It was an alphabet soup of sizzle/fizzle this week: EMV, WWDC, PLCC, CCI, and SFBI all rocked the payments and commerce world one way or the other. Read on if you want the full translation.
Yes, they are a hairball, as we have previously reported. But it turns out the months and months and months and months required to certify an EMV terminal was a solution solving for a problem that the merchants in U.S. market do not have: the need for offline authorization. That’s not the case, of course, in many countries outside of the U.S. but since we have a Zero Floor limit in the U.S. every card transaction has to be authorized. And that makes the need for offline authorization moot.
Visa has been working with acquirers to streamline and simplify the scope of the EMV certifications, which they say can reduce the time required to certify a terminal by as much as 80 percent. I know what you’re thinking: maybe we should have thought about this before, but the payments ecosystem can be gnarly to wrestle to the ground - and better late than never.
Main Street Businesses
The PYMNTS Store Front Business Index (SFBI) released on Tuesday delivered a much-needed bright spot to the growing list of concerns about the health of businesses overall. We were thrilled to report that the health of those businesses that line the side streets and main streets of Any Town, USA are not only healthy and growing but making the local economies in which they operate healthy, too. And, that’s not all the good news. Overall, this subset of the SMB market, some 3.4 million businesses, are growing at a rate that has outpaced GDP. So despite the disappointing news a few weeks back about job growth and consumer spend in sectors like travel, these backbones of the U.S. economy are doing just fine, thank you very much.
Last year it was reported that for the first time ever, people spent more on eating out than they did on groceries. Some thought that the trend was a blip. It’s not a blip. Point to whatever factors you wish – two-wage earner families, more (and better options) for eating out, consumer interest in spending money on experiences and not shoes or clothes – some part of this is driven by mobile devices and apps. Let’s face it, it’s easier than ever to find a place to eat and book a reservation at your local main street restaurant. It’s also easier to order ahead (and pay for it ahead) and pick stuff up to take home, too – not to mention have restaurant food delivered. Successful innovation is about solving a problem or introducing a better experience – and at least when it comes to the restaurant sector, mobile and apps have delivered for consumers and the hometown restaurants that are reaping the benefits.
Big Retail’s Online Checkout Conversions
It surprised even us that after nine months of looking at the 650 sites that represent 70 percent of eCommerce volume and the review of 10K data points that big retailers did no better than small ones at optimizing their online sites for checkout. That’s the big takeaway from our Q2 CCI – the Checkout Conversion Index. Curious – and admittedly confused — we talked to 70 big merchants to try to figure out why. We uncovered four big blind spots that cause big retailers to crash and burn at online checkout – you can get the whole story here. But now that we know why, hopefully, big retail can get to work on fixing the problem. We’ll, of course, be tracking their progress each quarter and measuring their performance.
Private Label Cards
It looks like private label cards, the retailer’s dream payments product, is facing a bit of a headwind. Synchrony sent the market into a tail spin when it issued guidance that suggested that there would be a 20 to 30 basis point increase in credit losses from these products. Their shares tanked – and brought the rest of the issuers down with them. Analysts say that consumers who miss a couple of payments are having a harder time catching up – a concern that has been growing all year. This comes at the same time that defaults on general purpose cards is also inching up, with charge-offs increasing to 3.10 percent from 2.97 percent last year, according to The Wall Street Journal.
Birchbox – the box that launched quite literally 6,000 flavors of subscription boxes – is feeling the subscription commerce blues. It’s scaling back and retrenching as new and better beauty boxes have flooded the market and investors turned their backs on writing more checks to fund more money-losing boxes. Then, of course, there was the announcement from Apple that it was going to “give” developers a break on commissions for any and all yearlong-plus subscriptions done via apps in the app store.
The flip side of that, of course, are all of the non-digital apps with subscriptions – everything from Trunk Club to the Bar Method to Weight Watchers to Blue Apron to Birchbox who today pay zero when subscriptions are activated within the app who will, starting very soon, pay 30 percent to Apple for the first year and 15 percent thereafter. And since most subscriptions peter out after 3 months, they’ll pay 30 percent for most of their subscriptions most of the time. Yes, consumers can subscribe outside of the app, but since most may use the app to manage their consumption of the product, as more and more people migrate to mobile, it will become easier and easier to re-up inside the app. And easier and easier for Apple to be paid — and harder and harder for retailers to keep their margins.
Speaking of Birchbox …
Sizzle or Fizzle? Birchbox
Birchbox is a perfect example of a peanut butter meets chocolate idea that inspired a thousand imitators almost immediately. It paired a great concept — a monthly subscription service that gave customers access to all kinds of beauty products for a mere $10 a month — with a winning narrative: Harvard MBA classmates Katia Beauchamp and Hayley Barna dreamed it up, and along came Birchbox in 2010.
After six years, Birchbox has raised $71.6 million, thrown a $485 million valuation up on the big board (as of its last fundraising over two years ago) and inspired so many imitators. These days if you want dog treats, shoes, Mexican candy, nail polish, video games, smoked fish, Japanese Candy, exotic art supplies, shaving materials or really just about any good under the sun, odds are pretty good there is a subscription service that would be happy to connect you to whatever it is for $10-$30 a month. Birchbox is widely credited with being one of the faces that launched those thousands of ships with a thousand esoteric goods.
Birchbox also had a clever element of surprise built into its goods. Those $10 monthly boxes were mystery gifts. By and large, consumers can expect beauty products, but part of the thrill of getting a delivery is discovery, and finding out what exactly one has been given to play with that month.
But as many innovators learn, you're sizzling hot until one day you're not — and it looks like Birchbox's day is here. A chilly and more bottom line focused investment environment has left Birchbox in a bit of a bind.
Raising funds just isn't as easy as it was during their $60 million round two years ago. According to Wall Street Journal reports, as of last year Birchbox hired JPMorgan Chase to raise some new funds or find a potential suitor, including Singapore’s Temasek Holdings. Ultimately, Birchbox couldn't find any takers.
“There is a complete reversal,” co-founder and CEO Katia Beauchamp said in an interview. “It is all about showing how you can operate this business profitably and it has forced us to completely change the way we operate, the way we spend money.”
Operating a business in a profitable manner — what a quaint idea.
Birchbox isn't alone in the investor penalty box. Lots of big name startups have run up against the recent chill in investing ardor as players that dropped around $500 million into U.S. startups last year have invested only about $86 million this year so far.
Which means Birchbox finds itself short on cash, which in the short term will mean less growth. Plans to open three physical stores in the United States have been shelved, and plans to move into overseas markets have been paused. And the layoff fairy has officially come to call. Reportedly, 50 of the company's 300 employees have been let go, and the company is officially taking up less office space in its NY headquarters.
Apart from endemic issues in its market space, Birchbox is simply suffering from inspiring competitors in the beauty arena that are doing better work, by some measures. Physical makeup powerhouse Sephora has its own subscription line. Ipsy, another eCommerce originated makeup subscription service, has more than 1.5 million subscribers. Meanwhile, Birchbox only has about 1 million.
And in both cases, both firms are offering more than Birchbox does — or even arguably can. Sephora has a well-developed network of stores, which matters when consumers are buying a product that they need to wear, and possibly receive instruction on wearing. Sephora can provide that. Birchbox can't, and since its physical expansion is on hold, it won't be able to for some time.
Plus, Sephora builds it boxes differently, featuring five "deluxe" samples, a perfume sample and a collectible bag each month.
"There was a desire for well-known, prestige items in each box, rather than a random assortment of filler products mixed in with one or two that they would really use,” said Deborah Yeh, a senior vice president at Sephora.
Ipsy, on the other hand, has made the commerce part of the business just one part of its broader context. Founded by YouTube's resident cosmetics expert Michelle Phan in 2011, ipsy promotes itself through a network of YouTube beauty and wellness celebrity vloggers, and encourage users to create and upload content. As of last September, ipsy had managed to bag $150 million in new venture capital funding
“Ipsy’s cost of goods sold and customer acquisition costs are radically different from that of other companies,” said Scott Stanford, co-founder at Sherpa Capital, which co-led the September funding. “And it isn’t viewed as cold commerce. If you unsubscribe, you are churning away from a community.”
The Changing Review Trouble
As Birchbox is looking to stay competitive, among the cost saving measures is an update to its loyalty program. Under the old system consumers received credits toward purchases in exchange for writing reviews of the product samples they received. As of this week Birchbox has announced that going forward customers credits will be capped after their first five reviews.
This move has proven to be unpopular with customers, and has sparked something of social media backlash — not something Birchbox needs as one of its main competitors is building an increasingly devoted community on YouTube.
"We always thought of Birchbox as a retail idea,” Beauchamp said, “We were never like how do we start a sample-box company.”
For now, additional retail stores are on hold, despite the investment Birchbox has already made in them. Beauchamp noted that Birchbox earns about a third of its revenue through the sale of products through eCommerce sites and its physical store in New York City.
As for future physical stores, it depends on those fickle capital markets.
"[It is] dependent on the capital markets and our abilities to operate this business in a way that would be attractive to investors,” Beauchamp said.
The beginnings of a fizzle?