October 14, 2019: Subscription services’ unclear future, Walmart sells Modcloth, retail jobs on the decline

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TRANSCRIPTION

Julia Raymond:
Our guests today include Diane Ellis and Dean Handspiker. Diane is a retail executive with 35 years experience. She’s currently CEO of DME Advisory Group, and previously held roles such as brand president for Chicos, CEO of the Limited, and CEO of Brooks Brothers.
Dean is the vice president of design for product and store development at custom men’s wear retailer, Indochino. He’s responsible for the overall vision, look, and feel of Indochino’s product and retail business. Diane, Dean, thank you both for joining the show today.

Diane Ellis:
Thanks! Our pleasure.

Dean Handspiker:
Absolutely. Thank you for having us.

Julia Raymond:
Great to have you. There’s a new report out about subscription services, from razors in bulk, to bones for your dog. More than half of online shoppers say they’re members of at least one monthly subscription service. And a new survey was just released from Clutch, that’s the ratings platform, and it revealed that Dollar Shave Club is the leading subscription box platform. Followed by Ipsy, Blue Apron, and BarkBox.
It also reported that millennials are the most likely demographic to be members of retail subscriptions. That said, it also indicated that more than a third of all retail subscribers cancel in less than three months. Over a third cancel in less than three months, and that jumps to over 50% canceling within six months of signing up. Those numbers are pretty shocking.
Diane, would you agree that this widespread retention problem is because the novelty wears off, or what’s going on? It’s a huge market.

Diane Ellis:

Well, I think it depends on what kind of subscription service you’re talking about. With regard to the Dollar Shave Clubs, and the Quips, and the Blue Aprons, and all of that, it can be where the novelty wears off. But I think the value equation has to be strong, where you’re getting either a premium product for a high value price and significant convenience. Or, you’re getting something that provides a sense of discovery or newness, or takes you somewhere where you on your own wouldn’t go.
So, the value equation is really driven by either expertise in the category that provides either, whether it’s wardrobing services or things like that, that allow it to be a high-value proposition. It depends on whether the novelty wears off on what kind of service it is. And again, you’re seeing the strength of those services in millennials because of a lot of that relating to the rental economy, and the fact that a lot of these subscription services are really driven by rental models. Where, again, they’re not making the commitment to own the products.
It does create some challenges with that high fallout rate to really either make it so seamless and so high value and you’re delivering a really significant premium product for a value price, or you’re getting to learn the consumer and really provide value by bringing other related products that really fit that consumer’s lifestyle. So, really understanding them and learning more about them through the process and continuing to add value in that manner. But it is a challenge to maintain that hook to keep the consumer interested and committed to something that’s a monthly service.

Julia Raymond:
Absolutely. And Dean, would you agree with Diane that it’s just about the challenge of keeping the hook and the high value combined with convenience? Or are there other factors

Dean Handspiker:
I agree with Diane, in that to keep up by the convenience factor, that it’s going to make my life easier, so I’m going to continue to subscribe. Or it’s going to somehow surprise, delight, offer that tremendous value that Diane spoke to.
But the turn is alarming. The cost of acquisition to get these subscriptions kicked off. And then the turnover in the loss of at that three months from this study, six months is huge. And I have to look to, to us as consumers, as you look through your Visa bill today and be peaks subscription between movies, music, news games, even everything data to support, that’s just the media consumption. So before the boxes arrived, there’s quite a few charges on your Visa before you leave the house to go shopping or go online to go shopping. There’s a lot of things. So I’d have to think there’s a realization with a lot of, especially this target demographic that seeing this on their credit card monthly and oftentimes accruing interest. Oh well what’s the need to have versus a nice to have some months in that review. We’re all looking to reduce some expenses in some areas and increase our spend on experience today. And often times our frills to the lifestyle as opposed to necessities.

Julia Raymond:
I would add to that, just I read a report, it was from 2018 but it said the average, and this is not globally speaking, but the average American pays just under 250 a month for subscription services and obviously if that report included Amazon, that takes up about half for prime. But is the acquisition costs that you spoke to Dean, how high would you estimate … I because if you’re having drop-off within six months, I don’t see all some of these companies that are profitable. I know personally I received so many subscription meal service mailers each month and I just toss them in the trash.

Dean Handspiker:
Absolutely. The mailers, the online retargeting, all that, the expensive way to market today, the online … the trash that’s coming through to your mailbox is actually less expensive in some cases. The cost of acquisition and could easily be from 50 into the hundreds of dollars depending on the category that you’re looking at. There’s no question that is expensive and if you can’t keep them at $30 a month for a year, plus you’re definitely not getting a return on investment.

Diane Ellis:
Yeah, and I think it also is looking at whether that balance between the retention that you’re getting in that model versus what you’re paying for costs for brick and mortar and the type of retention that you’re getting there as well. So I think in today’s environment consumers are not loyal in general. There’s less loyalty and more switching or opting to other alternatives that it’s a challenge across the board. I think it’s a question of whether, when you look at the models which have some for your particular brand make sense given the fact that you are a brick and mortar model is not necessarily as productive and has high acquisition cost as well.

Julia Raymond:
I think that’s an interesting point. And I’d ask you, what do you think about the future of these services? Because it seems like the market might be getting a bit saturated, but at the same time we heard a Rent the Runway Just a few weeks back announced to customers that they weren’t accepting new subscribers because of some issues they were running into, I think was scaling. So are we just going to see some top players come out of this and consolidation?

Diane Ellis:
Well I think Rent the Runway, it looked like it was a particularly a short term issue for them with a shift in some of their supply chain systems that caused that blip and that they weren’t taking new customers on the short term until they resolved some of the glitches with their new supply chain systems. I don’t know that it’s necessarily a scaling issue more than a issue with them with regard to upgrading some of their systems.
But that being said, I do think there as an anything, you know the wave of maturity and over-saturation in retail, that cycle is happening much, much faster. And so they’ve over-saturated the market in a lot of cases and now there will be fallout amongst key players. And those that really provide that value proposition enough to forego the hesitancy when they look at their monthly credit card as Dean said, that that says, “Look this is really worth it and I am getting value for that monthly investment.” Those will be the ones that will continue to, forge forward. But the ones where that value proposition is isn’t enough or the process isn’t seamless enough will fall by the wayside.

Dean Handspiker:
It’s interesting when you bring up Rent the Runway and certainly if it was a logistics challenge that their latest hiccup, but the evolution of their business to brick and mortar even is telling. The cost of acquisition piece plays into these decisions and as they looked to some of these stores to be physical spaces to connect with their client at a deeper level to acquire new customers who might be hesitant at the outset to shop online and risk the fit, the quality, the detail that it is more obvious or more readily visible in store. So some changes there. These subscription services in my opinion that they make your life easier, are going to continue to flourish. The others are going to have to evolve.

Julia Raymond:
Definitely. And obviously Amazon does a great job at bundling some of those. So we’ll see. We’ll see where it goes. So next in the news we’re going to jump into ModCloth, which is actually just a way of talking about Walmart because Walmart has sold the woman’s fashion brand after two years of attempting to dive into that market. And it’s laying off dozens of Bonobos employees.
So Walmart initially purchased ModCloth, the vintage inspired apparel and accessories brand for it reported 50 million. That was back in two 17 followed by its purchase of men’s wear brand, but almost for the 300 million.
The move was intended to help Walmart build its e-commerce assortment through proprietary brands, but in the case of ModCloth was instead abandoned by many of the indie brand’s loyalists. Dean what’s your take on Walmart’s decision to offload ModCloth? Was Walmart maybe too off-brand for ModCloth’s millennial customer based? Are there other variables you think impacting this decision?

Dean Handspiker:
Yes and and yes. First just want to say that I’m a big fan of both of these brands and what I would say represents next generation retailers with their approach to inventory and showroom and just to the potential to be a more efficient model all the way through and still delivered to clients what it is they’re looking for at home or in store. The acquisition had a few challenges at the outset. I went directly to the Bonobos Instagram page the day of the acquisition was announced and the amount of hate from their existing clients that was being posted, I’m sure similar to ModCloth, “I’ll never shop with you again.” Just the difference in values between those that saw themselves as part of the Bonobos family that perhaps didn’t see themselves ever shopping at a Walmart or I’d never shopped at a Walmart. There was a disconnect, disconnect in cultures.
That said, I certainly appreciated that Walmart could help both brands, all of the brands that they’ve invested in scale to the next level and hopefully maintain that independence and that culture and those values to an even wider audience. So something laudable, but the bigger challenge really is that you’re, you’re looking at a direct to consumer online brand that’s making this transition, brands plural, that are making these transitions and burning a lot of cash. And this, this online model that you see everywhere today most all of them are burning a lot of cash. They’re raising money and spending it as fast as they can and, in some cases, spending it well and in others spending it to be seen to be growing and making mistakes and losing money as a result. And I can’t speak to exactly where ModCloth and Bonobos is and but they … how it is they’re spending their money but their expansion has been expensive.
Bonobos is going to the top balls, they’re doing great build-outs, they’re spending a lot of cash. They’re not testing their way into new markets. They’re planting a flag and that continues to burn. When you contrast that to a Walmart who is widely publicly traded and consistently profitable and has invested in new markets and pulled out in a fairly short window internationally because the return wasn’t there, this is not surprising that it’s come to pass, that that faith is not as great as it was a couple of years ago when they went down this road.

Diane Ellis:
I think, for a Walmart the question was what was the wisdom for them? And I think they thought perhaps it was a way for them to change the positioning a little bit of their, their perception as a brand to be a little bit more contemporary and to really learn from the absorb the skillsets of the people like Bonobos and ModCloth and find some synergy with regard to the perception of the Walmart brand. In that regard it really didn’t … the cultures to Dean’s point were way to different and the models were very different and in regard to, Walmart is all about throughput and low cost and high efficiency and you’re looking at trying to latch onto that something that’s really about uniqueness and high quality and along with that very high cost.
I think you’ll see again, Walmart’s put Jetblack up onto the market on the sale block because again there, while it sounded like, an interesting concept and idea to be able to deliver same day and high touch and all of that, it’s costing … It’s about $15,000 per year per customer in cost to do that. So it doesn’t again, fit the returns and ROIs that that a high efficiency model like Walmart is looking for. So I think Walmart’s saying where they’re really putting their focus more on those categories where they have an opportunity to leverage Omni channel, whether that’s grocery or other categories where they’re putting more of their eCommerce and online investment in those categories versus these proprietary independent brands. So I think it was a learning and an experiment for them, but doesn’t seem to be the direction that they’re going going forward.

Julia Raymond:
Definitely it does not. And for Walmart, it seems like it’s a bit of a drop in the bucket and maybe it was just too bold of a company for them to take over. I noticed it was one of the first apparel companies that pledge no Photoshop.

Diane Ellis:
Right.

Julia Raymond:
In its early days in 2002 and beyond. So yeah, the values in the line, and I think Walmart’s move as you said, into grocery and some of these other categories is probably more top of mind, more valuable right now.

Diane Ellis:
Well, I think that’s always the challenge with any M&A, that sometimes why we admire companies to bring them in is to change and add to … change our culture and change our positioning. But if the cultures are too different and there’s not synergy with the end consumer, sometimes again the value proposition of that M&A doesn’t pan out.

Julia Raymond:
Despite a robust economy, a September, 2019 report shows retail jobs in the US are on the decline. Despite an additional 136,000 jobs, the unemployment rate fell under their 0.2% last month. And within that, the retail industry shed another 11,400 jobs that were mainly in apparel and accessories. So not a huge slip, but Diane, can you speak on the industry changes contributing to some of the job losses within apparel and do you think we’ll recover these numbers and over surface maybe in other categories?

Diane Ellis:
Well, I think again, for apparel and accessories it is overall, a declining spend. And so with the combination of store closures as well as the challenge that retailers are having to get a more efficient as sales decline as comps continue to be a challenge in the sector they’re cutting payroll and cutting non core essential positions within their corporate structure. So you will see again more tightening of the belt or I would say lean models within apparel and accessories. Now will other categories pick that up? We have emerging categories within this retail sector that are now opening locations and stores, things like a cannabis and other categories that are growing. So that balance will probably shift somewhat. I don’t know that it will pick up enough to absorb all of those open roles, but you’re looking at that shift in probably more into the service sector.
So whether you’re talking about restaurants or other service businesses again, everywhere you go there’s help wanted signs up everywhere looking for people and looking for qualified people. But I think it’ll shift again, more out of goods into services overall and out of apparel and accessories into new emerging categories.

Julia Raymond:
Of course, and like you said earlier with the rental economy in the services economy, this makes a lot of sense and could definitely be where the shift is happening. Do you agree with that, Dean?

Dean Handspiker:
Yes, certainly. I agree on the shift part. I will say though, despite retail having shut 11,400 jobs as a retailer who is growing and expanding, we’re having a great deal of time … great difficulty in recruiting the right people in our spaces nationwide. Really, it’s not limited to one market or one coast across the country. We’re certainly challenged to find the right fit. I agree, the shift and you know the jobs will shift to emerging or new higher growth categories and looking to the malls and where the space is being repurposed from apparel and other categories that are shrinking to food, to entertainment to experience, those categories will start to pick up some of these jobs that are being lost in, in apparel categories today. It’s a shift and it’ll happen naturally. Certainly the unemployment rate is low enough in the US to say that everyone that wants to find a job can, can find one in one category in other.

Diane Ellis:
Yeah, I do agree with Dean. It is a challenge to find qualified staff and associates to bring in. We saw, in my recent past the shift where you used to see a shift out of you would lose qualified associates to other competitors in your category that were paying more or had a better bonus program or something like that. But in the last few years you’ve seen that shift out of retail entirely where those former associates and staff members are actually moving into other non retail jobs like, again, food or banking or other categories where they’re feeling more stability perhaps and more less demand for weekend hours and even hours and things of that nature.
So as the unemployment rate goes down will have an opportunity to be more picky perhaps on the benefits and work life balance that they’re looking for. And so retail becomes sometimes a bit of a challenge across the board, particularly in a high employment economy.

Julia Raymond:
Interesting. So you’re saying maybe the perception of increased stability in, in other areas would maybe deter someone from continuing with retail or looking for a job based in retail. But then Dean, I also wanted to ask you, are the requirements changing? I know we’ve talked a lot about in the past how important frontline employees are and that there’s a shift and in the caliber of people needed for the roles and things like that.

Dean Handspiker:
Definitely in our category. Something that Diane said that in regards to people leaving retail for other industries completely, perhaps even outside of service and I see that more and more where before when someone resigned with us or in my retail career, it was to go across the hall for 50 cents more or a promotion or what have you within the center. Today it is oftentimes out of retail and into perhaps a nine to five job. This type of role. The needs for us are somewhat different and this is why we look not only to other apparel retailers to recruit from, but other retail categories that have a higher touch, higher product knowledge, higher customer service demand because we do made to measure suits while working with clients one-on-one. Someone who’s working in a center that’s predominantly or apparel retailers predominantly hanging clothes, refolding sweaters staying next to the person in line at The Gap is if not transferable skills for us.
It’s certainly not this day that someone couldn’t flourish a role with us, but it’s a different skill set. And finding people that are customer centric is harder, but finding roles that really demand that one on one with customers, it’s harder in retail today than it used to be. Too many retailers are just stacking the cash and making sure there’s not too much on the floor anymore. It’s not a terribly engaging job.

Diane Ellis:
Right. And Dean, I agree with you 100% that relationship-oriented associate that’s has the ability to build long term relationships and cultivates a client base is really critical and important. And we found actually now as it’s still several years ago at Brooks Brothers some of our best associates came out of sectors like telecom. They had built, they had come out of a sales environment and had built relationships with people that were so strong that those relationships transferred regardless of what category or what product that individual was actually selling. It was more about the relationship that they had built in that relationship of trust. So the retail environment, again those relationships oftentime supersede category or retailer or anything and having the ability to recruit people like that is critical where again, they’re able to build those long standing relationships that are high touch and in very trust oriented.

Julia Raymond:
Well, Dean, Diane, it was great having you on the rundown today and I hope to have you in the future.

Diane Ellis:
Thank you.

Dean Handspiker:
Fantastic. Thanks for having us.