(Bloomberg Businessweek) -- In the complex world of e-commerce, subscription boxes are such a simple idea that they sound foolproof. Customers sign up for regular installments of your products—meals, wine, cosmetics, clothes, whatever. They trust you to send them things they’ll mostly want, and they trust you with recurring payments on their credit cards. It’s a model meant to synthesize tech buzzwords such as “disruption” with an old-school, Columbia House sense of brand loyalty. What could go wrong?
Blue Apron Holdings Inc. is an object lesson. The meal-kit maker’s share price has fallen by almost half, to a little over $5, well under the price of one of its dinners, since its disappointing initial public offering at the end of June. In its first quarterly earnings report, on Aug. 10, the company’s $238 million in revenue slightly beat analysts’ estimates. But Blue Apron lost money ($31.6 million) and customers (down 9 percent, to 938,000) and revised the rest of the year’s sales projections downward. On an earnings call, Chief Financial Officer Brad Dickerson blamed costs associated with automating Blue Apron’s warehouses, which he said forced deep cuts in its marketing budget.
“Because of these factors, we’ll be reducing our marketing spend in the back half of the year, an obvious additional impact to the business’s top-line growth,” Dickerson said on the call. On Aug. 22 the company confirmed a temporary hiring freeze affecting many salaried positions. In an emailed statement, Chief Executive Officer Matt Salzberg said his team is developing products that can be adapted to changing tastes and that its customers have so much flexibility they can hardly be considered subscribers.
Five-year-old Blue Apron, which raised close to $200 million in venture capital before its IPO, has warned it may never be consistently profitable. And that isn’t just a Blue Apron problem: The business model for subscription boxes turns out to be much tougher than it sounds, because of the high costs of getting and keeping customers. “You’re coming into an area where margins have always been thin, which makes turning a profit a huge task,” says James Wester, an analyst at researcher IDC. “Just applying new technology on top of traditional industries doesn’t work.”
About 2,500 companies sell different kinds of subscription boxes in the U.S. alone, with the top handful generating nine-figure annual revenue. Profitability, however, is a different matter, and the past year has been littered with box companies that couldn’t work it out. The recently shuttered services have names like Treatsie (for high-end candy and other sweets), Fair Treasure (jewelry and other accessories), and Blush Box (beauty products, lingerie, and sex toys).
Now that Blue Apron has gone public, its numbers are more transparent than most. In pre-IPO filings, the company said it had spent an average of $94 in the past three years to acquire each subscriber, that each was paying an average of $236 a quarter for about 24 meals’ worth of preportioned ingredients, and that those numbers had dipped slightly since 2016. Counterintuitively, scale hurts subscription-box makers, because getting big means they have to spend way more on marketing. (Blue Apron spent $144 million on marketing in 2016, a 182 percent increase from the year before.) Among subscription boxes in general, “the pricing is not smart given the price of acquisition being so high,” says Ross Blankenship, a venture capitalist at Angel Kings.
Customer acquisition costs tend to rise further as companies try to retain them by introducing new products, says Jay Clouse, the organizer of Startup Weekend, an industry networking company. (On the Blue Apron earnings call, CFO Dickerson noted that a smaller marketing budget would in turn mean fewer new meals later this year.) It’s become clear in the past few quarters that raising more capital to fund marketing isn’t a long-term solution, Clouse says. And while most customers don’t mind recurring payments for consistent staple services, the kinds of personal-taste choices that subscription boxes tend to involve can turn people off, Wester says.
The e-commerce box companies managing to turn a profit have been expanding their offerings and laying off staff. Beauty-products supplier Birchbox, which has raised about $85 million in venture funding in its seven years, says it finally hit profitability in the first few months of 2017, after cutting 15 percent of its personnel in January 2016 and an additional 12 percent that June, shrinking the size of its boxes, and renegotiating shipping contracts. “The economic climate demanded that growth companies make changes to show a more immediate path to profitability, conserve cash in uncertain times, and rethink cost structures,” says CEO Katia Beauchamp.
Much of the pressure, Beauchamp acknowledges, came from investors. While VC funds have put about $600 million into subscription-based e-commerce this year, according to data analysis company Quid Inc., Angel Kings’ Blankenship says there’s a growing skepticism among Silicon Valley’s well-capitalized that bets on such box models will pay off. When budgets shrink, he says, “things like Blue Apron are usually the first to go.” —With Jing Cao
To contact the author of this story: Gabriela Barkho in New York at gabrielabarkho@gmail.com.
To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net.
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