Photographer: Chris Goodney/Bloomberg
Beauty

Birchbox Finds Cute Boxes Filled With Makeup Aren't Enough

The monthly subscription pioneer hopes brick-and-mortar stores will fuel growth.

Minutes before her Manhattan shop was to open on a crisp spring day, Katia Beauchamp, the co-founder and chief executive of Birchbox Inc., strode to the front door and let in a trio of waiting customers. Like everyone who crosses the threshold of her new SoHo outpost, she's counting on them to fill their bags with full-size, full-price makeup and skincare products. Yes—full size.

Birchbox is famous for cutesy cardboard boxes filled with delicate tissue paper and diminutive samples, the stars of countless unboxing videos on YouTube. But that may not be enough anymore.

The only Birchboxes to be found at this store are tucked away in the back, where a build-your-own-box table is stacked high with samples. To get to them, you have to wind your way through carefully maintained shelves stocked with all kinds of beauty goods: Suki exfoliate foaming cleanser, Laura Geller baked blush, and bottles of Amika dry hairspray. 

"We are not in the business of selling people samples," Beauchamp proclaimed, alluding to the revenue generated by full-size purchases. "That would be a really boring business."

Six years in, her company is at a crossroads. As it seeks a bigger slice of America's $16 billion prestige beauty industry, Birchbox is struggling to become a full-spectrum retailer rather than just a precious peddler of monthly subscription boxes. The original model's quick success attracted a lot of competition. Since then, the venture capital market has tightened and the need to work "towards profitability," as Beauchamp put it, became more urgent.

While Birchbox fights off competitors, one surprising strategic move it made was to open an actual store. An initial dalliance with pop-up locations showed promise, so Beauchamp went all the way and built a real one. The company is looking for an identity somewhere between the online box business and the retail store, a hybrid that can do battle with traditional beauty retailers and the horde of rival beauty boxes.

But if Birchbox isn't just about the box that made it famous, what is it?

Overnight Cachet

Beauchamp's New York store is a two-story smorgasbord of beauty products. The Texas native gestures to a wall of haircare items: The goods here are organized by type, not brand, unlike traditional cosmetics areas in department stores and even pharmacy chains. The format encourages shoppers to discover new labels, just as the sample boxes are meant to do. Down the light wooden stairs sits the men's grooming section, a segment Birchbox added four years ago and a testament to its willingness to seek out new customers and one day become a multibillion-dollar brand. 

 

Katia Beauchamp, co-founder of Birchbox, organizes her stores by product instead of label, just like the company's eponymous boxes.
Katia Beauchamp, co-founder of Birchbox, organizes her stores by product instead of label, just like the company's eponymous boxes.
Photographer: Chris Goodney/Bloomberg

At its core, Birchbox's premise has been simple: Beauty goods were slow to gain traction online since shoppers often want to test them out first. Birchbox brings samples to customers' doorstep with the hope that once hooked on some (or all) of them, they'll flock to Birchbox.com to order full-size versions. For shoppers who don't want to be pestered by salespeople at department stores or brave the crowds at Sephora, it's a godsend–or so the theory went.

That model drummed up plenty of hype when it burst onto the scene in 2010, helped no doubt by the startup's backstory: a plan whipped up in a few days by a pair of graduate students at Harvard Business School. They named the company after the silvery barked tree (gorgeous in every season, they said). The media provided glowing profiles of Beauchamp and co-founder Hayley Barna, giving Birchbox overnight cachet. The subscriber base flourished. Beauchamp said her company blew by its five-year plan in just seven months. More than 1 million people now subscribe, making the boxes the biggest part of the company's business. Birchbox doesn't disclose its financials but said the online shop makes up about a third of its revenue and described this as the "fastest growing part of our business." 

Copycats quickly appeared from such varied quarters as makeup tutorial star Michelle Phan, Allure magazine, and retail titans Wal-Mart Stores Inc. and Target Corp. Birchbox even acquired one, called JolieBox, for an undisclosed sum in 2012. The subscription box concept spread to other kinds of products—now there are monthly boxes for just about anything: tea, preserves, vitamins, dog toys, even GMO-free snacks.

The proliferation of the Birchbox model was ironic, to say the least, given the initial reaction the pair received in venture capital circles. "We were told people don't pay for samples, no one will buy beauty on the Internet," Beauchamp, 33, said during an interview at her SoHo store last month. Adjusting the black leather jacket draped over her shoulders, she recalled being annoyed at having to pitch the idea to men who've never bought or worn makeup. It became easier once the two women had harder sales data to show off after launching, she said. 

The inside of a Birchbox store leads you to a section in the back where you can build your own box.
The inside of a Birchbox store leads you to a section in the back where you can build your own box.
Photographer: Chris Goodney/Bloomberg

Over the past year, though, things started to change for Birchbox: Barna stepped down from her role as co-chief executive officer (though she remains a board member), and in January the company cut 15 percent of its staff and suspended operations in Canada. Around 250 employees remain. Birchbox is still fighting to be profitable, and it hasn't received new outside funding since a $60 million round in 2014. In total, it has raised $71.9 million. "It's tough out there," said Beauchamp.

Meanwhile, the move to stores has raised doubts among industry observers about the company's devotion to the sample box. The very existence of Birchbox's stores goes against its original pitch as the first beauty seller to do online right.

The Birchbox, and its model of delivering samples of different products every month, was quickly emulated.
The Birchbox, and its model of delivering samples of different products every month, was quickly emulated.
Photographer: Chris Goodney/Bloomberg

"Our vision for Birchbox has always been to build a standalone company, and today’s market demands that we reach profitability this year," Beauchamp said after the firings. In May, she declined to say whether Birchbox had reached that goal. (The sector grew 7 percent from 2014 to 2015, according to the NPD Group, Inc., a market researcher.)

Sitting in her shop, Beauchamp became animated as she described the customer she envisions shopping at each version of Birchbox, be it web or brick-and-mortar. While multiplatform retail kings Sephora and Ulta go after the woman who already likes makeup, Birchbox is targeting the one who "doesn't feel excited to shop beauty," Beauchamp explained. "We really want to change the potential customer for the beauty industry. We want to change her relationship with beauty. She doesn't have to have this boring, errand, I-have-to-do-this experience." 

Because Birchbox's strategy doesn't hinge solely on wooing clients away from the bigger retail stores, Beauchamp said there are no plans to open locations directly across the street from other purveyors of beauty, a common tactic on the retail battlefield. But converting monthly box subscribers to frequent full-size product shoppers, either in store or online, is paramount. 

Physical Footprint

In 2014, Birchbox opened its first physical shop. As it expands that footprint, it hired former Sephora executive Philippe Pinatel as president and chief operating officer, as well as retail veterans from Apple Inc. and Juicy Couture Inc. Beauchamp's model is more focused than scattershot: She hopes one day to open dozens, as opposed to hundreds, of venues to take on the department stores and specialty retailers. Online sales will remain the priority–Beauchamp said about 50 percent of box subscribers still go on to make full-size purchases. A recent study from research firm Slice Intelligence showed that shoppers who've signed up for samples spend more cash on beauty products, not just at Birchbox's website but through its competitors, too. Sephora gets a 5 percent rise in spending from new Birchbox members. Ulta gets a 6 percent boost.

The Mens section at the Birchbox store in SoHo, New York, on Thursday, May 19, 2016
The Mens section at the Birchbox store in SoHo, New York, on Thursday, May 19, 2016
Photographer: Chris Goodney/Bloomberg

Given the state of the subscription e-commerce businesses, it's no surprise Birchbox would move in a more traditional direction. The online space has taken a battering in recent years, with hundreds of niche players closing down in the face of rising competition. Investors haven't seen much of a payoff thus far, despite injecting more than $1.6 billion. Only men's fashion service Trunk Club, bought two years ago by Nordstrom Inc. for $350 million, managed to secure a big cash-out.

"Subscriptions have a lot of issues," says Sucharita Mulpuru, an analyst at Forrester Research. "They're not huge addressable markets, you're constantly dealing with churn, and you have to find new customers." The question for Birchbox, she said, is how many of its potential customers have already signed up for the box? 

A big part of the online retail business strategy is coddling customers. Birchbox staff, including Beauchamp, spend much of their time communicating with purchasers, often through social media. These interactions can be unpleasant when an order delivers angst instead of joy, a reality of the digital age. But if  "you own it, people are like 'Yes!' Being honest—it engenders even more loyalty," Beauchamp said. "It goes from you being a corporate behemoth to being human. And humans are flawed." The strategy, she jokes, is somewhere between customer service and online dating. Customers "want to feel like they're in a relationship with the company, and I feel like that's totally new. We constantly hear from customers that they are going steady with us, breaking up with us, and I think it's exciting, it's a privilege, and it's way hard. Every month is opportunity to delight and disappoint."

Given BirchBox has more than 175,000 Twitter followers and 1.8 million Facebook fans, Beauchamp's communication strategy may be working. 

During the company's embryonic period, she was inspired by the swell of female founders—Alexandra Wilkis Wilson at Gilt, Jennifer Hyman at Rent the Runway—taking over the booming digital consumer market. Seven years later, shoppers have countless choices, and Beauchamp is on the other side, a female founder able to inspire the next generation of entrepreneurs. Asked about the corporate culture, she lights up, flashing a Shinola watch she gives employees on their five-year anniversary with the brand: "I think the culture is a really ambitious one. Having female leadership and a lot of women, that impacts the culture."

But being the lone CEO during a rough patch isn't easy. Beauchamp stays upbeat when asked if she misses Barna, who's now a partner at a venture capital firm. "Every day," she says immediately. "It's a different era for sure." Early on, the two women told investors their plan was one day to file for an initial public offering. Now Beauchamp concedes she was naive. ​"Our sights have always been set on an IPO for Birchbox. It's not a matter of if, but a matter of when. As I've matured as a founder and as we've grown and matured as a business, we now better appreciate all of the internal and external variables that need to align." With e-commerce startups slumping, Birchbox's focus is elsewhere.

"Eventually, an exit is going to happen," she says. "But not now."

—With assistance from Jing Cao in New York.

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