In some industries, particularly the American manufacturing sector, outsourcing has become a dirty word. But in the retail subscription box industry, outsourcing isn’t just a part of the value proposition. In many ways it is the value proposition.
For starters, subscribers are themselves outsourcing some piece of their consumer behavior. The most well-known examples of this are the personalized apparel boxes like Stitch Fix, but there are others like Birchbox, which offers cosmetic products, or Blue Apron and HelloFresh, which deliver ready-to-make meal kits. The common thread among them is they offer customers a curated shopping experience without any of the hassle of shopping and bring the products straight to your door.
A Cultivated Culture. Detroit-based Gentleman’s Box buys bulk orders of men’s accessories, repackages them as a set — or box — and sends them to subscribers on a monthly or quarterly basis, depending on the subscribers’ preferences. The company’s model has some noteworthy differences from that of Stitch Fix, namely that there are no returns involved, but the basic concept of outsourcing remains.
There’s no driving to the mall, no sort- ing through stacks of ties, pocket squares, watches or other accessories, no sifting through search results on Amazon. Subscribers are exposed to a wider range of brands and styles than they might otherwise have been, and those brands in turn benefit from the additional exposure.
The value for customers is two-fold. First and foremost, they avoid shopping, but according to CEO Chris George, the real value is in the items themselves.
“For our basic monthly box, we’re giving customers roughly $100 worth of accessories in a box that only costs them $25 a month,” he said in an interview with American Shipper.
How can a company afford to sell its products so far below their alleged retail value? You guessed it: outsourcing.
Gentleman’s Box outsources nearly every aspect of its business with the exception of the packaging of its boxes, vendor management and client relations. It doesn’t make the accessories it sells, nor does it have the supply chain assets to move them from production facilities in China to its distribution center in Detroit or from the DC to its customers.
Launched in August 2014, the concept behind Gentleman’s Box was relatively simple.
“We saw the trend toward subscription and e-commerce in retail, but at the same time, we know guys don’t like to shop,” said George. “So we thought, ‘How can we get cool accessories like tie clips, pocket squares, lapel pins, etc. that guys are into right now into consumers’ hands without the hassle of shopping?’ We also realized it was an opportunity for brands to grow their reach, making it a win for everyone involved.”
An early-stage partnership deal with men’s magazine GQ helped the company to quickly grow from the founders sitting in a basement repackaging items purchased from Nordstrom to an industry leader ordering upward of $1 million annually in products. After teaming up with GQ, George found himself looking for other resources to help accelerate growth. But unlike other sectors, and the retail industry in general, there just wasn’t much out there in the way of education and networking for subscription box companies.
“Our growth has certainly been exciting, but what’s really exciting is where that’s led us,” said George. “We saw early on that there was a gap in the market when it came to resources for sub-box companies. Given our entrepreneurial spirit, we thought, ‘Why don’t we give it a shot?’”
Gentlemen’s Box launched the first subscription box conference in 2016 in order to help subscription box companies — or “subcoms” as they’re called within the industry — network, build relationships, meet potential brand partners and learn more about their own industry. And because it’s a subcom itself, Gentlemen’s Box was able to benefit from the conference in many of the same ways as attendees. The conference has grown exponentially in the last two years, with the 2018 meeting drawing more than 800 attendees, by far the largest event dedicated to the industry.
George didn’t stop there. After creating the Subscription Summit, he and his fellow Gentleman’s Box co-founders created the Subscription Trade Association (SUBTA) as the go-to resource for networking, education and lobbying efforts within the industry.
Subscription Logistics. Like many subcoms, Gentleman’s Box does not have its own transportation or supply chain department. Instead, the company out- sources management of its supply chain to Procurement Inc., located in Toronto.
The Gentleman’s Box supply chain begins in China, where the majority of the products it boxes are produced. Gentleman’s Box initially worked directly with brands, but now more than 90 percent of its accessories are sourced by Procurement Inc., which handles the relationships with both the manufacturers and the 3PLs that move the goods from China to the United States and inland to Detroit.
Most of the products arrive by ocean container, but George said air is used in emergency situations. Once in the United States, boxes are loaded primarily onto trains headed for Detroit, where they are switched to truck for the last leg to the packaging and distribution center. The warehouse manager and an associate manager then work with a staff of about 16 temporary workers about 10 days a month to get the goods boxed and ready to ship.
“We started off years ago with a clothing line that we worked with a couple subscription boxes to promote, and we realized that their process for procurement was a bit old-fashioned,” Procurement Inc. co-founder and CEO Jake Panavas told American Shipper. “They would reach out to brands and negotiate deals with them directly, trying to do one-off orders with hundreds of brands a year, and we realized there’s a better way to do it that’s more cost-effective and more time-effective. Utilizing one party that has access to hundreds of brands, like we have now, we can do it at scale without jeopardizing brand quality.”
It’s essentially the same value proposition a freight forwarder offers a shipper. The cargo owner benefits from the 3PL’s scale and a sharing of the inherent risk involved in transporting goods, while the 3PL charges a margin on top of its freight rates, which are already much lower than the shipper could negotiate on its own, and benefits from additional volumes further increasing its scale.
“We’re an outsourcer ourselves in that we provide procurement for a variety of companies, and we have the same beliefs,” said Panavas. “We have relatively few employees, but for us, it’s about using really great partners that almost act as an extension of our team. And that was the way we built the company. It was our belief from the beginning that with subscription boxes, for example, logistics is such a high-overhead process that they’re not getting the scale that we can.
“With a forwarder, you’re utilizing a third party that can do it better and faster and, quite frankly, cheaper than we prob- ably could if we brought that in house,” he added. “Their business is based on volume, so they’re able to relay that cost savings to us.”
And much like 3PLs, which have rosters of carriers from which to choose within a given mode, Procurement Inc. has learned to play the market so it is never bound to any one forwarder. The company has its own proprietary system for tracking certain key performance indicators for the 3PLs they use, just like forwarders do with their carriers, as well as things that can affect rates, such as the price of oil.
“In logistics, I think everyone’s demands are pretty much the same: transparency, cost and time,” Panavas said. “So those three factors are always taken into account whenever we do a shipment.”
Panavas said another advantage of outsourcing its logistics processes is that Procurement Inc.’s 3PL partners also handle all their customs brokerage and documentation needs.
“Customs clearance can be pretty cumbersome if you’re doing multi-commodity imports,” he said. “You’ve got to have a guy who has a contact there that can get it through for you quickly so there are no issues. One little document issue and your cargo could be stopped for a while.”
The company also has an internal team member who looks at compliance from a premanufacturing standpoint, working closely with contacts at the FDA and FCC.
“Sunglasses are a good example of that because there’s an FDA drop-ball test that’s needed,” said Panavas. “So if it’s the first time we’re making sunglasses, that’s something that we have to find out from the FDA how to get it done and what we need to do make sure we’re compliant when we’re importing. We do all those things before we start manufacturing.”
But that’s just the inbound side of the Gentleman’s Box supply chain.
For the outbound leg, from the company’s DC to customers in more than 35 countries worldwide, Gentleman’s Box contracts with traditional parcel and express carriers like UPS, FedEx and USPS for domestic — about 87 percent of the company’s business — and Asendia and DHL for international shipments.
Gentleman’s Box uses software from e-commerce fulfillment firm Shipstation that integrates with its own platform to automatically identify the best rate for a given shipment, but the decision is not limited to price alone.
“We take everything from rates and transit times to specific carrier network capabilities, reliability and customer service into account when deciding which carrier to use, as well as the carrier’s refund policy on lost items,” said George.
The company has used a combination of spot market and long-term contracts in the past, but George said there isn’t much incentive to make long-term deals given the constant fluctuations in rates.
“We’ve talked to FedEx and others about that kind of opportunity, but haven’t seen anything that really moves the needle,” he said. “There may come a point when that makes sense, but for now the shorter-term deals we’ve been making with our outbound shipping providers make the most sense because we can always be on the lookout for a better rate.”
Whether it’s inbound to the distribution center or outbound to the customer, both George and Panavas said their top priority is to make sure orders get where they’re supposed to go on time.
“In anything related to e-commerce, the customer experience is everything, so any delay in the supply chain can be extremely costly,” said George. “The most important thing from a transportation perspective is transit times and making sure products arrive on time. We’ve put inventory management tools in place to have products arrive 30 to 45 days prior to being shipped out.
“And then if there does happen to be a delay, you’ve got to notify the customers. That’s actually only happened to us twice, but what’s important is how you handle it. When you’re open and communicate with your consumers, they appreciate it. The success of everything we do is based on brand standards and customer service.”
Tariff Troubles? Given that both of their businesses rely so heavily on sourcing from China and Gentleman’s Box has customers abroad, George and Panavas said they are watching the U.S. trade policy situation closely.
President Trump in July imposed additional 25 percent tariffs on imports of Chinese goods worth $50 billion annually in response to what his administration has described as “unfair” and “abusive” trading practices with regard to intellectual property and innovation. He has threatened to up that to as much as $500 billion in annual value. Clothing and accessories were largely spared from the first round of China tariffs, but several apparel types were included in a second list of products worth $200 billion that will be subject to an additional 10 percent duty.
According to Panavas, who spoke with American Shipper prior to the release of the second list, Procurement Inc. has a short list of manufacturers in other countries ready to step in if apparel or textiles are targeted.
“We’re always looking at the actual likelihood of something like this happening, and then we weigh that against some options that we have on the table,” he said. “That’s something that we’re always keeping an eye on.
“At this time, textiles have been largely avoided and in my opinion, that’s something that would directly impact the American consumer and that would not bode very well for Donald Trump. If he were to put a 15 percent tariff on all textiles, just for example, that’s just going to be relayed on average as a 15 percent increase for the American consumer, which I think is going to be really unpopular for Trump.”
Panavas said such a move would likely incentivize importers to source products from other countries like Cambodia, Vietnam and Thailand.
“You just don’t have the same kinds of factories in the United States,” he said. “And I don’t think the American consumer can take the kind of increase in cost that comes with having to manufacture stateside.”
Michael Vickar, Procurement Inc. co-founder and vice president of operations, said he thinks those who only consider labor costs in the equation when it comes to sourcing from China are missing the point.
“I think people are misinformed if they’re thinking it’s just cheap labor because you have the rising middle class and labor has obviously increased as a result,” he said. “You could say some of it is currency, but also just the infrastructure they have in place. And that comes with scale, but they’re able to do it better, cheaper, faster because of the infrastructure that is in place.”
Panavas added, “Each country is specialized to some degree, and you have to source also based on shipping costs. So, for instance, if you’re sourcing cardboard boxes, it would depend on your scale, but in most cases, you’d kill yourself if you’re sourcing anywhere international. If you’re sourcing those from a European box manufacturer, the shipping is going to kill the deal in terms of any profit that might be had.
“But if you look at textiles and the kinds of things we do for the Gentleman’s box, there’s only a few countries that can do that, and China is the main one for a variety of reasons.
“If you want to see an efficient operation, go to a Chinese factory,” he said. “Sure, there is cheap labor there, but that’s only one input — albeit a large input — into actually producing something. When you look at their efficiencies, their processes, the infrastructure that they’ve got in place, all that comes together to make a really great ecosystem for manufacturing.”
On the outbound side, where the European Union, Canada and Mexico have all imposed retaliatory tariffs on U.S. exports in response to separate U.S. import duty hikes for steel and aluminum, George said it would depend on the size of the tariff, but noted that international customers are responsible for paying all inbound customs charges.
“So in that sense, it won’t affect our costs, but it could certainly have an effect on our growth if consumers decide they don’t want to pay the extra percentage,” he said.
Exponential Potential. No longer just a small corner of the overall e-commerce world, SUBTA estimates the subscription box industry will account for more than $90 billion in annual revenues within the next 10 years.
According to Brie Carere, senior vice president of global portfolio marketing at FedEx, subcoms on the Internet Retailer Top 500 list have seen “exponential” sales growth in the last few years, from $57 mil- lion in 2011 to more than $2.6 billion in 2016.
She said the key to that kind of explosive growth is repeat business, especially in an increasingly digital marketplace in which face-to-face interactions with customers have ceased to be the norm.
“Offering subscriptions means that you continue to have a relationship with a customer. When the box is delivered to your doorstep, it feels like your own personal gift,” she said. “So it’s no surprise that subscription boxes are playing a significant role in the growth of e-commerce.”
Carere cited a recent study by consulting firm McKinsey & Co. that found 15 percent of online shoppers signed up for an e-commerce subscription service in the past year alone.
“To see how important subscription boxes are to e-commerce in general, just take a look at the many major retailers and manufacturers that have created their own, partnered with or acquired a subscription service, including Walmart (Beauty Box) and Albertsons (Plated),” she said.
George said Gentleman’s Box took in more than $5 million in revenue in 2017 and is expecting to double that for 2019. The company estimates its total transportation spend was in the neighborhood of $500,000 last year, or roughly 10 percent of its total revenue. While George acknowledged the dollar figure will rise as the company ships more boxes, he said it should come down as a percentage of overall revenue as it increases in scale.
“We look at everything as changing with economies of scale both in shipping rates and cost of product,” he said, adding that the company already has agreements in place on the product side to reduce prices as volumes grow.
Carere said transportation providers like FedEx can help subcoms like Gentleman’s Box achieve those goals because they have the “physical assets and digital capabilities to create convenient and secure delivery alternatives,” especially for small and medium-sized e-commerce sellers.
“E-commerce fulfillment is a complex environment, and we organize the chaos into a streamlined process that runs smoothly and efficiently,” she said. “We help customers get the right product in the right box to the right place at the right time in the right quantity.”
Carere said sellers moving between 50 and 2,000 shipments daily are likely a good fit for the FedEx Fulfillment program, which offers two-day transit times to 94 percent of the U.S. population — even for customers storing inventory in multiple locations — and allows e-tailers to use their own branded packaging. The program also is integrated with FedEx Cross Border, “which empowers small to medium-sized businesses to grow their businesses glob- ally,” she said. “For small businesses that typically don’t have access to such services, it’s a game changer that allows them to put the focus on growing their business.
“Logistics is now powering every moment in a consumer’s e-tail shopping experience, from providing critical in- formation about items just placed in their online shopping cart to optimizing the returns experience for both the consumer and retailer."