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The Great Retail Reinvention: How the Internet Is Reshaping the Way We Buy Clothing
Apparel is currently one of the most fascinating categories within the Everyday Economy. It’s a $1T+ global industry undergoing tectonic shifts. We are currently seeing the most rapid collapse of retail since the Great Recession, due to the internet changing consumer demand and purchasing patterns. In 2017 alone, we’ve seen widespread store closures or bankruptcies from apparel retailers, including:
- True Religion
- JC Penny
- Ascena (Ann Taylor, Loft, Dress Barn, Lane Bryant, Justice, etc.)
- Michael Kors
- The Limited
- Wet Seal
- American Apparel
But unlike some other categories of commerce, I’m not convinced Amazon is the ultimate winner here.
How many people really think Amazon is the best destination for the bulk of their apparel purchases? Maybe they will get there, but I think that the experiential nature of the category — both in terms of the actual products and the brand experience — mean that this will play out very differently from other categories like media or consumer electronics.
Instead, today we find ourselves in a strange middle-ground in the apparel industry. The old brands and distribution channels are dead or dying. Most apparel purchases are now in some way influenced by the internet. But few companies have figured out how to create and capture value, and defend that value in this new order.
The Biggest Opportunities in Apparel
This kind of uncertainty and market shifts create the kinds of opportunities that we love to see, and has driven our seed investments in current market leaders like ThredUp and Dia&Co with many more opportunities ahead. In particular, we are thinking about a few big pockets of opportunity.
Personalization & Discovery
Ironically, some of the most successful apparel companies are winning on the dimensions that Amazon has historically crushed other competitors on — namely personalization and product discovery.
But what we have seen from companies like Stitch Fix, Dia, and others is that the physical interaction with products is critical. Consumers have to actually put the clothes on their bodies to discover which products are right for them. And it’s critical to get the granular data from these physical interactions to really improve algorithms around fit and personalization that cannot be tuned in other ways.
But while that particular model has seen success, it certainly won’t be the only way that companies will be able to create greater personalization and serendipitous discovery for their customers. Other models will certainly emerge, and will find new ways to couple data science and business model innovation to get the right products in front of the right customers.
Another irony of these rampant store closures is that increasingly, web-only brands are beginning to open storefronts or experimenting with other ways of establishing a physical presence. What’s looking likely is that instead of physical stores and ecommerce being distinct, separate channels, we will see increasingly tight integration between the digital and physical experience of a brand or retailer — and new forms of retail experiences altogether. Examples include pop-up retail experiences like what Bulletin is doing, or efforts by large brands to partner with startups like 19th Amendment to experiment with different direct-to-consumer models.
What this will exactly look like is still unknown, and so far, I think the early attempts feel too much like a retrofit into traditional retail parameters. There will be a huge opportunity for brands that really nail this integration, and enabling technologies or services that will support this shift. It will also be interesting to see if the “job” done by department stores (curation and traffic acquisition) might be fulfilled by something different in the new retail reality, as smaller brands or independent designers look to find ways to reach consumers digitally and physically.
New Direct-to-Consumer Brands
While launching new brands seems insanely risky and difficult, this might be precisely the best time to try to do this, given the backdrop of shifting consumer behavior, weakening incumbents, and marketing channels that allow brands to target better and tell their story more effectively.
The rapid growth of companies like Allbirds or MM.LaFleur is indicative of this. The beauty of the new landscape is that niches that were previously underserved can be targeted and aggregated effectively, and enthusiasm and notoriety of a brand can be built in a fraction of the time. These new companies will also all be digital- and technology-first, meaning that their adoption of software and platforms to operate their business (from marketing and customers acquisition to logistics and supply chain) will be quite different from the behavior of traditional brands and retailers.
These are just some of the opportunities we are thinking about, but as is often the case, VCs are usually a step or two behind the pioneering vision of entrepreneurs. For this reason, we stay fairly opportunistic in thinking about the problems that matter for the future of apparel and retail, and realize that we only see the surface of the opportunities ahead.
That said, the apparel category also has some healthy threats and challenges from an investment perspective. Two in particular make this category particularly challenging.
The first is the service expectations created by Amazon, which puts tremendous pressure on margins in this category. It is very difficult to win over customers without matching the jaw-dropping value and service that Amazon has trained consumers to expect. Free shipping, free returns and exchanges, rapid and high-quality service, fast shipping (and getting faster) are all difficult and costly to deliver on, and creates a huge drag on the economic attractiveness and capital intensity of these businesses.
Owning High Shares of Customer’s Wallet
The second challenge is how difficult it is for any fashion retailer to own a high share of the customer’s wallet in this category. Part of what made companies like Chewy and Dollar Shave Club so valuable is that these companies essentially consume 100% of household spend in their respective categories. You don’t buy multiple brands or razors, and you tend to buy the same type of pet food regularly for an extended period of time. This allows these companies to be conveyor-belt businesses with increasing basket size over time as customers add other related products.
This is very hard to do in apparel, especially in women’s apparel where customers value the ability to experience different brands and retailers to find the right item. Because there is less loyalty and habitual purchasing, companies end up needing to spend money to re-acquire customers regularly, making it more expensive to get and retain each customer over time. I think this is why we haven’t seen an ultra-large scale apparel ecommerce company emerge (yet) and why a number of companies that showed early promise ended up hitting a ceiling in their ultimate enterprise value.
Despite these challenges, we are very bullish that this category will yield some very important, long-lasting companies that will change the way the apparel industry operates and is experienced by consumers. The era of traditional, brick and mortar retail is over, but a new era is being built as we speak.