With hedge fund Viking Global Investors acquiring a $15 million majority stake in the beauty box subscription service Birchbox in May, it appears the 8-year-old company is revealing the first steps of its next act. Today, Birchbox announced its strategic partnership with Walgreens, where the beauty company will debut elevated shop-in-shops with prestige product in stores, and Walgreens will acquire an undisclosed minority equity interest in Birchbox.
Currently, Birchbox has only two physical retail stores — one in New York’s Soho neighborhood and another in Paris — but starting in December, the beauty brand will have presence in 11 Walgreens stores across New York, Chicago, Los Angeles, Minneapolis, Dallas and Miami, with more coming in 2019. This alliance with Walgreens allows this company to grow its in-store footprint as it becomes more difficult for companies to scale solely online — sixty-five percent of Birchbox’s revenue still comes from subscriptions, while its e-commerce shop and two stores account for thirty-five percent. (The company would not break out store revenue alone.)
“We’ve always been very focused on the consumer who is not obsessed with beauty; our customer has a more casual relationship with it, and she’s underserved,” said Birchbox co-founder and CEO Katia Beauchamp. The company found that 70 percent of women identified as this kind of shopper, and with Walgreens store reach of more than 8,100 locations, the partnership provides Birchbox the opportunity to scale significantly.
The beauty brand reports it has 1 million subscribers globally and 2.5 million active customers (people who have shopped with it in the last 12 months), and though 2017 was Birchbox’s biggest year ever for subscriber acquisition, according to the company, it is still looking to grow. The Birchbox-Walgreens launch markets are areas where both businesses are already highly penetrated.
The Birchbox-Walgreens shop-in-shops will be tested in different store formats — with formats ranging from 1,000 square feet in flagship stores to 400 square feet in corner stores — and feature a number of “experiential” bells and whistles, including a Build-Your-Own-Birchbox area, where customers can shop five sample items for $15; two limited-edition boxes (one for men, one for women); discovery kits in which shoppers can explore seven products in a specific category; test and play tables to try product; and a dedicated Birchbox checkout area with a trained beauty consultant.
Perhaps, the most important piece of the experience, though, is the Birchbox-curated product. For launch, more than 40 prestige brands across skin care, makeup and hair care will be featured (all via full-size products), including Sand & Sky, Beauty Protector, Beachwaver, Wander Beauty and RMS Beauty. Many of these brands are Birchbox top sellers — for instance, the Beachwaver curling iron is the No. 1 hair tool on the Birchbox site, and RMS Beauty’s “Un” Cover-up and Wander Beauty’s Dualist Matte and Illuminating Concealer are the top two best-selling concealers at Birchbox Soho, respectively, according to the Birch box.
For RMS Beauty, it was a fairly easy sell to be featured in the Birchbox/Walgreens shop-in-shop. Aside from Birchbox, RMS Beauty is also sold in specialty stores like Credo, Follain and Anthropologie. “We have been partnering with Birchbox since 2011 and have been able to gain meaningful, measurable access to a new audience,” said RMS Beauty founder Rose-Marie Swift. “It is a great opportunity to scale RMS Beauty and reach millions of women in a really smart, effective way.”
Birchbox is also putting serious attention to the experience piece of the shop-in-shops, not only from a consultant and test-and-play point of view, but also by facilitating an easy shopping experience. Rather than organizing product by brand, which is what most mass stores do, all merchandise will be displayed in a grid-like format that speaks to steps in a shopper’s routine, like cleanse, treat and moisturize, and goals and concerns, such as detox, balance and brighten. This will intuitively help the customer shop, said Beauchamp. There will also product displays dedicated to other segments, like clean beauty and female founders. “This is our way to share our very specific Birchbox point of view, but also tell customers this is the product’s job or function,” said Beauchamp.
By further expanding its retail footprint, Beauchamp also hopes to also grow its online business. According to the company, customers who shop in its Soho and Paris stores go on to have a three-times higher lifetime value with Birchbox online.
Prices for Birchbox’s full-size product assortment start at $5 for an Acure sheet mask and go as high as a $130 for a Beachwaver curling iron. Walgreens, on the other hand, is known for its mass assortment and products priced as low as $0.79, like a Trim tweezer. On the high end, five Bond No. 9 fragrances are sold on Walgreens.com (ranging from $220 to $295) as are Elchim ionic hair dryers at $199 — still, these prestige products do not make up the vast majority of the over 10,500 products in the Walgreens beauty assortment.
Certainly, Birchbox offers Walgreens a level of modernity and innovation, much like CVS Pharmacy with its beauty store format called BeautyIRL, which recently launched in collaboration with salon-and-spa brand GlamSquad. According to market research firm Euromonitor International, mass-store sales accounted for 51 percent of the beauty industry 15 years ago, but have dropped to 45 percent in the U.S. today — so players like Walgreens and CVS need to pivot to capture a changing demographic.
Walgreens has been trying to update its own beauty strategy for some time, though. In January, the company said the category accounted for 9 percent of total retail sales. In 2016, Walgreens launched its Beauty Differentiation program, which elevated its merchandise offerings to include in-house brands No7, Soap & Glory and YourGoodSkin, as well as L’Oréal brands such as NYX Cosmetics and La Roche-Posay. At the same time, it also debuted its Beauty Enthusiast rewards program, which the company said boasts 8.3 million customers.
“The new Birchbox partnership is an important strategic move, because it continues to offer an enhanced experience. Our customer wants that expert care and a wider assortment from prestige brands, and more digitally-native and indie brands,” said Lauren Brindley, Walgreens group vice president and general merchandise manager. “It really is about including and responding to the latest and greatest from social media to be on front of what people are talking about.”
Though Walgreens would not comment on its best-performing segments and brands, and if they align with the new Birchbox assortment, it did say the nearly 3,000 stores where it has piloted its Beauty Differentiation program are outperforming in the beauty category, thereby, providing some proof of concept for the partnership. “We feel very confident that our customer is ready for this kind of experience and assortment,” said Brindley.
