Boxed: Love that Bulk!

How a game developer is using technology to deliver groceries and savings to your door.

boxed-subway-ad

A year ago, I noticed a quirky advertisement on the subway during my morning commute. It was about a company I had never heard of before: Boxed. Their proposition was very simple. Buy everything you need in bulk on your phone. No membership, no problem. As a busy New Yorker who relied primarily on public transportation, Costco and BJ’s were completely out of reach for me. Boxed was the ultimate solution, offering household products in bulk at discount prices. My package arrived the next day and included a hand-written thank you note.

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Boxed was launched in August 2013 by Chieh Huang on iTunes. Huang began his career as a social game developer and sold his first company, Astro Ape, to Zynga in 2011. He launched Boxed within three months of leaving Zynga with a team of 10 engineers. Starting with one warehouse in New Jersey, Boxed promised overnight delivery to New York, Philadelphia, Boston and Washington D.C. and two day delivery in 48 states. They have since expanded to three distribution centers and continuously deliver high quality bulk goods in two days or less. True to its software development roots, Boxed is not just a mobile app; it is an innovative application of technology to a tried and true business model.

Business Model

The Boxed business model is quite simple: purchase goods direct from manufacturers and distribute to consumers at a relatively cheap price. A quick comparison search on Boxed and Amazon shows the significant savings for customers. While a 12 pack of Kleenex sells for $31.80 on Amazon Prime, it is only $17 on Boxed. But that doesn’t mean that Boxed doesn’t also make a profit. By cutting out intermediaries, Boxed captures more of the value. Boxed also limits its SKUs to products that have higher margins and can be shipped easily. By choosing the right product mix, Boxed generates enough profit from product mark-up and does not have to charge annual membership fees— which can run as high as $110 at traditional retailers.

Kleenex Boxed Kleenex Amazon

Arguably, the true value that Boxed delivers to its customers is convenience and time savings. Boxed advertises itself as the company for customers don’t have the time or the means to shop at a big box retailer. Originally, Boxed targeted men in urban communities, expecting a lot of demand for items like bulk whey protein. Surprisingly, and yet not surprisingly, Boxed received the most interest from busy moms who prefer to spend the weekend with their children than at a Costco. The value of saving time and money along with the convenience of free two day delivery allows Boxed to compete with services like Amazon Prime and local retailers, particularly for non-urgent essentials.

Operating Model

In order to deliver consistent value to its customers Boxed has to be well stocked, lean, and fast. They optimize their operating model by making decisions about their warehouse locations, product offering, use of technology.

Warehouses Boxed leases three fulfillment centers in New Jersey, Las Vegas, and, most recently, Atlanta. The location of each warehouse maximizes access to consumers and enables very fast shipping. 89% of packages arrive in two days or less, with overnight shipping possible in several urban locations like New York City and Las Vegas. Shipping is also outsourced to UPS so that Boxed, unlike Amazon, does not have to manage a fleet of delivery trucks.

Product Line When Boxed initially launched, it limited its product line to ~700 SKUs to optimize warehouse space. This is significantly smaller than Costco, whose SKUs number in the thousands. With the recent rollout of Boxed “Express”, an Instacart competitor, the number of SKUs has increased but the overall product offering remains limited. The balance between providing enough variety and managing the product mix efficiently is intentionally maintained.

Technology Although Boxed is in the business of delivering groceries, the software is the core of its operations and its main differentiator. To optimize inventory management, Huang and his team developed a proprietary warehouse management system in-house. Workers also experiment with technology, using wearables like Google Glass, and iPads on wheels, to find merchandise and pick customer orders. Please watch the video below for more examples.

 

Boxed is ahead of the curve, becoming the first e-commerce-only big box retailer. It has caught the attention of several venture capital investors, successfully raising $30m from top players like Greycroft Partners and GGV Capital. Most recently, Alibaba is considering an $80mn investment into the company. If the deal is successful, it can unlock even more value for the company. As a satisfied customer, I am looking forward to seeing this company develop as one of the biggest tech disrupters in a brick-and-mortar industry.

So in conclusion:

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 Sources:

http://fortune.com/2015/01/14/boxed-raises-25-million/

http://www.forbes.com/sites/hollieslade/2014/05/13/costco-of-mobile-apps-boxed-raises-6-5m-to-take-on-amazon-prime/

http://www.fastcompany.com/3016226/fast-feed/meet-boxed-a-delivery-service-for-wholesale-goods-thats-like-costco-on-wheels

http://qz.com/149811/how-10-people-built-a-competitor-to-amazon-com-for-1-million-in-90-days/

http://www.forbes.com/sites/miguelhelft/2015/05/26/meet-the-tech-ceo-whos-offering-free-college-tuition-to-his-employeess-children/

http://www.bloomberg.com/news/videos/b/8e4ca3bd-37b3-4078-bb5d-6d0e1cc6876e

http://www.retailwire.com/discussion/16992/can-boxed-deliver-the-warehouse-club-experience-online

http://www.techtimes.com/articles/104793/20151110/alibaba-looks-to-take-on-amazon-with-80-million-investment-in-grocery-ordering-app-boxed.htm

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7 thoughts on “Boxed: Love that Bulk!

  1. Very interesting! I am a frequent user of Boxed. I love the idea, but think it would be more helpful if they offered more SKUs – I often find it convenient to order from Boxed, but they never sell everything I’m looking for. It seems that they will need to offer more SKUs to compete with Amazon, Costco, Sams over the long term?

    1. I think you make a fair point. There is a very important balance for this company in offering the right product mix so that they can make money vs. making sure their customers are satisfied. I think the company started out with ~500 SKUs and this number has grown significantly. The company is using information from their customer base- demographics, location etc. and have responded to this data by expanding their mix to include things like diapers, which were originally excluded as too cheap/bulky but would appeal to young parents. They also encourage users to give feedback about their products and to request products on their contact us page. I do not think, at least at the level they are currently, that they can reasonably stock the same 2000-5000 SKUs that Costco does, but I would agree that they still have room to expand their product offering.

  2. Great article, Rina! I wonder if there is a bit of a cap on their growth though because of the size and pockets of Amazon and Costco. If they continue to grow rapidly or begin cannibalizing Amazon’s sales on certain SKUs to the extent that Amazon begins to notice – I wouldn’t be surprised if Amazon lowered price just on those particular SKUs to outcompete Boxed. I can’t imagine Amazon would even notice taking temporary losses or lower margins on 800 SKUs to drive out a competitor!

    1. I think that the great business and operating models really come into play for Boxed in making it a strong competitor against these giants. Boxed is a very niche product–offering only bulk items, and utilizing a very lean operating model to both profit and pass savings down to consumers. Boxed isn’t really looking to replace Amazon, but is more likely a threat to Costco and brick and mortar retailers. While I do not know whether or not Amazon would try to price cut such a niche competitor, I think there are some elements in the operating model that make Boxed really strong- not owning delivery trucks, limiting SKUs, providing free 2 day shipping without a membership fee (Amazon also has a membership fee for Prime). I also don’t think that Costco can really compete with Boxed in the long term, because they already offer almost the same prices, and Costco has all of the overhead and inventory management to deal with that it can’t enter into a price war. Boxed doesn’t just choose its product mix randomly. It picks the top selling 800+ SKUs that can be delivered quickly and cheaply. So if Costco were to cut prices on these SKUs, it would have to take a very big hit in its margins. In addition, the size of this market is so huge, that Boxed may not be currently hurting Costco that much anyway. The Costco customer tends to be older, in the 40+ age range, and live somewhat close to a Costco. Boxed attracts millenials and young Gen Xers, as well as older folks who simply do not have access to a big box retailer because they live in remote areas. I will be interested to see how these companies respond to Boxed in the future, but I do stand by the company model and would expect Boxed to, at the minimum, give these guys a really good fight.

  3. I loved going to Costco with my family, but now I can’t go anymore because I don’t have a car here. This is a great alternative solution for me. I do wonder though, how easy it is for Costco to enter e-commerce market and how would Boxed compete with it? Since Costco already have warehouse in great locations that enables fast shipping and limited product line with high productivity that optimize space, all they have to do is invest in delivery (or outsource it) and technology to play in e-commerce.

    1. Costco has had a mobile website for a long time now. And if you have a membership, you can order from them for delivery. But that just brings to light how Boxed can serve as a much better alternative for you anyway. Boxed has no membership fees, is able to keep costs low with low overhead, and already delivers in under 2 days to most places. In fact, Boxed may even charge lower prices than Costco for the same products. Check out this Tide detergent, which is sold for $8 less on Boxed:
      https://www.boxed.com/product/300/tide-pods-152-pacs-spring-meadow-scent/
      http://www.costco.com/Tide-Pods-Spring-Meadow-Scent-152-Count.product.100230702.html
      It is clear that although Costco may offer more products, Boxed just has a better operating model, which drives savings for its customers.

  4. Great post and comment thread on a fascinating company!! The operating model is fascinating – it would be interesting to see how they obtained minimum efficient scale in the first place… thanks for everything!!!

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