When your business begins to slow, what do you do? If you’re Birchbox, you head to your local Walgreens.
The beauty startup entered the world with a bang when it was founded eight years ago, kick-starting the subscription-box craze by sending customers sample-size cosmetics and encouraging them to buy the full-size version online. But as profitability stalled and layoffs set in, Birchbox reportedly went looking for a buyer. Instead of a Walmart or QVC, it ended up with a hedge fund, Viking Global Investors, which bought out its other backers.
Until America’s second-largest pharmacy came along, anyway. With dreams of its own to compete in earnest with Sephora, Walgreens took a minority stake in Birchbox in October and promised to place the buzzy e-commerce brand in 11 stores, with up to 1,000 square feet in each. “We expect that we’ll find consumers that are similar but that we haven’t reached,” says Katia Beauchamp, Birchbox’s cofounder and CEO.
The same considerations—right down to the minority investment—were in play at CVS two months earlier. Eager to be as well known for makeovers as for medicine, CVS in August announced that it would put professionals from Glamsquad, the on-demand beauty service, in four locations. On tap: $40 blowouts and $30 makeup applications, a cheaper version of what the almost five-year-old startup offers its own customers in their homes and offices.
“We are confident that this retail presence will become a strong pillar of our business and complement our on-demand model seamlessly,” Glamsquad CEO Amy Shecter says.
So what’s going on here? The drugstore dinosaurs (CVS: age 55; Walgreens: age 117) are working to establish new revenue streams (and in the case of CVS, replace old ones like tobacco) as they reinvent themselves as wellness destinations. They’re also watching the rise of young brands like Fenty Beauty, available at beauty bazaars like Sephora but not at drugstores, as they take ever-larger pieces of a $56 billion U.S. beauty pie that includes color cosmetics, fragrances, hair care, and skin care, as estimated by market researcher Euromonitor International.
“Beauty is an important part of our front-store growth strategy and a way to attract younger customers,” says Maly Bernstein, VP of merchandising for beauty at CVS.
Meanwhile, retail digital darlings like Birchbox—facing high churn, low margins, and frightful costs—seek new customer acquisition channels. It’s an effort to de-risk the business, says Greg Portell, lead partner in the global consumer and retail practice of consulting firm A.T. Kearney.
“The myth with a lot of these digital startups is that they can survive just in a digital environment,” Portell says. “The path to scale has to involve some sort of physical footprint.”
But it’s a treacherous trail, and investors have cooled on the category. Asks Sapna Shah, an investor at Red Giraffe Advisors focused on retail, fashion, and consumer startups: Is it better to be one of many coveted brands at a store like Macy’s, Ulta, or Sephora, or is it better to be one of few brands with cachet at the drugstore?
Whatever the answer, the romance between digital commerce startups and physical retail stalwarts seems to be low risk enough to warrant experimentation. Major pharmacy chains have little problem attracting people to their stores but could use new ways to keep them there to generate more sales. And while getting on drugstore shelves won’t solve the inherent business problems faced by subscription and on-demand beauty startups, it may alleviate the pain—just the sort of remedy
a pharmacy is good for.
A version of this article appears in the December 1, 2018 issue of Fortune with the headline “Clicks And Mortar.”
