The “subscription box” retail model, in which customers commit to a regular delivery of product, is nothing new. Pre-Internet examples include magazine and newspaper subscriptions, book and record clubs, and a range of food subscriptions services, including Harry and David’s 1937 “Box of the Month” service. (source: Wikipedia)

However, interest has boomed since 2013, with over 2,000 subscription box start-ups launching with more than $1 billion in venture capital funding. (source: Forbes) The breadth of offerings is also remarkable. While the bigger players are competing to deliver beauty products, snacks, clothing, and ready-to-prep meals, there are many niche boxes, catering to coffee lovers and Harry Potter fans. There are subscription boxes for sex, drugs, and rock and roll — and don’t forget the kiddies. What’s behind the explosion? Internet engagement and customer-driven marketing tactics have added modern punch to the venerable model.

Using monthly visitors as a proxy for customer interest, and to a lesser extent, business success, we can pick out the major players in the industry. The top independent subscription box companies are Birchbox, Dollar Shave Club, Loot Crate, Blue Apron, and Graze, as of January 2016.

Several sources say that there are more than 2,000 subscription box companies in the market, generating 21.4 million monthly visits, but the big six attract 66 percent (14.2 million) of that. 

But how big is the subscription box business, and what is its market potential? A trade event press release puts the market “on track to generate $40 billion in revenue” in 2017; that’s a cite without a source, from an organization that profits if people are excited about the business, so consider that an upper bound rather than a definitive objective measure. (Source: PR Newswire)

HOW IT WORKS

Internet engagement is the key that has given the subscription box industry its new life since its “book of the month club” roots. Jill Standish of Accenture, writing in Chain Store Age, explains the advantages. “The ability to provide reliability, accurate product delivery, along with a great consumer experience calls for reinforced abilities in innovation, digitalization, and the ability to harness consumer data successfully,” Standish says.

Subscription box products fall into three basic categories, according to Kristina Knight of BizReport.

• “Replenish” subscriptions deliver commodity goods that are always in demand and which need replacement as they are used. The key factors driving customer loyalty here are timely, reliable service. Examples: Dollar Shave Club, Amazon Subscribe and Save.
  
  

• “Discovery” subscriptions offer unique experiences and surprises that cater to a passion or lifestyle. Customers do not know everything that will be in the box, and that’s the fun. Examples: Graze and Craft Coffee.
  
  

• “Productivity Enabling” subscriptions fall outside the physical, literal “box,” offering services that help you work. Examples: Adobe Creative Cloud and Slack.

Note that in a competitive market, many replenish-model companies are using customer-driven marketing tactics to stand out and build brand loyalty, primarily through social media and user-created content. A great example of this is Loot Crate, a subscription box business that caters to to the gaming and geek community – “Comic-Con in a box.”

Loot Crate co-founder Matthew Arvalo, writing in BusinessZone, explains it this way:

“Since the get-go, Loot Crate put Looters centre stage. While we create a lot of content in-house, we wrap most of our social media efforts around Looter’s own content in the form of engaging in their social media posts, funding creator content from our Looter community and sharing their YouTube unboxing videos (for those in the dark, unboxing videos show people taking products out of their packaging for the first time and explaining the package’s contents to the camera). … Beyond unboxing videos, we use social media to share behind-the-scenes videos that include Looters in our content journey. The unpolished nature of these videos (some of them have even been shot in a garage) helps to create honesty and transparency with our audience.”

Using digital tools to find new customers and engage with existing ones seems obvious, but the most successful players take it to an extreme. They launch new boxes on Kickstarter, they are heavily into Instagram and Facebook Live, and they embrace user reviews on box-concatenation marketplace platforms such as CrateJoy.

LOOKING AHEAD

As of late October 2016, only 5% to 8% of all U.S. Internet users were box subscribers, so if you think that more than 10% of the populace might be interested in the concept given the right marketing incentive, then there are definitely untapped customers out there. 

For a look at historical growth, consider this graph showing monthly visitor growth from almost zero in January 2013 to 20-million-plus January 2016. 

Now, this data only runs through January 2016, and look at that plateau in the last six months of 2015. This graph overall tells a growth story, true, but is this a story with and end in a bust, a plateau, or rapid expansion? Is there news of more recent vintage? Here are a few data points to shed light on recent trends.

• Winery club businesses reported 16% growth in 2016. (source: Wine Business Monthly)

• Subscription box revenue overall rose 16% on Black Friday and Cyber Monday in late 2016. (source: Pymnts.com)

• BirchBox, a cosmetics box company and a pioneer in the field, struggled in 2016, cutting staff 15% and abandoning plans for brick and mortar. However, this year it turned its first profit. (Source: Fast Company)

• Publicly traded toy giant Hasbro just announced the launch of its Gaming Crate. (source: Fortune)

Pundits being pundits, there are both positive and negative opinions to be found on the Internet …

Kristina Knight of BizReport, interviewing James Gagliardi, VP of Strategy and Innovation, Digital River, suggests that there is no reason to hesitate:

Kristina: Is now the right time for a retailer to get involved with this type of subscription service?
James: The short answer is yes. Experimentation is important, especially in retail, to create an ongoing experience. The subscribe-and-save concept is the convenience play, which is perfect for things like diapers, so I don’t have to go to Target and pick out those products on an ongoing basis. The other element at play is the surprise and excitement of the curated boxes, like Target’s beauty box. You don’t know what’s going to be inside every time.

Christopher Goodfellow of Sift Media has a realistic take on the hurdles facing a new subscription box business, but his enthusiasm about future growth is clear:

It’s an exciting time for subscription box businesses. They sit at the intersection of several consumer trends: people are more interested in provenance, whether it’s buying British or supporting craft breweries; the interest in provenance is driving people to shop locally and buy from boutiques (witness Waterstones’ faux independent bookshops); and the comfort of home delivery brought on by the rapid increase in ecommerce. Those that have been successful stress the trick is to make sure your audience is well defined. That your marketing can target and convert them in a cost-effective manner in a well developed, content-led sales funnel. And that you continue to build engagement throughout customers’ lifetimes. 

However, there are a number of industry analysts who think that the potential is much more limited, or that a bust is just over the horizon. CNBC’s Krystina Gustafson foresees a coming winnowing and consolidation.

A shakeout is already underway among the smaller subscription box players. A recent report by CB Insights mapped out funding at 57 start-ups selling subscriptions for physical goods. Collectively, they’ve raised more than $1.4 billion, the intelligence firm said. But as more players enter the market, the success of these businesses has varied widely. Whereas Dollar Shave Club was acquired by Unilever for $1 billion, the celebrity-focused Beachmint site – which had raised nearly $75 million in four rounds of funding – was shuttered.

Econsultancy tech reporter Patricio Robles asks, “Is the subscription commerce boom over?” She compares the industry to the “daily deals” business model, a trend that came and went.

The rise and fall of subscription box services was just as predictable as the rise and fall of daily deal services. Subscription businesses obviously have attractive attributes, the most attractive of which is arguably an annuity-like revenue stream. But there are numerous cons to the subscription commerce model that make building a business for the ages a challenge. … it seems quite possible that subscription box services could go the way of the daily deal, leaving investors who have funneled over a billion dollars into the space very disappointed. But even if subscription box services have already seen their best days, subscription commerce is not dead. Some subscription box services will survive.

Stacy Berns, writing in Forbes, is not asking a question. She states, “the bubble is ready to burst”:

While sub-box businesses have been the shiny new object in retail, their edgy exterior does not mean they are immune to the age-old principles imparted by successful retailers through fad and fashion – innovate, personalize and fill a void.  And only the ones that do, will survive.

INSIDER TAKE

So which is it? Boom or bust? Well, take a look at a few more pieces of evidence. One of the bigger players, Loot Crate, is expanding with a Sports Crate. (source: aNb Media) Large retailers moved into the space dramatically in 2016, notably Hasbro (see above), Sephora’s Play!, Amazon’s Prime Pantry, and Target’s Beauty Box. Amazon saw full year 2016 sales growth of 38% overall in a overall market that grew only 6% (source: Chain Store Age) — although one cannot attribute Amazon’s growth entirely to subscriptions!

I can confirm Amazon’s subscription box power personally, however. Last year my wife signed up for recurring Amazon delivery of toilet paper, Ovaltine, and IZZE soda. I marvelled that there was a winning business model in shipping cases of soda-pop through UPS! But so it seems, at least for my household pantry.

Note that even the bleakest of naysayers does not expect subscription box retail to disappear. Rather, expectations range from rosy growth to some measure of retraction. In a competitive landscape, with many players jostling to stand out, there will inevitably be some firms foundering, some acquisitions, and some survivors. But booms don’t have to lead to busts, and there seems to be room for growth in this marketspace.