Source: Trunk Club After earning a master’s degree a decade ago, David Hill wanted to boost his personal style and signed up for Trunk Club, which promised to mail him boxes of tailored clothing as often as he wanted. Hill was visiting the company’s showroom in Chicago to meet with a stylist and pick out clothes he could wear to the office or for special occasions. The stylist helped him design a custom suit and sent handwritten notes to check how he liked his clothes, turning Hill into a loyal customer. Then the Covid-19 pandemic hit. “At first they were trying to tell me to buy sweatshirts and joggers,” he said. But Hill, 41, no longer needed new clothes as he worked from home and barely went out, and canceled his subscription. Not too long ago, major retailers were scrambling to get in on the subscription craze sweeping the apparel industry. But then the pandemic upended daily routines and made shopping behaviors much less predictable. Now, some analysts and investors question the appeal of these types of businesses and their ability to retain customers, who often sign up during a major life change but eventually lose interest. After acquiring Trunk Club in 2014, Nordstrom announced in May that it was shutting down the business and focusing on its in-house personal styling services. Rockets of Awesome, which curates boxes of children’s clothing, ran out of funding earlier this year as it sought a buyer. Stitch Fix, one of the best-known services in the space, was gaining traction in the years before the pandemic, but now it’s losing money and subscribers. The subscription business model was attractive to apparel companies because it offered a predictable revenue stream based on regular membership fees. But companies are realizing that driving profits away from the playbook is harder than they thought.
Waning of interest
Stitch Fix’s struggles to turn a profit during the Covid-19 pandemic underscore how difficult it can be to run a subscription-based business, especially when consumer tastes are a moving target. The company charges a $20 styling fee when a customer starts the styling process with boxes of clothes called “Fixes” they might like. The money can later be used on items that customers decide to keep from a box, which can be delivered every two weeks, every month, every other month or every three months. Edward Yruma, managing director and senior research analyst covering the retail industry at Piper Sandler, said people often sign up for subscription services when they’re excited about a big change, such as starting a new job, losing a lot of weight or become pregnant However, he said enthusiasm often wanes, making it difficult for companies to retain customers. According to analytics firm M Science, new customers account for the dominant share of sales at Stitch Fix, but their spending generally declines over time. About 40% of Stitch Fix’s revenue has been generated by new customers since the fiscal first quarter of 2020, according to the company. “There definitely seems to be fatigue in the box,” Yruma said. Over time, he noted that companies are also realizing the downsides of the subscription business model, “People are returning too many things with these boxes, and you just can’t make enough profit out of it.” David Bellinger, executive director of MKM Partners, said he believes Stitch Fix’s number of active customers may have peaked in the August to October quarter, when the company reported a record 4.18 million active customers. “This calls into question the long-term potential of integration,” Bellinger said, noting that inflation and other macroeconomic challenges could lead to more cancellations. In the company’s most recent quarter ended April 30, Stitch Fix said it lost 200,000 active customers, bringing its total number to 3.9 million. Its net loss jumped to $78 million, from $18.8 million a year ago. The company announced it was laying off 15% of its workforce, or about 330 people. To attract new customers, Stitch Fix expanded the availability of a “Freestyle” option last fall that allows shoppers to purchase individual items from its site without signing up for a program or paying a styling fee. But the company is still trying to make sure people know the option exists. “We’re in the midst of a transformation, and we know it won’t be easy every day or every moment,” Stitch Fix CEO Elizabeth Spaulding, who took over from founder Katrina Lake in a memo to employees in June, wrote August 2021. A spokeswoman said Stitch Fix avoids describing itself as a subscription company because it allows customers to choose the rate at which they receive boxes of clothing. In November 2017, when it went public, Stitch Fix had a market valuation of over $1.6 billion. Its market value is now less than $800 million. The company’s push to turn a profit comes as consumers say they are trying to curb their overall spending on subscription plans, according to research by Kearney, a consulting firm. The company found earlier this year that 40% of consumers believe they have too many subscriptions. People reported spending the most on streaming plans, followed by music and video subscriptions, games, food subscriptions and boxed drinks. Shopping subscriptions, which include fashion, came after these categories.
A changing consumer
Sonia Lapinsky, managing director of retail at AlixPartners, said the subscription business model needs to go through a major reset after the pandemic. Companies also need to get better at keeping up with evolving shopping behaviors, he said. “Not only are they different than they were before the pandemic, they’re constantly changing,” he said of consumers. Tara Novelich, a teacher who lives in Orange County, California, is among the once-loyal Stitch Fix customers who have since left the service. Novelich signed up for the service in 2012 when she felt pressed for time, and said she bought at least one item from her monthly “Fixes” box about 18 months ago. But then he said the quality of clothes and service began to “go downhill” and that shipments were too frequent. “I wasn’t that excited anymore,” Novelich, now 46, said. Most recently, she’s been enjoying her FabFitFun membership, which sends customers a selection of beauty, jewelry and seasonal accessories. Novelich accepts shipments four times a year. In other cases, the subscriptions may seem too excessive. A 35-year-old advertising executive who asked that her name not be used to protect her work became a part-time stylist and Stitch Fix customer in 2016. But during the pandemic, she stopped working at Stitch Fix to focus on her work full-time and began shopping at Trunk Club, which she said offered better quality. Eventually, this became too expensive. “I could never afford most of it because it would be $600 to $1,000 every month,” he said. Hill, the marketing executive who now lives in New Jersey, hasn’t gone back to shopping through a subscription program and instead picks out his clothes at a nearby Nordstrom. He recalled the days when he would visit one of Trunk Club’s physical locations and a time when he and his wife were greeted with champagne. “Obviously, that model wasn’t that sustainable,” Hill said.
