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When Hayley Barna and Katia Beauchamp, two Harvard Business School alums, launched the beauty startup Birchbox back in 2010, the idea was completely novel. For a monthly $10 fee, subscribers were sent a box of five deluxe samples handpicked by beauty experts. Eventually, they could also buy a regular-size version on Birchbox’s site if anything struck their fancy.
A subscription box was the perfect way to try products before committing, and Birchbox hit instant success during its early years: It nabbed more than $80 million since 2010, expanded into the men’s beauty business (as well as internationally), and even opened stores.
Several years into the business, though, Birchbox wasn’t soaring the way it initially did. It’s since scaled back on growth plans, saw two rounds of layoffs, and had difficulties raising more funding from venture capitalists. Over the past year, it’s been searching for a buyer, as the debt it owes its investors is now due.
Yesterday, Recode broke the news that the investment firm Viking Global Investors is buying a majority stake in Birchbox, which the startup confirmed to Racked. In a statement, Beauchamp, the company’s CEO, said the acquisition is a way for Birchbox to grow.
“The next phase for Birchbox is about amplifying the impact we can have on our customer and accelerating our growth as a company,” Beauchamp said. “As an independent company with renewed investment, we are in a position to actively pursue plans that help further our mission and fuel our ambitious goals in the U.S. and in our global markets.”
While Beauchamp speaks of the news as an opportunity for both Birchbox and Viking Global Investors, Recode notes that other Birchbox investors “are expected to walk away with nothing” and that if Viking hadn’t bought the company, Birchbox could have faced bankruptcy. Although Viking, a previous investor, is giving the company another $15 million in funding, Birchbox is still reportedly tens of millions of dollars in debt.
How does a company seemingly so promising end up in such a predicament?
According to the statement from Beauchamp, the company now has more than 2.5 million customers, and last year it gained more subscribers than ever. While it can certainly be credited for kick-starting the subscription box craze, Birchbox also introduced the model to every category imaginable, from doggie treats to weekly dinners to shaving accessories to clothing picked out by an algorithm.
The beauty sector caught on too, and by 2016, the Wall Street Journal reported there were 300 other beauty box subscriptions eating away at Birchbox’s market share. While Beauchamp always played off competitors coolly, some major ones ended up coming ahead of Birchbox: Ipsy, the beauty startup by YouTube star Michelle Phan, has a subscription box called Glam Bag, which makes an annual $360 million, according to the Journal (while Birchbox brings in $200 million, according to WWD).
As the bubble of subscription boxes bursts, the novelty has worn off, and so Birchbox has tried to pivot. Beauchamp told Bloomberg two years ago that the company was “not in the business of selling people samples.” Instead, it’s been trying to turn itself into a beauty retailer, facing off with kingpins like Sephora and Ulta. The American beauty market is an $84 billion opportunity, except, as Fung Global Retail Tech’s 2017 beauty report found, most shoppers prefer a destination like Sephora because of its wide retail footprint, easy-to-navigate website, and access to prestige beauty brands.
Customers who belong to Birchbox might learn about new products from their monthly boxes, but there isn’t too much of an incentive to buy the products there. Birchbox has a loyalty program, but so does Sephora, as well as other stores that sell beauty, like Bloomingdale’s. Meanwhile, Birchbox is spending money to acquire these samples, and on its samples, boxes, and shipping.
Last year, in a note published on Medium, Beauchamp shared that Birchbox turned profitable in 2017. But as a beauty store, Birchbox isn’t all that different from what’s already out there. Birchbox collects data to make its boxes as personalized as possible, but this hasn’t exactly translated into creating the ultimate beauty experience. As Racked reported back in 2016, some customers feel their profiles aren’t leveraged the way they should be, and others complained the same type of products are constantly being sent. The company also has its own private beauty labels, Arrow and Love of Color, but it’s hardly a draw the way beauty competitor BlueMercury’s in-house label M-61 is (the PowerBlow Peel Pads are the store’s best-selling product).
Birchbox has since tried to test new iterations that might get people to spend more on its e-commerce site, like allowing shoppers to trade in boxes for points that will apply to store credit. Under new ownership, the company will work toward newness: specifically, “product innovation, the evolution of our digital experience, and scaled partnership opportunities,” according to Beauchamp’s statement. If Birchbox is going to hack away at Sephora’s business, or come out of its shadow as a monthly box distributor, it will have to debut something truly disruptive, and not just throw around that word like every other startup.