Why ‘box fatigue’ may be hitting the apparel industry, Stitch Fix
A selection of menswear packaged by Trunk Club, which closed earlier this year after Nordstrom bought the personal styling service in 2014.
Source: Trunk Club
After earning a master’s degree ten years ago, David Hill wanted to bolster his personal style and joined the Trunk Club, which promised to send him boxes of clothes tailored to his tastes as often as he wanted.
Hill would visit the company’s showroom in Chicago to meet with a stylist and pick out outfits he could wear to the office or for special occasions. The stylist helped him design a bespoke suit and sent handwritten notes to check on how he liked his clothes, making Hill a loyal customer.
Then the Covid-19 pandemic hit.
“At first they were trying to tell me to buy sweatpants and joggers,” he said.
But Hill, 41, no longer needed new clothes as he was working from home and barely going out, and he canceled his subscription.
It wasn’t that long ago that major retailers were scrambling to participate in the subscription craze that was sweeping the apparel industry. But then the pandemic upended daily routines and made shopping behavior much less predictable. Today, some analysts and investors are questioning the appeal of these types of businesses and their ability to retain customers, who often sign up during a big life change but end up losing interest.
After acquiring Trunk Club in 2014, Nordstrom announced in May that it was winding down operations and focusing on its in-house personal styling services. Rockets of Awesome, which organizes children’s clothing boxes, began to run out of funding earlier this year as it searched for a buyer. Stitch Fix, one of the best-known services in the space, was gaining traction in the years leading up to the pandemic, but is now 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 making a profit from the playbook is harder than they thought.
Decline of interest
Stitch Fix’s struggles to turn a profit during the Covid-19 pandemic underscores how difficult it can be to run a subscription business, especially when consumer tastes are a moving target.
The company charges a $20 styling fee when a customer begins the styling process with boxes of clothes called “Fixes” that they might like. The money can then be applied to items that customers decide to keep in a box, which can be delivered every two weeks, monthly, every two months 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, like starting a new job, lose a lot of weight or become pregnant. But he said the excitement often wears off, making it difficult for businesses to retain customers.
According to analytics firm M Science, new customers make up a predominant share of Stitch Fix’s sales, but their spending generally declines over time. About 40% of Stitch Fix’s revenue has been generated by new customers since its fiscal 2020 first quarter, the company found.
“There definitely seems to be box fatigue,” 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 them.”
David Bellinger, chief executive of MKM Partners, said he believes Stitch Fix’s number of active customers may have peaked in its August-October quarter, when the company reported a record high. 4.18 million active customers.
“This calls into question the longer-term membership potential,” Bellinger said, noting that inflation and other macroeconomic challenges could lead to more cancellations.
In the company’s last quarter ended April 30, Stitch Fix said it lost 200,000 active customers, bringing its total number to 3.9 million. Its net loss climbed to $78 million from $18.8 million a year ago. The company announced that it was laying off 15% of its employees, or around 330 people.
To attract new customers, Stitch Fix expanded the rollout of its “Freestyle” option last fall that allows shoppers to purchase single items from its website without subscribing to a plan or paying a styling fee. But the company is still trying to make sure people know the option is there.
“We are in the midst of a transformation and we know that every day or every moment will not be easy,” wrote Elizabeth Spaulding, CEO of Stitch Fix, who took the reins from founder Katrina Lake in August 2021, in a note. to employees in June.
A spokeswoman said Stitch Fix avoids describing itself as a subscription company because it allows customers to select the rate at which they receive boxes of clothes.
In November 2017, when it went public, Stitch Fix reached a market valuation of over $1.6 billion. Its market cap is now below $800 million.
The company’s drive to turn a profit comes as consumers say they’re trying to cut their overall spending on subscription plans, according to a survey by Kearney, a consulting firm.
The company found earlier this year that 40% of consumers think they have too many subscriptions. People said they spent the most on streaming plans, followed by music and video subscriptions, games, and food and drink can subscriptions. Shopping subscriptions, which include fashion, came after these categories.
A changing consumer
Sonia Lapinsky, general manager of the retail practice at AlixPartners, said the subscription business model needed a major reset after the pandemic. Companies also need to better track changing buying behaviors, she said.
“Not only are they different from what they were before the pandemic, they’re changing all the time,” she said of consumers.
Tara Novelich, a teacher living in Orange County, Calif., is among the once-loyal Stitch Fix customers who have since dropped the service. Novelich signed up for the service in 2012 when she felt pressed for time and said she had purchased at least one item from her monthly box of “Fixes” for about 18 months.
But then she said the quality of the clothes and service started to “degrade” and the shipments were too frequent.
“I wasn’t as excited anymore,” said Novelich, now 46.
More recently, she’s been taking advantage of her subscription to FabFitFun, which sends customers a selection of seasonal beauty items, jewelry and accessories. Novelich receives deliveries four times a year.
In other cases, subscriptions may seem too expensive.
A 35-year-old publicist who asked that her name not be used to protect her work, became a part-time stylist and client for Stitch Fix in 2016. But during the pandemic, she quit working at Stitch Fix to focus on her. full-time job and started shopping at the Trunk Club, which she said offered better quality. Eventually it got too expensive.
“I could never afford the majority, because it would cost between $600 and $1,000 a month,” she said.
Now she works mostly from home and buys the majority of her clothes from Amazon, which offers a “try now, buy later” option. She also recently shopped in the “Freestyle” section of Stitch Fix.
Hill, the marketing manager who now lives in New Jersey, did not resume shopping through a subscription plan and instead chooses her own clothes at a nearby Nordstrom. He recalled the days he visited one of Trunk Club’s physical locations and a time when he and his wife were greeted with champagne.
“Obviously that pattern wasn’t that sustainable,” Hill said.