September 6, 2018 • Volume 23
Subscriptions – where are we now and where the heck are we headed?
I’m working on a presentation for our upcoming Rakuten Optimism conference in San Francisco [if you’re going to be in the city on Friday, September 7 and would like to attend, drop me a line]. I’ll be looking at the current state of online subscriptions. Not subscriptions to magazines, but subscriptions to replenishable CPG products.
When Rakuten Intelligence (then known as Slice Intelligence) launched its first market research products back in 2014, it seemed as though subscriptions were taking over the e-commerce space. Dollar Shave Club was about to overtake Gillette as the leading online shaving brand, Amazon’s Subscribe & Save program was growing much faster than Amazon’s overall business, and curated beauty box sellers copying Birchbox’s model were multiplying like rabbits.
Recently, we took a fresh look at Amazon’s Subscribe & Save [S&S] program across all CPG categories to see whether things had yet changed. The answer is a very clear sort of.
Amazon S&S sales increased by 30 percent in the 12 months that ended on June 2018, but declined as a percentage of Amazon CPG sales, from 15 percent to 14.3 percent in a year. When we dive down to the category level, we see that S&S sales are declining as a share of many categories and increasing in a few [see below for representative examples]. Disposable diapers is the most deeply penetrated S&S category, representing 52 percent of Amazon sales, but that is down from 63 percent two years ago.
When the subscription model fits the outfit
Other categories that scream out for subscription solutions such as feminine care and oral care are surprisingly thinly penetrated, at 12 and 10 percent respectively. Both are declining in category share, while modestly growing in absolute dollar sales.
The other challenge for brands hoping to push more sales to subscription is high customer churn. Across every category that we analyzed, the most common subscription frequency rate is one. Consumers either accidentally press the prominent ‘Subscribe Now’ button or do so with the intent of taking the discount, and then cancel their subscriptions.
What is going on here? The sustainable business proposition of subscriptions was, and still is, convenience; which was, and is still the principal growth driver of the e-commerce channel. Consumers, however, had to trade off control for convenience. They accumulated too many razors, they ran out of dog food too quickly, and they got locked into monogamous brand relationships that sometimes became, well, monotonous. And as Prime membership grew, more and more consumers had access to free two-day delivery [oftentimes next day delivery for people that live in densely populated markets], which gave consumers back the control that they gave up with subscriptions.
Despite a downward general trajectory, it is undeniable that subscriptions are a critical part of the CPG e-commerce landscape for some brands, in some categories, today, and into the foreseeable future. There are categories where we desire no variety. Diapers and pet food are bought for those that can’t say ‘Dude, let’s mix things up a bit for Pete’s sake!’. Bath tissue and facial tissue don’t scream out for variety, and lend themselves to packages that can be created economically without forcing the consumer to stockpile to an absurd degree.
In other categories, there is an opportunity for innovative ideas that move beyond the Amazon commoditized algorithmic S&S approach – combinations of marketing, bundling, pricing, and packaging in categories where variety-seeking behaviors are not prevalent. Startups will invent novel subscription approaches to hair care, oral care, feminine care and others. With that said, there are many categories where variety-seeking behaviors and unstable use-up rates will keep subscriptions at bay.
We’ve moved to a stage in e-commerce subscriptions where differentiated approaches targeted to particular products, and particular customers will define the next set of winners. Brands don’t necessarily have to win in the subscription game in all categories, but there will be winners, nonetheless. The biggest trick is to avoid over-investing in a category with no subscription legs.
Amazon $1 trillion and the history of retail
Amazon hit a big benchmark on Monday, becoming only the second company to achieve $1 billion in market capitalization. At the same time, we have seen a bifurcation [always a good idea to sprinkle words like bifurcate into a newsletter to burnish one’s geek cred.] amongst competing retailers. Walmart, Target, and Best Buy have found their groove in an improving economy while retailers such as JCPenney and Sears continue on their own inexorable [that’s two points in one paragraph] downward spirals.
As an analyst who has been focused on e-commerce for twenty years, it is tempting for me to write these laggards off as retailers that missed the e-commerce train. But that isn’t really accurate. Walmart and Target were slow to embrace e-commerce. JCPenney and Sears were among the first to grasp and invest in e-commerce and achieved material e-commerce penetration surprisingly quickly – largely powered by histories as hybrid catalog/store retailers.
My theory is that the demise of many retailers, certainly of JCPenney and Sears, was driven by an inability to manage aging demographics, increasingly obsolete real estate, and investors that valued stability over longevity.
JCPenney and Sears both had the benefit of more than a century of experience, with the brand recognition and trust that came with that. Many of JCPenney and Sears’ customers today began shopping with these retailers in the post World War Two era when they were young and ready to take over the world. Their loyalty fueled a shift from downtown locations to freestanding locations to shopping malls. Customer satisfaction studies that I ran on these two retailers during the mid-aughts showed that their core customers were highly content.
JCPenney’s Board, recognizing a need for change, brought in a CEO [Ron Johnson, formerly of Apple Store fame] to shake things up. But it turned out that shaking things up led to upsetting JCPenney’s older customers, who didn’t want change. They didn’t want simplified pricing, they liked promotions. They liked mall-based locations. They liked the merchandise assortments offered. The problem is that JCPenney and Sears couldn’t keep younger shoppers – the future of both companies – engaged.
Both retailers also made big moves into malls, which as we now know, became overdeveloped. At the time it made sense because that is where the core shopper wanted to shop. But when the value of these venues deteriorated, long term leases left their hands tied.
JCPenney and Sears both brought in CEOs with a penchant for ‘mixing things up’ and an appreciation for the importance of e-commerce. At that point, though, Sears was too far gone, and JCPenney shoppers were too entrenched in their old habits.
These issues could have potentially been managed, though, had they not tried to placate investors, who did not want adventure from their JCPenney and Sears investments [this is easy for me to say from the comfort of an analyst’s chair]. They wanted dividends and stability in earnings. Demographic shifts were easy enough to predict, and oversaturation of malls was, in hindsight at least, obvious. But investors that wanted growth bought Amazon, not JCPenney or Sears in turnaround mode.
The big lesson for retailers that aren’t already doomed, is the criticality [if that’s an actual word that makes three points] of building a culture that rewards constant tweaking and occasional re-invention. It is also a lesson for all retailers that skew toward older demographics; one can chase high customer satisfaction rates all the way to the graveyard.
Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.
Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.
Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.