Are subscription services viable across retail broadly? #SmallBiz - The Entrepreneurial Way with A.I.


Tuesday, July 21, 2020

Are subscription services viable across retail broadly? #SmallBiz

Subscription-based services have heated up in recent years. From startups like Dollar Shave Club and Birchbox to mass merchants like Amazon and Target, the model gained traction as e-commerce grew and consumers felt more comfortable paying for value over time.

According to a September 2019 survey from ratings and reviews platform Clutch, 54% of consumers use a subscription service. The appeal comes from its ability to provide convenience and unique experiences, Clutch said.

The model's growth hasn't lost steam moving into 2020. As the coronavirus pandemic forced states to issue stay-at-home orders and temporarily shutter nonessential businesses, more consumers looked online for goods.

According to an April survey from Zuora, 88.6% of subscription-based businesses said memberships were either flat or growing during the start of the pandemic, with 22.5% reporting that memberships accelerated during the period.

However, not every sector in the industry with the model reaped the benefits.

Stitch Fix reported its client growth slowed in its most recent quarter (Q3) rising 9% to 3.4 million users from the year-ago period, compared to 17% year over year growth in Q2. In the second quarter, active clients totaled 3.5 million, while they dropped to 3.4 million in the third quarter. The company also swung to a $34 million loss in the third quarter, which ended May 2.

Apparel generally has taken a huge hit during the pandemic. The sector in June saw a 25% drop from last year, after falling 63.7% in May and 89% in April, according to data tracking monthly retail sales from the Department of Commerce. Demand for apparel, specifically workwear, declined as more consumers began working from home, analysts previously said.

But the performance of specific companies may indicate that the viability of the subscription model could be dependent on category — discretionary versus non-discretionary.

In Chewy's most recent quarter, for example, active users increased 32.6% year over year to 15 million. Comparatively, in Q4, the quarter prior, active users increased 27.2% from the year-ago period to 13.5 million. Though not every customer is a member of Chewy's Autoship subscription service, the retailer did report that sales from that service exceeded $1 billion for the first time and made up 68% of sales.

Executives at Bark, a company that has subscription-based subsidiaries like Bark Box and Super Chewer, previously told Retail Dive that the company saw an uptick in its subscription business at the start of the pandemic. Even prior to the COVID-19 pandemic, analysts hailed subscription-based services in the pet category due to the convenience they bring.

"Why would you go to the store to pick up a 20-pound bag every 15 or 20 days, or every month, when it's delivered straight to your door?" Moody's Investors Services Vice President Mickey Chadha told Retail Dive last year. "It takes that hassle of actually lifting that bag by bringing it to you."

The discussion forum on RetailWire asked its BrainTrust panel of retail experts the following questions:

  • Should CPGs and retailers who had not implemented subscription services consider launching them due to pandemic-era factors? 

  • How might existing subscription services improve and differentiate themselves?

Here are seven of the most insightful comments from the discussion. Comments have been edited by Retail Dive for length and clarity.

The longevity of subscription services post pandemic is unknown

Mark Ryski, Founder, CEO & Author, HeadCount CorporationCOVID-19 has been a trend accelerator for subscription services. Given that the pandemic event seems to be one that will linger for some time, I would encourage CPGs and retailers to seriously consider how subscriptions could work in their own context. But while the pandemic has been good for subscription-based services, I believe that this is primarily a result of social distancing and consumers wanting to avoid physical stores, and so some of this behavior may create a headwind for subscriptions once a vaccine or therapeutics have been created.

The model is not a silver bullet

Suresh Chaganti, Co-Founder and Executive Partner, VectorScientSubscription boxes do help, but they are certainly not a silver bullet. Companies mistakenly spend a lot more than they would otherwise to acquire customers, thinking that subscription customers are more profitable.

Subscription boxes do not equate to loyalty or an increased lifetime value. Product recommendations and engaging only at the right frequency and right time had the biggest impact on increasing the customer [lifetime value].

Subscriptions work best for consumer staples

Neil Saunders, Managing Director, GlobalData RetailSubscription services have worked well for regularly purchased household staples. For many they take the hassle out of replenishment shopping and signing up to a subscription service often unlocks discounts over standard prices. From work we have done in grocery, subscription consumers switch brand far less often as they don't shop around for brand alternatives. That's great for the CPG company or brand that initially locks the consumer into the service; not so good for the rest!

Outside of staples and regular purchases, things like meal kits have traditionally worked less well as a lot of households find it hard to plan meal occasions and disliked being locked into services. However, the pandemic has disrupted that trend and means more people are staying home more often rather than eating out. So it's logical that meal kits and meal subscriptions are having a moment. How long that moment lasts remains to be seen!

The model can give time back to consumers

Stephen Rector, Founder, President, Bakertown ConsultingSubscription boxes can give consumers back one of the biggest luxuries people want, which is time. The boxes that use AI and data to put the correct product in the boxes will be the winners.

They provide a stand-in for experiences while physical shopping remains changed

Georganne Bender, Principal, KIZER & BENDER SpeakingI have tried several subscription services; none of them held my interest for long, but times are different now. Like other consumers I am looking for things that make me smile, a mystery box of goodies can do that.

An uptrend during the pandemic makes sense, let's see how long the subscription companies can make that trend last once it's over. Judging from COVID-19 updates they have plenty of time to make it stick.

Apparel may not benefit as consumers spend more time at home

Lauren Goldberg, Principal, LSG Marketing SolutionsSubscription services are doing well, but they're not a silver bullet for any CPG or retailer. The items in the box need to meet customer needs in this moment. Meal prep kits, kids activity kits or craft cocktails make sense because people are eating, playing and staying home. Jewelry and fashion curation for rent or purchase probably doesn't make as much sense because we're not going anywhere.

A step toward personalization, but not a perfect solution

Ron Margulis, Managing Director, RAM CommunicationsSubscription services are a bit faddish, a stepping stone to much more personalized curation of product for shoppers. There is almost always a miss among the assortment sent, so the shopper is rarely totally satisfied. Plus, there is rarely real value beyond the "surprise" of the package contents. Maybe I'm missing something here, but I don't see this as a good long-term strategy for retailers or brands.

via by Caroline Jansen, Khareem Sudlow