Member Brief: The 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 

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