Wal-Mart reportedly interested in Birchbox acquisition, move would fit a pattern

by Kim Souza (ksouza@talkbusiness.net) 536 views 

After doling out roughly $6 billion on e-commerce acquisitions in recent months Wal-Mart is reportedly in talks with beauty subscription company Birchbox who is shopping itself to various retailers. The story was first reported by Recode on Wednesday (Aug. 9).

Walmart U.S. e-Commerce CEO Marc Lore has repeatedly said the retail giant is in the market to acquire interesting online businesses that can provide expertise and incremental sales potential for higher-margin categories.

Wal-Mart declined to comment on the Birchbox rumor, but retail insiders seem to think New York-based Birchbox would be a good fit for retail juggernaut given the two parties already cater a similar customer base.

“Wal-Mart’s interest in Birchbox certainly fits a pattern as it seeks to fill digital category niches, this time in the beauty subscription arena,” said Carol Spieckerman CEO of Spieckerman Retail in Bentonville. “Wal-Mart is steadily building a portfolio of digital-forward holdings that will expand its reach and relevance to completely new customers. Beauty and is such a hot and high-margin category. It only makes sense that Wal-Mart would turn its acquisitive eyes in that direction.”

Lore told the media in June there are several “long-tail” categories that offer potential for the retailer looking broaden its customer base. Beauty is such a category as is apparel and home furnishings which Wal-Mart and Jet.com have already invested in with ModCloth and Bonobos, in addition to the $90 million deal Jet made for home goods e-tailer Hayneedle in 2016.

Annibal Sodero, professor of supply chain at University of Arkansas, told Talk Business & Politics a Birchbox deal with Wal-Mart makes a lot sense.

“At this point Wal-Mart has made their growth strategy very clear and we can see they are executing it pretty well. The good economy and low interest rates allow Wal-Mart to borrow funds to pursue more acquisitions while money is still cheap,” Sodero said.

Birchbox launched in 2010 as one of the first subscription-based businesses to offer beauty products to customers which are curated monthly based on a customer preferences. Since that time Birchbox has grown to more than 1 million subscribers who pay $10 per month for the box of beauty samples. Birchbox generates about $200 million in annual sales. The company also has a brick and mortar store in Soho (New York City).

In recent years, Birchbox has lost some of its marketshare to a market player Ipsy which caters to a higher-end customer and beauty retailer Sephora. In 2016, Birchbox streamlined its operations, reduced its workforce by 30% and invested heavily in mobile marketing. CEO Katia Beauchamp described 2016 as a “scary” time for the business. The company slashed overhead costs, marketing spending and automated some of the business.

The payoff for Birchbox was profitability which was achieved this year primarily because 35% of the subscribers are returning to the company’s website to purchase full-size products which now include two private label brands.

Lore has also said Wal-Mart will be attracted at online retailers which have curated their own brands and have a loyal following. The two private brands launched by Birchbox would fit that criteria.

Sodero said given that Birchbox has now turned its own business around, the timing couldn’t be better for acquisition. He said the several retailers involved in talks with Birchbox is an indication that subscription models are important for the future of retail. He said the customer base of Birchbox is aligned with the Wal-Mart core customer which can make for easy transitioning. He said there is a lot Wal-Mart could learn from a Birchbox given its loyalty base and global reach.

“We know beauty is a growing category and it’s an area where Wal-Mart could do better. Birchbox could help them get there.” Sodero said.

The subscription model makes sense and Restoration Hardware, now rebranded RH.com, is a good example, he added. The one-time online home gadget and hardware retailer broadened its business adding home furnishings and textiles. Sodero said he bought an 8-foot long couch from RH.com online and his wife is also a fan of HR.com’s new subscription service which provides deep discounts to its most loyal shoppers.

“You can recoup the cost of the subscription from the discounts you get when you subscribe,” he added. “Wal-Mart could benefit from the loyalty that comes from subscribers.”

Wal-Mart launched its own beauty subscription service last year and it used BrandShare to help with this endeavor. The Walmart Beauty box is sent quarterly by season to subscribers and recently the retailer launched a Men’s Grooming box, which costs $10 per shipment. Like Birchbox, Wal-Mart’s model sends product samples to its subscribers. Wal-Mart recently has dabbled with the Walmart Baby Box, Back to College Bag, and Sam’s Club offers a Caregiver Box which includes samples of health and wellness products.

With the know-how that Wal-Mart could obtain from Birchbox in subscription business could also be applied to its other e-commerce businesses such as MooseJaw, Shoes.com, ModCloth and Bonobos which have a loyal customer base.

NPD Group recently reported the subscription market for apparel is one of the hottest shopping channels in the swiftly evolving $217.6 billion U.S. apparel market.

“We have entered a new world of retail where the traditional leaders are faced with unconventional channel competition and subscription services are the newest player,” said Marshal Cohen, chief industry analyst with NPD Group. “Consumers are more critical about the purchases they make today and no longer purchase just for the sake of buying. The personalized approach of subscription services complements the shift toward more prioritized spending.”

He said there is muich room to grow within the subscription model, and the competitive field will continue to expand as online retailers develop subscription services and options for auto-replenishment.

Sodero explained that from a supply chain perspective, subscription models are more efficient than those for online retailers. He said the retailer with a subscriber base knows what demand is going to be and doesn’t have to carry extra inventory like retailers who have to access demand on the fly. He said because the retailer can buy inventory in bulk well ahead of time for shipment it can likely negotiate better costs. And because the boxes will be shipped on a set schedule, the retailer can fill the full truck load with boxes which is far more efficient that shipping final mile for one or two items.

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