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Space productivity is, by essence, a hot topic for Department Stores, but the year 2020 literally made it incandescent: in a Covid-19 world where customers are afraid of germs and crowds, how do you make sure they come at all to your store, and, more importantly, come back? Also, in a context when rental, resale and other circular initiatives are being increasingly successful among customers jaded with owning “things”, how do you cope with simply selling products? Some industries found a way to break away from the one-off selling model, and by doing so found out that it also allowed them to increase both their margin and customers’ loyalty. Subscription retail is now expanding across several sectors, and might very well be an option for department stores not only to enlarge their services range, but also pocket extra bucks by doing so, while maximizing their existing assets and structures.

What: The subscription retail model across the industry

Why is it important: it could very well be an option for department stores

Introduction – from selling service to renting content, the example of Netflix

Netflix was founded in 1998 with a seemingly simple idea: a mail service of physical copies of movies & shows to be selected from a website. Apart from convenience, its specific angles were:

• Value for money: an unlimited plan with a fixed monthly fee,
• Selection: an advanced recommendation engine focused only on available copies, diverting the demand from only newly released movies, and increasing immediate customer satisfaction.

With the combination of both angles, Netflix became able to orientate subscribers’ choices, therefore freeing itself from the studios’ power. With time, it acquired a good understanding of its subscribers’ tastes, which led to overriding studios and producing its own content.  When you know what your customers want, why would you share the margin?

They pivoted from renting a movie (whatever its support) to renting a service (entertainment through stories designed exactly according to the customers’ expectations). On top of this, the low monthly fee, perceived as a bargain by the customer, has great chances to become a permanent part of the household economy precisely due to its low price.

How does this relate to department stores? As of today, they sell a product, with the hope that the store name, experience, or service quality, will lead customers to return, just like when Netflix used to send DVDs. At the same time, department stores have a great customer knowledge (in terms of tastes and behaviour offline and sometimes online), and for most of them, manage a content, be it via a “unique” & “curated” selection, or, more prosaically, via their private labels, in a similar way to Netflix’s own productions.

In the hope to systematise customers’ trips to department stores, is there a way to use existing assets, i.e. customer knowledge & content creation, in a pivotal way such as Netflix? Is “subscription retail” an option to increase sales and productivity? What can we learn from other markets and channels?

Subscription retail as a paying members’ club

A first form of subscription retail embraces the notion of exclusive member’s clubs, accessible with a fee. This enhances the club’s perceived value while financing the exclusive services provided (in theory). For instance, when applying to Prime, Amazon customers buy the ability to know exactly when they will receive their order, shipped for free. With this system, even if it is reported to be unprofitable, Amazon significantly increases its 150m Prime members’ loyalty. As an additional free perk, they also get access to Amazon Video and Music, which helps Amazon to improve its algorithms.

Another example is the REI Co-op membership programme. Not only do members have access to exclusive events, sales, limited-edition members-only products, lowered rental fees and specific activities, but they also receive an annual dividend on REI’s profits. The customer is buying a creed: it is possible to share values and beliefs (REI advocates for topics such as sustainability, etc..), be part of an entrepreneurial adventure (many customers

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) and receive dividends for loyalty. REI operates 165 stores across the US and distributed to its 19 m members USD 211 m dividends in 2020.

This model is ideal to capture customers, feed their loyalty (as another example, Retail Restoration Hardware in the US proposes a club with a USD 100 yearly fee: 95% of its turnover is made through members) and generate additional revenue: in 2020, the Amazon Prime program is estimated to have generated a revenue of USD 6,57 6.57 bn.

Is it possible to adapt this model to department stores?

• Membership programmes with qualifying amount spent already exist – it would be difficult to pivot to an upfront payment model,

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) and this would come on top of digital investments or stores refurbishment, a non-credible option in 2021.

• Execution must be perfect, which is why Target dropped its "subscribe and save"service after 7 years, due to poor execution and lack of appeal for customers.

H&M has recently launched a new brand, Singular Society, with a membership fee model (EUR 9.95 a month) which gives access to collections sold at cost price. H&M claims to try a new business model, relying on the monthly subscription to make a living and not the product margin. However, from the department store point of view, this option is somehow radical, and will also require a significant investment to build the brand equity necessary to be appealing to customers, not to mention that it is currently not applicable to the existing businesses.

If the paying fee is seemingly not an option, what else can be learnt from other industries?

From Saas to subscription boxes

Tech companies were the first to deploy subscription models: rather than selling a software, prone to copies and hacks, why not diffuse it on a free basis, allow trials, and then propose only a subscription? This is what Adobe successfully did in the past years, transitioning from a software catalogue sold on a one-shot basis to a monthly fee granting access to selected plans, to the point of generating 86% of their revenue in 2018. Microsoft, as documented in the IADS article on disruption, achieved more than half of their turnover following the same path.

How can this be applied to physical products?

Subscription boxes are an answer. Varying in costs and frequency, the types of promises are the same across categories: discover with a relative low risk and cost new products (Birchbox), ease customer’s life by automatically reordering, especially in Fashion (Stitchfix), or save money (The Dollar Shaving Club). McKinsey values the US Box market alone at USD 12 to 15 bn.

Surprise customers with an exciting offer: the box business is a savoir-faire mastered by retailers. This is why larger brands and retailers also launched boxes: Urban Outfitter with Nuuly, Macy’s and Bloomingdale’s with beauty boxes (based on a discovery and low price claim) or Nike with the Nike Adventure Club (targeting kids).

However, it requires building from scratch a new activity (from product sourcing to community building and animation, through logistics and invoicing) which is difficult for department stores at a moment when they look to increase the productivity of their existing assets.

Another option could be to add a layer of recurring revenue to an already existing activity: the ‘rundle’.

Ready to rundle?

The term was coined after ”recurring revenue” and ”bundle”, by Stern School of Business professor Scott Galloway. Three types of bundles have proven valuable on the long run:

• A bundle of different products increases its value through the perceived discount,
• A pack including a less popular product is a way to get rid of worst sellers,
• A pack including a new product is a way to have customers try while mitigating risks.

Coupling this approach with a recurring revenue model is efficient, thanks to the perceived low monthly fee (liberating customers from the urge to use the rundle at its maximum: only 18% of gym club members hit the club consistently, translating into a significant revenue / cost of acquisition ratio improvement on the long run for the gym company).

The Amazon Prime Video and Music addition is a perfect example of rundle based on introducing a new product coupled to best seller (free delivery). Apple TV new move to bundle Apple Music, Icloud, Care, Pay… is, on the contrary, a good example of rundling in a single offer a seemingly good value-for-money proposition, looking more interesting than cumulating the various services without the package.

Have we seen an equivalent model in retail? For Christmas 2020, Westfield London has opened popups with Christmas trees, decoration and tableware bundles available to rent for the period of Christmas, to be returned within 10 January. Going further, Ikea has announced a recurring revenue model, which is based on renting furniture. However, after a 1.5 year-long teaser, the service is still nowhere to be found on internet, including on the Swedish website. John Lewis, on their side, have announced a similar furniture rental model through a partnership with Fat Llama. Interestingly enough, this partnership is nowhere visible on the John Lewis website, and not even consistently advertised as a John Lewis offer on the Fat Llama website.

Innovating and limiting risks

Subscription is not equal to renting or leasing:

• A renting/leasing solution involves a down payment, usually not refundable. A subscription down payment is smaller and fully refundable,
• A renting/leasing model has a fixed contract, not the subscription model,
• A renting/leasing model involves penalties if the offer is modified, not the subscription model.

This is why subscription model for cars (Carro), rundle hotels offers (such as Citizen M, proposing a credit of 29 nights at EUR 50 to be used in whatever location of the chain), or even shoes subscriptions by On Running shoes are so disruptive: they are literally non committing, cheap and highly addictive.

Perhaps a way for department stores to explore rundles without taking too many risks would be in F&B, enticing customers to come spend time. As an example, the Pret a Manger initiative proposes, for GBP 20 a month, up to 5 coffees a day, in a non-committing, auto-renewable contract. By following a similar initiative from Panera (coffee subscription for USD 8,99), they exceeded their sales target on the first day by a factor of 5. The catch? The customers cost of acquisition is the production cost of an Espresso. If the rate of active customers is the same as the one for gym clubs, then, the department store is creating recurring revenue even when customers are not active. When they are active, the job is to make sure they buy additional products, just like how Monoprix seems to have built its Place Publique in their new store, with a very efficient merchandising approach.

Space productivity is a crucial topic for department stores. Questions about stores’ ROI and KPI are on everybody’s lips, and the topics of many IADS meetings (IADS Space Productivity Meeting). There is space for new ideas that do not require significant capex and investments other than the courage of proposing smart new options to customers.

Credits: IADS (Selvane Mohandas)

Read also

• IADS Exclusive: Monoprix: what makes a popular store?
• IADS Exclusive: Responding to disruption
• Bain&Company – the Future of retail: winning models for a new era, 2020
• The Rise Of The Rundle: A New Trend For Subscription-Based Services