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Are subscription boxes the new D2C channel for CPG brands

The term “Subscription Economy” was first used by Zuora CEO Tien Tzuo to describe the purchase and consumption of digital products or services through a pay-as-you-go model. Nowadays, consumers primarily look for easy access, entertaining personalized experience, and an attractive price. In return, CPG corporations have responded with “surprise me” bundles or tailored boxes, containing products and services adapted to consumers’ ever-evolving lifestyle. With 100 percent annual growth in the past 5 years, subscription e-commerce will increasingly impact CPG business models.

Subscription models started to gain significant ground 20 years ago with the growth of mobile phone adoption. A few years later, with the launch of Salesforce, the software business completely shifted as well to a SaaS model. More recently, the entertainment industry, long driven by the consumer’s desire to own content, went through a similar disruption with the rise of Netflix. Those major industry changes all relate to consumers’ changing habits and their desire to experience and try rather than own products and services. Seeing those opportunities, CPG brands have started to surf on those trends and offer “boxes”, monthly bundles of sample and/or full-sized products According to research conducted in 2018 on 4000 U.S. online shoppers, 15 percent subscribed to one or more offers to receive products on a recurring basis, mostly via monthly boxes. Although in comparison, 46 percent of online shoppers chose to subscribe for an online streaming-media service such as Netflix or HBO Now, the gap is narrowing.

The growing adoption of subscription in CPG has been driven by two main benefits: – Simplicity and predictability, reducing the need for consumers to make multiple buying decisions – Saving consumers’ time by reducing regular trips to physical points of sale while ensuring recurrent replenishments of daily products (razors, beauty and care products, food…)

The acquisition of data is a structural challenge that many CPG brands face in a variety of sectors – the very nature of product-based customer relationship is that only a limited amount of data is generated for the manufacturers. Retailers, being in direct contact with consumers, will earn the customer relationship including all consumer data generated. From major brands like Nike to small companies just starting out, companies are shifting to a direct-to-consumer model not only to reduce costs and improve customer experience, but exactly for this reason: collect customer information. Brands realize the broad potential of subscriptions as the model itself allows for contextual data collection. In addition, 22 percent of consumers would accept sharing data and information that would allow receiving a more personalized product or service (Deloitte survey, 2016) P&G, for instance, launched a direct-to-consumer, subscription business for its Tide Pods branded Tide Wash Club. This service not only requires customers to register shipping and payment information with Tide, but also their consumption pace, giving insights into their consumption habits.

In 2018, there are 18,5M subscription box shoppers in the U.S. in 2018, which equals a 24 percent increase since 2017.

In 2017, online sales made up 90 percent of the growth in the CPG industry, displaying a fast-growing segment in a traditionally stagnating industry. In that context, subscription models, albeit still small, are experiencing phenomenal growth. In grocery for example, where store revenue is forecasted to grow by 1 percent annually through 2022, the market for meal kits – proposed on a subscription box model – is projected to grow by a 10x factor over the same period.

Launched in 2012, Blue Apron proposes meal kits priced between $8 and $15 containing a variety of chef-designed, step-by-step recipes on a weekly basis. It counted more than 750 000 customers and 1 million subscribers by the end of 2017. In the beauty section, launched in 2011, Ipsy offers monthly boxes including 4 to 5 sample products for $10/month. In the U.S. it is the leader with more than 3 million subscribers as of 2018. There are subscription boxes for every need. Dollar Shave Club launched in 2011 has been acquired by Unilever in 2016 for $1 billion. The company has now 3,2 million subscribers in US, Canada, UK and Australian, and plans to expand to Europe and Asia.

The term “Subscription Economy” was first used by Zuora CEO Tien Tzuo to describe the purchase and consumption.

In 2017, online sales made up 90 percent of the growth in the CPG industry, displaying a fast-growing segment in a traditionally stagnating industry. A recent study conducted by Nielsen and the Food Marketing Institute forecasted that by 2022 consumers will spend $100 billion dollars per year on online grocery. The same research forecasts online grocery sales will make 20 percent of all grocery sales by 2025, becoming a $100 billion market. The acquisition of Whole Foods by Amazon marked the establishment of the ecommerce wave, with groceries being the last frontier for ecommerce disruption. This year, Amazon Fresh became Amazon’s fastest-growing category with sales reaching a 40 percent growth. Additionally, a survey conducted by Coresight Research revealed that 59,5 percent of U.S. internet users shopped groceries from Amazon within the last 12 months. To face the ever-incoming new smaller challenger brands entering the market, food and beverage giants are developing their own direct-to-consumer channels. Additionally, according to Forbes, mergers and acquisition are at a 15 year high in the CPG industry. CPG giants realize that the industry growth is happening online, hence either mimicking smaller DTC brands’ strategies or acquiring them such as Unilever with Dollar Shave Club and Sunbasket.

Written by: Richard Impenge