Member Brief: Subscription Box Crash

Subscription boxes are essentially products built on the principles of marketing arbitrage: you set a price, you buy a customer, and you count on the lifetime value of the customer exceeding the cost of that acquisition. Many brands that pursued this model raised loads of capital, front-loaded costs, and hoped to achieve profitability at scale (with superior retention). The revenue is predictable and marketing methods are often quantitative in nature. The problem is that very few companies can perfect unit economics, maintain fruitful marketing channels, and maintain the sense of utility required to keep a customer engaged.

Winc, Birchbox, and Blue Apron’s shrinking markets tell the story of what happens when a subscription model falls out of favor with consumers. Each company’s current concerns teach a different lesson: Winc’s DTC-only strategy diminished growth, Birchbox’s acquisition partners failed at every turn, and Blue Apron can’t seem to turn a profit. In each case, these subscription companies learned that the novelty of subscription wears off.

Winc went public last year after it raised $22 million in its initial offering. Founded in 2011, the company shipped bottles of wine to customers on a subscription renewal basis, personalizing recommendations, and saying it offered discounts by cutting out the middlemen. Winc’s subscription was $60 a month with the fee going toward total purchase cost. The wine subscription model, like many other online concepts, had a pandemic boom period, when consumers were looking to avoid trips to the store and spend more time at home (with a deserved glass of wine). It went public like many other internet retailers did, including: ThredUp, Poshmark, Allbirds and Warby Parker. But a year later, without ever turning a profit, the company’s stock price had plummeted to .30 / share and it said it would be filing for Chapter 11, Bloomberg reported.

Losses ended up eating Winc alive, just in time for people to return to liquor stores and bars. Just a week before the bankruptcy announcement, the company’s CMO spoke to PracticalEcommerce about the complexities of selling wine online. As he put it, the company’s competitive advantage was the fact that it was direct to consumer, buying grapes directly from growers and making and selling wines in house. But key to its downfall was the shipping and logistics of selling alcohol online. CMO Jai Dolwani:

Selling alcohol online is a difficult business. Shipping it is equally difficult owing to the weight and fragility. U.S. laws surrounding the sale of beverage alcohol date to the 1920s prohibition era. It’s a three-tier distribution system of complex rules and regulations.

This is a story we’ve seen before: Haus shut down operations earlier this year, citing the expenses and challenges around shipping bottles of alcohol. Alcohol deliveries had also presented challenges for Winc’s subscription model: two years ago, Dolwani said, the company switched from an automated delivery system – meaning customers only had to opt-in once to unlock repeat purchases, a win for companies who rely on forgetful users who forget to cancel – to a credits-based system that replenished automatically but required customers to build and ship boxes of wine.

But ironically enough, the data shows that DTC alcohol sales is on the upswing. The Spirits Business reports:

Looking to 2025, e-commerce is expected to represent 6% of all off-trade beverage alcohol volumes – compared with less than 2% in 2018. The study also found that online business models for alcohol sales are becoming more diverse, as consumers tend to shift between channels to purchase alcohol online.

Buying drinks online is now divided into the ‘traditional’ and ‘modern’, according to IWSR. The traditional model is website and delivery-driven with longer delivery times, and ‘modern’ is centered around app-led online platforms with on-demand features.

Like many online retailers before, Winc seems to have suffered from a case of too little too late. With the growth rate tipping in Winc’s favor, it remains to be seen whether the business could be viable under different management. Their business has faced headwinds relative to other categories of online retail like apparel, consumer packaged goods, electronics, or beauty. But segment maturity does not always equal profitability or even long-term viability.

Birchbox, the pioneering subscription beauty box company, began warning creditors of impending bankruptcy proceedings. The company had been on rough waters for several years, trying a number of evolutions before stumbling to this point. It has tried to become an online marketplace for beauty and skincare, expanding beyond traditional box subscription economics. It sold through Walgreens in an attempt to diversify its distribution model, as well. No luck there, either. In 2021, a healthcare startup FemTech bought the company and planned to reestablish it as a wellness offering. But that hasn’t panned out, and the company is no longer accepting new subscribers.

Like DTC alcohol, grocery subscriptions are a difficult sell (though HelloFresh seems to be humming along). Blue Apron, which has been figuring out how to keep customers and trying to innovate after leading the meal kit subscription boom, has looked to the reliance on the subscription model as the source of some of its troubles. From PYMNTS:

In what could be seen as the latest wrinkle in the subscription commerce sector, Blue Apron said Monday (Nov. 7) that meal kits that stick to a subscription-only model could be losing valuable customers, including those who make purchases from the brand every week.

The comments from the meal kit provider came on a call with analysts to discuss the company’s third quarter 2022 financial results that it has learned, through its partnerships with online marketplaces Walmart and Amazon, that non-subscription offerings can help the firm reach new, high-value customers.

What does all of this mean for the subscription model? At the height of the DTC retail boom, subscriptions became a popular way to quantify brand loyalty. Customers of these internet brands were more likely to want to become subscribers, which kept loyalty high and which translated to automatically replenished orders, helping to lower pressure on customer acquisition costs. Companies from MeUndies to TechStyle, which eventually faced a lawsuit over its misleading subscription acquisition practices, used the model to gain and retain customers. Box subscriptions also took off, with Blue Apron pioneering meal kits, Winc leading in wine subscriptions, and Birchbox inventing the beauty box model. But for many retailers without proper unit economics, the model appears to have run its course, proving that subscription is best as an added function and not the entire pitch.

Which is to say that they can still work; there is still interest in the market – especially for gifting. Butcherbox has a big and profitable business built on the back of a meat subscription. How has it pulled it off? Any CEO would be wise to ask and answer these questions when considering the subscription model:

  • Does a brand have potentially profitable unit economics?
  • Does the brand have a purpose beyond being known as a subscription product?
  • Does the brand have value outside of its own marketplace? Would you be compelled to buy the product outside of the box or without the subscription?
  • Does the brand have a value system?
  • Does the brand maintain marketing arbitrage? Or has it identified a new one.

On that last note, Winc revealed in its bankruptcy filing that its top creditor is Meta, owing the platform more than $700,000 in advertising spend. For each struggling business, you can see how the subscription proposition falls apart as you ask more questions. Blue Apron meals cost more than they would at the grocery store, and many people’s lives are too unpredictable to sign up for fresh food being constantly delivered at home. Winc is not selling anything that you can’t find in your local store. And Birchbox’s monthly boxes are never meant to be a permanent fixture in anyone’s life: they sell products to test, meaning samples added up and people ultimately shop elsewhere for their beauty needs, where options are more plentiful.

The industry is settling in and while this report highlighted three companies that are struggling, there are a number of subscription box retailers that continue to find success with their model. The proliferation of the model has illustrated that there has to be a value that surpasses the ease of shopping through eCommerce apps. The products have to be unique enough to outlast competition. And the products have to have the right price incentive or lack of availability elsewhere. If you can buy it from Prime and have it within the hour, the subscription value proposition may not be enough to convince a consumer that automation is superior to the convenience and variability of the instant needs industry.

By Web Smith | Edited by Hilary Milnes with Art by Alex Remy and Christina Williams 

Member Brief: Musk v. Apple Inc.

There isn’t a bigger gatekeeper than Apple. And while Meta, Snapchat, Epic Games, and even TikTok have begun to learn that the hard way (thanks to ATT’s implementation), Twitter’s impending battle with Apple may be its fiercest. Twitter’s new CEO plays by few rules. Here’s what we’ve written about Apple’s approach to business thus far:

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This content is designed exclusively for Executive Members

Memo: Cyber Five

More than a quantitative measure of retail health, this year’s span of five days – beginning on Thanksgiving and ending on Cyber Monday – may serve as a judge of the entire economy. If text messages like these are any indication, our economy is coming out of its hole:

Positive news: we absolutely, unequivocally CRUSHED BFCM week.

Black Friday fought the good fight against inflation and cost of living hikes, this year. But there’s more to this weekend’s holiday shopping story than that day. Our Blackest Friday report began with a Jeff Bezos quote: “Don’t buy a fridge, hold on to your money.” So to spend or not to spend? This was the question. The answer was a resounding ‘yes’; consumers spent despite the economic forces at play. First, the top line numbers.

  • According to Adobe, online sales for Black Friday reached a record $9.12 billion, a 2.3% year-over-year increase.
  • Adobe anticipated that weekend online sales on the Saturday and Sunday on Thanksgiving weekend would hit $9 billion on their own, while Cyber Monday sales would hit $11.2-11.7 billion, versus $10.7 billion last year.
  • This year, mobile shopping hit a new record, accounting for 48% of online sales, up from 44% last year. Buy now, pay later schemes also had a big year – a sign of the times.
  • BNPL orders increased 78% during the holiday week (November 19-25) compared to the week prior, while BNPL revenue increased 81% in the same time frame.
  • Exercise equipment, toys, smart home devices, audio equipment, games and gaming devices, Macbooks and Dyson products were all top sellers. Apparel, sporting goods and TVs all saw peak discounts over the weekend.

In all, Adobe data indicates 2022’s “Cyber Five” is on track to generate a total of $34.8 billion in online sales, a 2.8% increase over 2021’s data and a drop off from the projected 7% growth that analysts predicted. A few things are happening at once.

In the past several years, retailers successfully trained customers to shop earlier and earlier: Cyber 5 is more like October through December. This allowed for a steadier stream of high sales volume days – though none are expected to top Cyber Monday. The extension of the sales holiday also places less strain on logistics and supply chain efforts by spreading sales volume over 60-70 days rather than 6-7. As Adobe pointed out, savvy shoppers are waiting until December 1 to buy appliances, for instance, when discounts are expected to peak.

At the same time, inflation is the story of this season. A 2.8% increase is insignificant compared to the 7% projection. The 2.8% increase is less impressive when you consider the higher consumer pricing index (CPI). Discounts for the holiday weekend were also not as extreme, hinting that retailers are waiting to see how much is necessary in terms of markdowns before customers bite. As Axios calls it, it’s a “game of chicken” to see who gives in first: the customers making purchases vs. the retailers setting the prices. Last year, customers were scrambling to buy early to avoid everything selling out as supply chain backups gripped the season. USA Today reported on this year’s consumers bargain hunting before a different backdrop:

Due to elevated prices for food, rent, gasoline and other essentials, many people were being more selective, reluctant to spend unless there was a big sale. Some were dipping more into savings, turning to “buy now, pay later” services that allow payment in installments, or running up their credit cards at a time when the Federal Reserve is hiking rates to cool the U.S. economy.

The Two Winners: BNPL and Physical Stores

One industry segment that is benefitting from the current economic shortfall are the “buy now, pay later” family of companies. These platforms removed one more barrier out of the way of cash-sensitive consumers, allowing them to pay for products over the course of four or more payments – minimizing up front costs. Holiday seasons are often mortgaged during times of economic distress.

In a US survey, 60% of people were found to be more likely to use BNPL because of inflation, and 53% were using BNPL out of necessity. Forty-five percent said they were were most likely to use BNPL when their finances are tight. That means that Klarna’s 2022 troubles aren’t to be blamed on a decline in interest on BNPL. But rather, a more tenuous financial outlook makes people more reliant on services like BNPL. For many, it’s a way to make purchases now without taking on credit card debt. It’s a dangerously unregulated substitute for traditional debt. CNBC recently explained how Klarna’s rebound may be tied to increase usage:

The Stockholm-based startup saw 85% erased from its market value in a so-called “down round” earlier this year, taking the company’s valuation down from $46 billion to $6.7 billion, as investor sentiment surrounding tech shifted over fears of a higher interest rate environment.

This Cyber Five’s winner? The physical store. This year: Walmart, Target and Kohl’s all overtook Amazon in terms of online Black Friday discount searches according to data from Captify. Walmart searches surged 386%, followed by Target, then Kohl’s, then Amazon. That’s telling for a few reasons. People seem to associate Amazon with the best deals less than they used to. And more people are likely to search for deals across stores and online, knowing they can strike both at any of the big-box retailers before Amazon. According to MasterCard SpendingPulse data, in store sales increased 12% year over year. RetailNext, tracking foot traffic to stores, found that traffic rose 7% this year on Black Friday compared to 2021. Here was the takeaway from Placer.ai:

Shopping malls saw far and above average visits. Indoor malls saw visits up 261% compared to the daily average for Q1-Q3 2022, outlet malls saw visits up almost 366%, and open-air lifestyle centers saw visits up around 151%. Compared to the first three weeks of November 2022, visits were up about 277% (indoor), 395% (outlet), and almost 160% (open-air lifestyle centers), respectively, at those mall types.

Going into Black Friday, we forecasted some of these key elements, to include muted growth and the return to physical stores:

​​(1) The recessionary effects are likely to cause muted growth in eCommerce performance in a YoY basis. Searching for bargains, more customers will be pursuing in-store purchases where deals may be greater. (2) Try to conserve your money this season to prepare for any additional market downturns. It’s likely that large purchases may be fewer and farther between in 2022 YoY basis. (3) eCommerce marketplaces will do better than traditional DTC brands’ online stores because utility purchases are likely to rise vs. luxury and other purchases that signal high-discretionary income.

But about that traditional DTC brand thought, it wasn’t altogether accurate. Shopify noted: “More than 52 million consumers globally purchased from brands powered by Shopify this year, an 18% increase from 2021.” Shopify reported promising Black Friday sales figures for its merchants; Shopify merchants brought in $1.52 million a minute on Thanksgiving and $3.5 million per minute at its Black Friday peak, setting a record with $3.36 billion and $7.5 billion between Friday and Monday. This was a 19% increase in sales and a 21% increase on a constant currency basis. But this is more a reflection of how Shopify has grown as an enterprise retail provider than as a snapshot of the greater whole.

Cyber Monday Data (via Adobe)

According to Adobe’s data, consumers rang in $11.3 billion on Cyber Monday, seeing the industry to a 5.8% YoY improvement and a whopping $12.8 million earned per minute. Vivek Pandya, lead analyst, Adobe Digital Insights:

With oversupply and a softening consumer spending environment, retailers made the right call this season to drive demand through heavy discounting. It spurred online spending to levels that were higher than expected, and reinforced e-commerce as a major channel to drive volume and capture consumer interest.

In all, the Cyber Five earned $35.27 billion, a 4% increase over 2021’s eCommerce-driven holiday season. This number is even bigger when you consider the entirety of the shopping season: November 1 – November 28 rang in $107.7 billion with $210 billion expected through December 31. How did this happen? Adobe Analytics noted that discounting hit records highs in 2022 to offset the rising costs of living. And BNPL services like Affirm saw volume rise 85% vs. the prior week, increasing revenue 88% over that time period. One surprising line from the analytics data provided by Adobe:

Strong consumer spending across Cyber Week was driven by net-new demand, and not just higher prices.

Consumers came out for the week and chose the glee over doom, there will be study after study written about this holiday season. It wasn’t all black and white. With the holiday shopping season at its peak, the statistics have been unpredictable at best but not altogether surprising. Retail is irrational and retailers are hoping that it stays that way over the closing four weeks of the holiday shopping season. Jeff Bezos went unheard, consumers chose the 30% off refrigerator over holding on to their money. Let’s just hope that the good news extends and the economy continues its slow recovery.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams