Once solely the domain of gift ideas that ended with the words "of the month," subscription services have moved beyond wine, cheese, fruits, and other novelties.
Target (NYSE:TGT), which entered the increasingly crowded subscription field last fall with a service for a variety of baby care products, has scaled up its efforts and now offers over 1,500 items across a broad range of categories. The company is also sweetening the offer by adding a 5% discount on all subscription orders along with free shipping (plus a second 5% discount if customers pay using a Target REDcard credit card).
The improved service includes "household necessities like laundry detergent and printer ink to beauty and health care items," according to a Target press release . The move puts the company in direct competition with Amazon (NASDAQ:AMZN), which has offered a subscription service for two years.
Target does not break out online sales but Jason Goldberger, senior vice president of Target.com, told The Associated Press that "since the subscription service began just over six months ago, the babycare items that were part of the rollout now account for 15% of online sales for that specific category."
Amazon has an early lead (and maybe a better deal)
Amazon does not release the number of customers that use its subscription service dubbed "Subscribe and Save," nor does it specify the number of products offered. Whatever the number though, it's a lot across a wide range of categories from automotive supplies to gluten-free products, cleaning supplies, breakfast cereals, and pretty much every basic household item you can imagine.
Amazon offers discounts up to 15% (if customers order at least five separate items) and free shipping on all subscription orders. Amazon does have a dedicated section on its website for the service but it also offers customers the option to subscribe when they are buying an item in the regular way if it's part of the service.
Both companies offer a variety of paths to their subscription products but neither makes the overall signup page all that easy to find. If you don't know the subscription services exist it's easy to miss the opportunity to use them. On both sites subscriptions are offered only on certain items in specific packaging sizes. If you click on a deodorant or toothpaste you might not be offered a subscription deal, but a slightly different version (maybe another size) of the same item will have the offer. It's confusing on both sites, though Amazon offers a mildly better experience if you know to look for the dedicated subscription service page (if Target has one, I couldn't find it).
Both sites appear to be using subscriptions as a nice add-on and neither seems to be pushing it that hard to customers.
The category is growing
Subscription services benefit businesses because they lock in revenues and make ordering easier. Plus, if Target or Amazon knows it has 1,000 orders in May for a three-pack of Dial soap, the company can purchase the item in the most cost-effective way possible, store it for the least amount of time, and handle it as little as possible. This has made the model popular with venture capitalists -- Subscription Commerce Insider reports that a number of subscription services have raised venture capital including JustFab (women's shoes), BeachMint (fashion), BirchBox (grooming/beauty), and Dollar Shave Club (razors).
A number of other subscription services have come and gone over the last couple years. One of the keys to survival is offering a product not easily found on Amazon. One success -- Birchbox -- sells curated monthly boxes of beauty samples for $10 each (while selling the full-sized version on its website too). In three and half years the company has grown to 800,000 subscribers and $96 million in annual sales on its subscription service and at least $125 million overall, CNN Money reported.
The company raised $12 million in initial funding and just nabbed another $60 million to fuel growth.
It's possible for smaller players to compete with Amazon and Target by operating in niche areas and offering a level of specificity that's not cost-effective for the big boys. Amazon and Target are looking to take business away from grocery chains not targeting specific market segments (though Target has broadly gone after the baby supplies category). That makes sense as total supermarket sales rose 3.1% in 2013 (compared with 3.8% in 2012), pushing them over the $600 billion mark, Progressive Grocer reported.
With their subscription services Target and Amazon can skim some of that business from traditional grocery chains.
Not all subscription services succeed
Target and Amazon have a number of advantages over start-ups including huge purchasing power and an already built-out infrastructure. That does not guarantee success, however, as Wal-Mart's (NYSE:WMT) efforts to launch a $7 a month snack subscription service was shuttered less than a year after launching. The service, Goodies.co, failed to attract much interest from consumers despite it offering cheaper prices than other similar services, TechCrunch reported.
That failure may say something about the Wal-Mart customer base and its willingness to lock in purchases in advance. Target may have similar problems, but since its subscription service is more of an add-on than a stand-alone brand it should be a success even if it's only marketed by offering customers the option of subscribing as they check out.
Amazon is likely to be the big winner in this space -- the company already has a subscription relationship with tens of millions of its customers through Amazon Prime. The online retailer has also become a grocer of convenience for many, a place to purchase items that may not be easy to find in grocery stores. If you're already buying your gluten-free pasta on Amazon (as I am) why not sign up to get a few boxes every month? And once you do that, if the savings grow as you add items, why not look for more staples to add to your recurring order?
Every item you buy as a subscriber on Amazon or Target is likely one you won'y buy at your local supermarket. That makes shopping a little easier and could very well be a ball rolling downhill as customers notice how much easier it is when things you buy regularly just show up at your front door right when you need them.
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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.