Subscription-Based Startups Size Up Amazon, Brick-And-Mortar Stores

Xconomy Wisconsin — 

Amazon said it shipped more than one billion items worldwide this holiday season, marking another record-setting year for the Seattle-based online retailer. Sales figures tell part of the story, while Amazon’s (NASDAQ: AMZN) steadily expanding geographic footprint tells another. The upshot is that for a new company looking to break into e-commerce, Amazon is likely to be viewed as a competitor, partner, or a combination of the two.

That’s the landscape some startups in Wisconsin are navigating as they build businesses delivering goods to customers’ doorsteps each month under a subscription model. There are several key differences between the companies—Bright Cellars and Wantable, both based in Milwaukee, and PrettyLitter, which participated in the Gener8tor accelerator program in that city last year—but leaders at all three seem to relish, and see advantages in, playing the role of underdog in their effort to compete with incumbents, including Amazon.

These early-stage companies see opportunities to differentiate themselves through novel products, bespoke services, and educational experiences.

“Amazon’s going to take 20 to 30 percent right off the top, and then there’s the shipping fee,” says Daniel Rotman, founder of Los Angeles-based PrettyLitter, which sells cat litter that’s designed to change color if a cat is experiencing certain health issues. “Cat owners very much are a passionate community [and] effectively consider themselves parents.”

Rotman launched PrettyLitter in California in 2015, and returned to the West Coast in November after graduating from Gener8tor. While his startup is still relatively young, he points to other companies that he says have shown it’s possible to persuade potential buyers to start ordering items online that they previously purchased from a physical retailer.

He mentions two companies that ship razor blades to a mostly male clientele: Venice, CA-based Dollar Shave Club, which Unilever (NYSE: UL) bought in July for $1 billion, and Harry’s, which is based in New York. At first Harry’s only sold razors through its website, but several months ago the company said it had teamed up with Target (NYSE: TGT) to allow customers to purchase Harry’s razors offline as well. Rotman says he could see PrettyLitter taking that same route eventually.

“Given the fact that the majority of cat litter is still bought [offline], yeah, I’d love to see PrettyLitter in brick-and-mortar [stores],” he says. “But I want to make sure that it in no way undercuts the value or our ability to sell competitively online.”

Rotman envisions PrettyLitter expanding its product line in the future to include things like mats, scoopers, and liners for litter bins. Asked about Pets.com, a once-promising business that has come to represent a microcosm of the dot-com bubble bursting in the early 2000s, Rotman believes the company was a victim of poor timing. Today, consumers know they can buy virtually any product on the Web, he says, and there is a higher level of trust in most online retailers compared with 15 years ago.

Jalem Getz remembers Pets.com. Getz is a serial entrepreneur whose latest venture, Wantable, ships its customers boxes of goods each month that contain clothing, beauty products, and other accessories handpicked by a team of stylists. Previously Getz led BuySeasons, an online retailer and distributor of costumes and party supplies that he co-founded in 1999 and helped to grow to $170 million in yearly revenue.

Getz says he doesn’t foresee a bust in the technology sector on the scale of what happened in the early 2000s. He says that while there’s a “fear of Amazon” among some companies looking to launch or expand an e-commerce platform, it’s clear that buying and selling items online is something that’s here to stay.

Still, Getz says some of the other startup companies that offer subscription services and have grown quickly “are just going to crash and burn.”

“The writing has been on the wall for a long time,” he says.

One company Getz singled out was New York-based Birchbox, which followed a rapid growth period with multiple announcements that it was laying off employees. The company is similar to Wantable in that it ships items directly to customers each month, but Birchbox focuses mostly on makeup samples. It also tries to beat competitors on price—subscribers pay $10 a month, while Getz says that Wantable’s rates for a box of goods, any of which can be returned at no additional cost, start at $36.

But with the core service that fueled much of Birchbox’s growth, products are not matched to the skin tones or preferences of individual clients. The idea was on top of spending $10 a month for samples, subscribers would visit Birchbox’s website and buy more makeup from its partner vendors à la carte.

“But that didn’t work,” Getz says. “All the vendors that sell to Birchbox are telling us, ‘They’re asking us for free samples but they’re not buying any of our product.’ Nothing, to me, paints a better picture of the flaw in that business model.”

Other competitors in the makeup subscription business faced challenges in 2016. Seattle-based Julep settled a lawsuit brought by the Washington state attorney general stemming from complaints that it enticed customers with free or discounted initial shipments that were difficult to cancel.

Wantable has raised more than $5.1 million since launching in 2011, and the majority of that total has come in the past year. The company reportedly has 73 employees, and in the coming months plans to move into a larger space about far from its current headquarters in Milwaukee’s Walker’s Point neighborhood. Last month, Wantable announced that it will soon begin shipping boxes to male customers containing athletic apparel. Still, the startup “will remain a female-centric brand,” Getz wrote in a post on the new business line.

Getz believes subscription services startups can justify a premium over Amazon or physical retailers by selling each consumer a box of items selected specifically for her. Wantable makes selections using a combination of software and human judgment, he says.

That’s also part of the value proposition with Bright Cellars, a startup that sends customers boxes containing four bottles of wine, with the option to add cheese. Each month, subscribers rate the most recent shipment, and the company feeds that data into a proprietary matching algorithm to create the next shipment, custom tuned to an individual’s tastes.

Bright Cellars co-founder and CEO Richard Yau says that the service is not designed with wine connoisseurs in mind, but rather to help people learn more about wine and understand what makes them like or dislike a particular vintage.

“I could ask someone, ‘What’s your favorite type of wine?’” Yau says. “Pinot Noir comes up a lot. A lot of people don’t realize that it’s a lighter-bodied red wine. I [might then] ask, ‘Do you like full-bodied reds?’ and they say, ‘Yes.’ Those are contradictory statements. I think that’s because there’s very little information available.”

On its website, Bright Cellars lets users see aspects, or “tags,” of a particular wine—that it contains notes of cherry, for example. The ultimate effect is to help subscribers—many of whom are part of the millennial generation—become more knowledgeable about wine, as Yau says has happened with craft beer over the past decade.

Yau says that for Bright Cellars, which is also a Gener8tor portfolio company and has been growing its team since going through the accelerator, it’s not about capturing the entire wine market, which he says is $35 billion in the U.S. alone. Consumers who are particularly sensitive to price will continue to buy from stores like Trader Joe’s, he says, or from Amazon or another online retailer.

“We see Bright Cellars as a club that’s able to distill that and create a great educational experience for somebody that is newer to wine,” he says. “Most of our customers come to us via social media. [They] get to learn and interact.”