchasing model, and subscription companies can’t advertise by merely adding a display to the end of the aisle, as traditional retailers might.
Churn is high for a number of reasons. In the subscription meal kit space, it’s because the kits are expensive and can create stress for subscribers, who sometimes feel pressured to cook a meal before the food spoils. Blue Apron’s marketing expense was 18% of revenue in 2017, and HelloFresh’s SG&A expense was 72% of revenue in 2017, compared with 50% for Blue Apron and 21% for Walmart. The high turnover of customers suggests that meal kit firms will continue to suffer substantial acquisition costs and, so, find it challenging to achieve consistent profitability.
2. Increased Competition
Incumbents in the subscription space face heightened competition from newer entrants. In the U.S., HelloFresh is powering ahead in meal kits at the expense of Blue Apron. Meanwhile, Birchbox has reportedly lost customers to beauty subscription rival Ipsy.
Blue Apron Faces Difficulties
In a post here in March, I asked, “Is Blue Apron A Canary In The Coal Mine For The Online Meal Kit Category?” The market leader in meal kits, Blue Apron has been posting falling revenues and deepening losses. The company posted a 13% year-over-year revenue decline in the fourth quarter of 2017, which accelerated to 20% in the first quarter of this year.
Competition is heating up for the company, too. HelloFresh is making headway in the U.S. market, with sales nearly doubling year over year, to $616 million in 2017. Still, HelloFresh is far from profitable, reporting a net loss of $104 million in 2017 and $106 million in 2016.
Birchbox Is Struggling
Birchbox was finally acquired by an existing investor this spring, after seeking an acquirer for nearly a year. News website Recode reported that one of Birchbox’s investors, the hedge fund Viking Global Investors, had acquired a majority stake in the company. Recode cited high acquisition costs as one of Birchbox’s barriers to profitability, along with low margins associated with products sourced from third-party brands.
Birchbox also faces steep competition from rival beauty subscription site Ipsy, whose subscribers receive monthly Glam Bags with personalized beauty product samples. Reports from the two companies indicate that Ipsy has more website visitors than Birchbox does.
The viability of stand-alone subscription services has yet to be proven, as growth and profitability are not moving hand in hand. At Coresight Research, we believe that subscriptions work best for both consumers and retailers when they are offered as one of many purchasing models. On the Amazon website, for example, customers can choose to purchase an item one time or use the Subscribe & Save replenishment model. Another benefit with a hybrid model is that its scale enables merchants to amortize fixed costs across a significantly higher revenue stream.