Fashion subscription services could soon experience the “Netflix effect” if the American economy officially stalls.
The streaming giant recorded losing roughly 200,000 subscribers during the first quarter this year—its first decline in more than a decade. Goldman Sachs cited “concerns around the impact of a consumer recession” when it downgraded Netflix’s rating to “sell.”
The effects of macroeconomic uncertainty are spreading to other sectors. “The collision of inflation and the world opening up is a perfect storm,” Kearney Consumer Institute lead Katie Thomas said. Fashion benefited from pent-up demand early in the year, but many shoppers are now re-evaluating their discretionary spending. Inflation-hit shoppers feel like they’re “getting less bang for their buck,” she added.
Trouble could be ahead for subscription services. “Across categories, many subscriptions are often structured as an ongoing revenue stream first, rather than determining the clear consumer need,” Thomas said. As shoppers see their grocery and gas bills go up, they might not have the budget for recurring subscriptions. “Consumers will scrutinize across the wallet, and any spend that doesn’t demonstrate a clear ongoing need will be up for review,” she added.
Kearney’s research shows that consumers seem to be reaching a new level of subscription fatigue. “Over half of consumers that the Kearney Consumer Institute surveyed said they’d like to spend $50 or less monthly on subscriptions, and they allocate over a third of that to streaming, music, and video services,” Thomas said. Forty percent expressed a desire to cut down, saying they already pay for too many services.
Fashion platforms in particular present “high complexity” for operators, “due to rapidly changing styles and preferred categories, along with logistical challenges,” she pointed out. Apparel subscriptions require more personalized customer service than simple replenishment schemes for home goods, groceries or cosmetics. “Consumers have not asked for everything to be automated,” Thomas added.
Stitch Fix is already showing signs that this shift is underway. The styling service lost 200,000 active customers in the first quarter for a 4.9 percent year over year. While the 11-year-old company has been working to move away from the subscription label, it charges a styling fee of $20 each time a shopper orders a box of clothing curated by its in-house stylists. Freestyle, where Stitch Fix shoppers can purchase a la carte like they would on a regular e-commerce site, is performing better than the subscription model. The company is cutting 15 percent of salaried positions, or 330 employees in mostly styling and corporate roles, as the business remains in flux.
Meanwhile, Nordstrom ended the Trunk Club subscription business it acquired in 2014. CEO Erik Nordstrom said the department store was “sunsetting” the service last month, and “redirecting our resources to the services that our customers tell us they value most.” The retailer offers its own styling services both in store and online, and sees “the highest number of customers engaged with our in-person styling.” Trunk Club charged a $25 fee for each stylist-curated box.
Digital subscribers for e-commerce brands reached 43.1 million in the U.S. in 2020—12.8 percent growth from pre-pandemic levels, according to eMarketer. Last year saw 10.2 percent more subscriber sign-ups, reaching 47.5 percent nationwide. The market research firm expects just 3.3 percent growth this year.
And while eMarketer pegs 2022’s subscription sales at more than $33 billion, consumer spend seems to be on the decline. Subscription revenue is projected to grow 15 percent this year, a slowdown from 41 percent in 2020, and 25 percent last year, it said. “This means companies building subscription models will increasingly have to draw dollars from existing subscribers,” it added. “Consumers will eventually hit a ceiling with subscription spending, making long-term sales growth more difficult.”
Meanwhile, the subscription space is full to overflowing. Fashion and apparel platforms account for just 7.9 percent of the total subscription pie, according to eMarketer, but a recent report from market intelligence firm PipeCandy and subscription platform Rodeo suggests that up to 75 percent of direct-to-consumer brands will have a subscription-based offering by next year. LeTote, Gwynnie Bee, Adore Me, Dia&Co, Curateur, Wantable, Stylogic, Dailylook, Elizabeth & Clarke, along with TechStyle-owned Fabletics, Savage x Fenty, JustFab and ShoeDazzle, are just some of the players fighting for wallet share.
“It’s very frustrating for shoppers to keep paying for things that they don’t necessarily need, or that they use infrequently,” Sucharita Kodali, vice president and principal analyst for market research firm Forrester, told Sourcing Journal. Subscription-based models have “big problems with shopper churn,” with most experiencing more than 100 percent customer turnover each year.
Kodali believes shoppers are likely to continue to slash subscription spending because “no one likes being locked into a recurring billing scheme for anything.”
Subscription-based models work on certain types of customers “but they are limited in the number of shoppers that want them, especially if it’s physical goods or services,” she added. Desires for products and in-person experiences are subject to change based on social plans, travel and budgeting, and necessary repeat expenses are limited. To keep shoppers engaged, subscription providers must constantly broaden their offerings. “Amazon keeps adding products to its Prime subscription for exactly this reason—to give people reasons to stay with them,” Kodali said. Stitch Fix and Trunk Club’s deviation away from the curation model suggests that consumers are getting tired of the subscription approach.
Catering to evolving appetites becomes very expensive for marketers, “because you are constantly looking to acquire new customers, but the irony is that the value of the model is supposed to be about retention,” Kodali added.
“It sounds a lot better to investors than it is in actuality,” Kodali said. “I expect that subscriptions will fade.”
Fashion rental services, however, seem to be bucking the trend. After experiencing a decline during the pandemic, Rent the Runway’s (RTR) June earnings presentation revealed better-than-expected results for Q1 2022. Revenue reached $67.1 million, beating a $64.2-million estimate and topping year-ago results by 100 percent. RTR said it aims to see year-over-year revenue growth of 45 to 50 percent during 2022.
The company ended the quarter with a record 134,998 active subscribers, according to CEO and co-founder Jennifer Hyman. The platform has “never been more relevant than it is today,” she said, adding that new opportunities for “traveling, dining out, attending events, heading back to the office, or simply hanging out with friends” have attracted new users in search of “fashion variety.” Plans range from $94 to $235 per month, allowing members to rent up to 16 garments and accessories. Or, they can borrow single items for a variable fee.
Urban Outfitters’ Nuuly monthly rental subscription saw sales increase by $15 million year over year for the quarter ending April 30. Calling the period “a very strong one,” Frank Conforti, Urban Outfitters co-president and chief operating officer, said the business “finally experienced a period with limited Covid interruptions,” positioning it “to capitalize on the customer’s interest in fashion and going out.” Active subscribers increased nearly 200 percent year over year in Q1, and 50 percent from the end of Q4. Launched just months before the pandemic began, Nuuly now has over 82,000 active paying subscribers, who spend $88 each month to rent six garments from Urban Outfitters, Free People and Anthropologie.
These businesses are hitting on three key success factors for fashion subscription companies, according to Coresight Research analyst Sunny Zheng. “First, adopting an integrated model combining both subscription-based and non-subscription services”—à la Rent the Runway—allows consumers to try out the platform before subscribing. Leveraging client data is a must for companies offering personalized service. Rentals offer a wealth of insight into shoppers’ tastes and allow companies to serve up the products that are most likely to resonate. Finally, they must consistently expand their assortment to keep customers interested. “Offering subscribers a wider product range improves customer retention and boosts spending,” she said.
Subscription services grew at an average annual rate of about 17 percent between 2014 and 2019, according to the Subscription Trade Association. Coresight estimated that the total market was worth $11.5 billion in 2020, growing in the high-20th-percentile in 2021.
This year, “we are seeing some fatigue in the fashion and beauty subscription sectors,” Zheng said. “We believe the top reason would be that in this inflationary environment, consumers are cutting spend on unnecessary discretionary items, and not wanting to have an extra bill”—especially a recurring one. But pre-pandemic performance suggests consumers could once again embrace subscriptions.
Subscription companies must continue to innovate, however. “If a subscription no longer provides a sense of personalization and the right products in the right sizes, it will definitely lose resonance with shoppers,” she said.