By Sophie Jin
In the cult classic Clueless, Cher Horowitz famously scrolls through her gigantic closet with the ease of swiping on a tablet. At the time, many admired her exaggerated closet full of the newest season of designer clothing. Now, two decades later, there are various ways to achieve Cher’s reality—one of them being direct-to-consumer (DTC) subscription boxes.
The world of high fashion is not the only sphere being infiltrated by subscription boxes offering curated convenience. The once novel concepts of delivering a tailored selection of food, clothing, and other household products are all successfully embodied in companies like Blue Apron, Stitch Fix, and Dollar Shave Club. There is a surge of excitement from all areas of the business community—from venture capital (VC) firms to entrepreneurs to consumer brand companies—over the DTC subscription-based goods market after seeing these companies succeed. However, this excitement is ultimately misguided: the oversaturated market has the makings of a bubble.
One of the most well-known subscription services, Rent the Runway, allows consumers to borrow gently used designer items for a monthly fee. However, the firm has been crippled by pervasive supply chain issues, even temporarily halting the acquisition of new customers in September of 2019. A large part of the reason behind these mounting supply chain issues was the pressure to find more designers and to lower prices. Since the increased popularity of these fashion-subscription based DTC boxes skyrocketed within the last three years, Rent the Runway and similar firms find themselves in positions cornered by increased customer acquisition costs and increased competition.
But despite this setback, Rent the Runway reached a private valuation of $1 billion in March. VC firms and industry experts still believe in the firm’s ability to profit off of increasing demand for subscription goods, especially among its niche target market of young women in high-income brackets.
On the surface, it is easy to believe that the subscription box market will continue to expand. Monthly visitors to these online storefronts reached over 21 million in 2016, a 3,000% increase from 3 years prior. Consumers idealize boxes that are delivered right to their doorsteps as convenient, novel, and customizable, offering varying degrees of personalization. There also appears to be several profitable niche segments within this overall market, and companies like Rent the Runway have chosen to pursue consumers with particular demographics: women make up 60% of the total addressable market, while millennials are the most likely age group to subscribe.
To take advantage of market growth, many VCs are eager to discover the next company satisfying the current increase of interest, especially among women and young consumers. Birchbox, a subscription box selling makeup products, received a $15 million investment from the VC firm Viking last year, placing its total investment at $90 million despite major, public profitability issues. Unlike other DTC companies, Birchbox does not generate revenue from its subscription boxes, which have thin profit margins: the business relies on siphoning online retail sales.
Both Rent the Runway and Birchbox highlight many of the common issues facing DTC companies, which VCs in this space have continued to downplay. However, funnelling continuous funding can only go so far—businesses have already started to bend to exogenous market conditions. VC firms fear falling behind on the next big thing—even as startups continue to suffer from tough market conditions, including thin profit margins and competition from other DTCs or traditional retailers, outside of their control.
However, not all subscription-based boxes are unsuccessful. The beauty industry is a competitive space with both existing large, successful retailers such as Sephora and other subscription services, including IPSY. IPSY provides DTC boxes containing make-up samples, similar to Birchbox. Although the DTC beauty market is tough, IPSY reached over $500 million in revenue in late 2019 using a similar profit model. However, unlike Birchbox, which relies purely on the retail and subscription market, IPSY was co-founded by popular beauty influencer Michelle Phan.
Phan has driven the firm’s strategy of utilizing influencer marketing to build market share and brand loyalty; a significant portion of IPSY’s success can be attributed to the power of its brand ambassadors. Birchbox even had the first-to-market advantage, but despite being initially comparable through the lens of the tough siphoning to retail business model which many DTC companies do, it was IPSY’s innovative marketing that propelled it to profitability.
Overzealous entrepreneurs remain interested in the expansion of this field despite the tough business model. Evidence of this are the creation of new online platforms of Subbly and Cratejoy, both of which are ecommerce sites that exclusively promote DTC-based subscription box start-ups. New entrants abound, driven by excessive excitement surrounding the market. But what they often overlook is the large price of customer acquisition needed to establish a customer base. A substantial customer base is absolutely critical to a DTC company since the only way for shipping, packaging, and product costs to be lowered to an affordable range is to supply in bulk. The inherent obstacles of needing to raise significant portions of capital while maintaining the acquired customer base just to carry out the initial business model of supplying in bulk can be an impossible task for young companies.
But despite the multitude of services available offered by these new entrants, the subscription goods and services market is saturated, with little room for disruption. One area of opportunity gaining traction—particularly from established companies—is groceries. Traditional department stores have chosen to create footholds through groceries, coupling necessities to other household goods. For example, Amazon’s launch of Amazon Fresh, a subscription-based grocery service, has led Walmart to unfurl its own plans. Namely, the company is working to lower prices and implement same-day delivery.
In order for any new entrant to thrive within the space of DTC groceries, they will have to compete with giants backed by massive amounts of capital. Of course, while it is rarely easy for any new company to compete against established companies, the difficulty is exacerbated due to the need for a large existing customer base to cut costs before reaching profitability in the first place.
Even existing consumer brands are now actively participating. Vince, a high fashion retailer, recently entered the subscription-based services with its own minimalistic box titled Vince Unfold. These developments only mark further expansion of the bubble. Historically, when passive participants are hoping to directly gain a slice of the growing pie, there is an influx of indifferentiable services amongst companies. Existing consumer brands are then able to monopolize the market, and newcomers are rarely able to overcome steep market conditions. All of these factors are visible in the DTC market, indicating the makings of a bubble.
Going forward, the only companies that will thrive are ones that are innovative beyond the common difficulties of thin margins, shipping costs, or business models reliant upon retail sales. Only the most innovative firms with qualities such as social media influence or a viral marketing nature can propel a subscription box into the common zeitgeist.
The market for subscription boxes is currently attracting a slew of VCs, entrepreneurs, and existing companies all trying to participate despite the oversaturation and thin profit margins. Nevertheless, it is possible for a select few subscription services to strike gold before the bubble bursts, presenting dreams of convenience—just like Cher Horowitz’s closet.