Beauty Subscription Model Gets Another Boost

There’s plenty of life in the beauty subscription model yet.

 

After Unilever’s reported $1 billion deal to acquire subscription grooming site Dollar Shave Club, a pioneer in the space — Birchbox — has raised $15 million in bridge financing from existing investors that is meant to act as a cushion as the company works towards profitability.

Sources close to the company said that Birchbox is expected to become profitable by the end of 2016.

 

“Birchbox raised a $15 million round of internal financing from existing investors to bridge the company to profitability,” said chief executive officer Katia Beauchamp. “Birchbox’s investors are very supportive of the company and its ambitious long-term vision, and continue showing their confidence in the business through this financing round.”

 

The pioneer of the beauty box business raised the capital as some beauty and subscription models are being heralded for their success. The Unilever deal for Dollar Shave Club underscores the relevance of the model, according to Ken Wasik, managing director of Stephens Inc.’s consumer practice. “Any time you get a consumer to sample your item the retention rates and conversion rates skyrocket,” he said, citing both Proactiv and Dollar Shave Club as successful subscription models. “There is a smaller sample of the population that [Birchbox] fits perfectly,” Wasik said.

 

Birchbox’s investor lineup includes Accel, Aspect Ventures, Bullish, First Round, Forerunner Ventures, Glynn Capital Management, Grace Beauty Capital, Grape Arbor VC, Harrison Metal and Lerer Hippeau Ventures, as well as individuals.

 

“[The bridge financing] is likely a way for the company to maintain focus on an operating plan that they’ve put in place…in order to get them to an eventual sale or other form of capital,” said Martin Okner, managing director at SHM Corporate Navigators.

 

Birchbox’s recent moves — including layoffs — have been motivated by its drive towards getting into the black. Since the beginning of the year, the company has cut roughly a quarter of its staff — about 80 employees. After the latest round of layoffs in June, Beauchamp wrote: “We are one of the fortunate companies that is growing and has supportive investors, but today’s climate demands growth companies make changes to show a more immediate path to profitability, conserve cash in uncertain times and rethink cost structures in order to sustain and build a company that can both survive and thrive in any market.”

 

The business has also put its retail rollout on hold and decided to alter its points system, which gives customers discounts, so that customers earn points only for their first five product reviews and points expire after six months. That decision prompted some customer backlash on social media. Last year, Birchbox engaged J.P. Morgan Chase & Co. to explore options, sources said.

 

Birchbox currently brings in about 65 percent of its revenues from its $10 subscription box service, and 35 percent from the sale of full-sized products, the company said.

 

Birchbox’s latest capital infusion follows the company’s previous $60 million Series B round in April 2014. After that round, which valued the company at about $485 million, the business expanded and opened its first retail location, with plans to eventually open more. Several sources suggested that in those days, Birchbox took on too much, too quickly, but stressed that the company still has a chance to make it — especially in an environment where subscription models are proving attractive.

 

“They need to either focus on being a retail company or being a media company — that’s their fundamental issue,” said Okner. “For a prestige company, as a media channel or more of an awareness-and-trial-building vehicle, that becomes the cost center. I think they’ve been really pressured by a lot of manufacturers to become more of a retailer, and that obviously comes at the expense of media.”

 

“They’re sort of caught in the middle right now and they need to pick a path,” Okner continued. “They’re not dead. They’ve got a viable model, they just need to retrench and focus on their core.”

In 2015, Birchbox hired a team to oversee the brick-and-mortar expansion strategy. At the time, Beauchamp told WWD: “Our expansion in bricks-and-mortar wasn’t on plan when we launched five years ago — we were focused on the subscription-box model and on sampling. But as we evolved, we realized that this business is about underserved consumers. We can’t be just one channel. And as we have become a much larger company, it’s become really important for us to have both expertise and entrepreneurial tenacity. Our roots are online and user experience is key — we want to make sure they will be delighted in-store, too. It made sense to focus on hiring a team with extensive experience in retail.”

 

While some industry sources have expressed skepticism about Birchbox’s decision to go into retail, not all experts agreed.

 

“I think you need stores,” said Jane Hali, ceo of Jane Hali & Associates, a retail analysis business. “If you look at any retailer, if they have e-commerce, if they have small stores, if they have off-price — all of those channels are another touchpoint for the brand, and the more touchpoints, the more conversion.”

 

Customers who have shopped at Birchbox’s retail outposts have a 2.5 times higher lifetime value with the business, according to the company.

 

But for now, Birchbox’s focus remains on e-commerce. “We’re still very focused on being digitally native while continuing to grow and enhance our omnichannel efforts; we want to remain predominantly digital with a smaller, more impactful offline presence,” Beauchamp said.