Birchbox Solving the Wrong Problem

As I tried to cancel a subscription to Birchbox today, I stumbled upon waaaaaay too much advice online, but also this article https://www.fastcompany.com/40567670/heres-why-nobody-wants-to-buy-birchbox-even-after-vcs-spent-90m about how Birchbox solved a problem in the cosmetics industry. Essentially, Birchbox delivers free samples of beauty, health and grooming products to mostly Millennial women and men in their own home on a subscription basis. And, the problem being solved was to bring samples directly to the consumer, bypassing the hassle of going to a store and dealing with sales people, so that brands could build a customer base online.

Therein lies the problem. The basic case for Birchbox appeared to be that they would bypass the sales floor and take samples directly to the consumer, who would enjoy the experience so much that they would shop online and simply add the full sized product to their next Birchbox subscription shipment. From my decidedly Gen-X perspective, that model seems doomed.

Nearly all subscription services boomed in 2016 to 2017, the darlings of VC investors, as well as Millennial subscribers. 2018 cast the space in a bit of a different light, where the search for actual customers for full sized products, as well as good old-fashioned profits, pushed these businesses to new formats. Dollar Shave Club arguably had the best exit and has earned the most success diversifying their product line and attaching "full sized" products to their monthly shipments. They have a tight product catalog, surprise their customers with samples, and deliver an extremely easy method to complete the add on sale.

Birchbox can learn a lot from DSC. First, Birchbox contents vary every month, which likely creates strain on the logistics systems. DCS's tight product catalog makes logistics easy. By having a small set of products with well defined proportions, sizes, and weights, DSC reduces their logistics cost as much as possible. As a result, DSC pays the lowest possible shipping and handling costs associated with their overall revenue per box. Birchbox, by contrast, has to build inventory and handling systems to put a different group of items of different shapes and sizes into their boxes every month. Even if they control for weight and postage, the "assembly" costs of their boxes would be tough to optimize.

And, the cost of attachments at Birchbox can be very high compared to DSC, where their most expensive attachment product adds only about $10 to the next shipment. With Birchbox, most "adult" sized products cost well above $20, with many add-ons tripling the cost of the subscription.

Birchbox boasts 2.5M active subscribers, and reported $200M in annual revenue, about 35% of which came from the sale of full priced products, or about $70M from "adult" sized goods. If the average cost of an add-on sale is about $30, then Birchbox sells only about 1 add-on product per active subscriber per year. Divide that volume among as many as 30-40 different products, and it's not tough to see that Birchbox has a problem selling on behalf of their brands. But, then again, that's the problem that they sort of set out to solve, isn't it?

Birchbox created a better shopping experience for consumers by sending samples directly to them in the mail. Millions of (presumably) Millennials bought into the service, but that seems to be all they bought. Birchbox investors and suppliers likely expected a high attachment rate and follow-on sales of full sized products. But, what Birchbox sold seems to me to be the free samples and the experience of bypassing the store with the convenience of at-home delivery. Their customer cohort seems somewhat self selected into a low margin group not as interested in buying the full sized products as much as getting a little gift of cool grooming products each month in the mail.

Unfortunately, even if the suppliers give them samples for free, Birchbox still pays too much to acquire new customers, too much to stock and ship the samples, and too much to host and manage their e-commerce pipeline to make much money. Essentially, the Birchbox model seemed intent to avoid the very element of the sales channel that was working for their brands, namely the sales people in the department stores.

Not all is lost. Recently, Birchbox has taken a lifeline round of funding from one of their major investors, and their new strategy seems to embrace in-store expansion to drive visits with Walgreens Boots Alliance. Seems "in-store" still works, as Harry's, the other razor company, has found productive with their brand placement within Walmart and Target. Recode reported that in summer 2017, Birchbox was profitable on an EBITDA basis, so the market seems to have rightsized the business and funding provides firmer footing for operational improvements. If they can tackle the logistics issues, perhaps add a house brand that their subscribers appreciate, drive new traffic and sales of allied brands into Walgreens and Boots stores, and maintain their margins, they may survive to thrive. Now, if only the website made it easier to opt-out of auto-renewal, I'd be a fan.