• Atlanta

Subscription Companies Boxed Out

By Lisa Pittman, Leader of Cushman & Wakefield’s Atlanta Industrial Tenant Representation Practice

This article is the first in a series on how eCommerce is affecting the retail and industrial real estate markets.

You might think that everything that’s sold online is experiencing fantastic success. After all, according to Garrick Brown, Cushman & Wakefield’s Director of Retail Research for the Americas, overall retail sales have increased 2 percent to 3 percent annually since 2010, while eCommerce sales increased in the 15 percent range over the same time period. However, there is one specific subset of online shopping that has yet to prove its staying power – the subscription box.

Birch Box, which ships its customers a handful of sample sized cosmetics each month, was arguably the first subscription box service to launch in 2010. Since then, everything from razors to dog toys to dinner ingredients can be shipped right to your front door on a recurring basis. There is a subscription service for just about everything.

The industrial real estate market and third-party logistics (3PL) companies have greatly benefitted from the onslaught of online shopping, and subscription boxes have been no exception. Subscription services require a significant amount of space to house products and fulfill orders. Because Atlanta is the heart of the Southeast and offers easy access to many other Southern cities, it has been a popular location for subscription box companies to lease warehouses for logistics and distribution. Home Chef, a meal kit delivery service, just leased 189,000 square feet in Lithonia, Georgia, about 20 minutes from Downtown.

However, industrial real estate owners and third-party logistics companies who are relying on subscription boxes to stay for the long haul should be wary. In 2016, there were more than 2,000 subscription box services in the U.S., according to Shorr Packaging. Oversaturation is occurring, and customer retention is an industry-wide challenge as people lose interest or can’t utilize all of the products before the next box arrives.

The single most important factor for any business is customer retention. The subscription box service market is relatively new and still determining its identity, but there will be success stories with the ones that are able to build repeat business.

Venture capital funding for new box companies is slowing down, and the box model is a cash-heavy business. In fact, some companies like Stitch Fix or Trunk Club, clothing services that give customers the option to buy items in their box, end up shipping the same item six or seven times before someone purchases it. CB Insights found that venture capital funding for subscription boxes has dropped by 90 percent, and as a result, lesser established box services are taking a hit.

We will see continued consolidation across this sector in the short term as some box services merge and retailers or more established companies acquire others. Long term success will be dictated on a Darwinism basis – which products do you really need delivered on a monthly/bi-monthly/quarterly basis? Those companies will need to determine the cost benefit of investing in expensive material handling equipment, real estate and labor or paying a higher price per foot through a 3PL.

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