Amazon.com Is Taking Over the World... of Apparel

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the eighth installment of a series that takes an in-depth look at the lesser known lines of business for Amazon.com (NASDAQ: AMZN), this article focuses on yet another distinct sector of the retail space with its own unique characteristics, challenges and competitors: apparel.  Amazon.com has used a consistent formula to enter into new lines of business through strategic acquisitions, investment in inventory for its core retail website, and partnerships with both manufacturers and smaller retailers to gain a foothold in everything from pet supplies to groceries.  Unsurprisingly, this is exactly what Amazon.com has done to create a compelling storefront for fashion items including clothes, shoes and accessories.

The "boring" apparel business presents a tremendous opportunity for Amazon.com.  The apparel industry generated approximately $1.1 trillion in revenue worldwide in 2011 and is expected to grow to around $1.3 trillion by 2016.  

Amazon.com's apparel offerings

Here's how Amazon.com has started to create a platform from which to capture market share in this space going forward:

  • Zappos.com - After establishing itself as the largest online shoe store with a decade of producing customer loyalty through wide selections and unparalleled customer support, Zappos.com was acquired by Amazon.com in 2009 for $1.2 billion. At the time, Zappos.com had just cleared the $1 billion revenue mark in 2008. While Zappos is estimated to generate about 80% of its revenue from shoes, CEO Tony Hsieh has established a goal of reaching $1 billion in revenue from clothing by 2015. Progress towards this initiative is evident based on the scope of Zappos.com's brand name selection, including apparel from Nike, VF Corp's North Face, Ralph Lauren and others that you would expect to find at a department store like Macy's (NYSE: M).  
     
  • Shopbop.com - For the higher end shopper, Amazon.com offers Shopbop.com.  Shopbop offers designer apparel in an environment similar to Urban Outfitter's (NASDAQ: URBN) Anthropologie website, and features a wide range of luxury brands including VF Corp's 7 For All Mankind, Splendid and Ella Moss.  Like Zappos.com, Amazon.com has embedded a premium customer service experience into Shopbop's web presence, which differentiates the site from competitors.  The products and customer service a customer finds at Shopbop are designed to be competitive with what you'd expect from higher-end stores such as Anthropologie and  Nordstrom (NYSE: JWN).  
     
  • MYHABIT.com - To address the growing market for flash deal sites focusing on designer brands such as Rue La La or Gilt, Amazon.com unveiled MYHABIT.com in 2011.  This site offers comparable functionality to its peers but boasts free shipping where the competitors do not.  MYHABIT also has a significant logistical advantage; Amazon.com can leverage its existing sizable relationships with its apparel vendors to obtain exclusive deals for MYHABIT.  Furthermore, Amazon.com can use MYHABIT as a vehicle to clearance both its own inventory as well as that of its retail partners. 
     
  • Amazon.com/Clothing - While each of Amazon.com's specialty websites has a compelling apparel offering, Amazon.com's core website also has a comprehensive selection of a wide range of apparel; Amazon.com/Clothing offers a complete spectrum of apparel options that is broader than any single competitor.   In addition to tremendous selection, Amazon.com's clothing store offers everything customers have come to expect from Amazon.com, including free shipping, two-day Prime shipping, free returns on clothing, and some substantial discounts and coupons during this holiday season.

    In addition to the sizable investment that Amazon.com has made in its apparel inventory, yet another competitive advantage exists in the seamless integration of its marketplace partnerships with sellers and vendors.  For example, Under Armour (NYSE: UA) has over 1,000 apparel items listed on Amazon.com's website; this is a much larger scale version of the "Sell on Amazon" features that provide small businesses the opportunity to sell products through seamless integration into Amazon.com's website. At times, the free shipping options on Amazon.com make these items less expensive to buy through Amazon.com as they would be directly from Under Armour's website.  Since the inventory is stocked and fulfilled by Under Armour itself, Amazon.com has no inventory risk and simply collects high-margin fees for every item sold.  Additionally, these relationships provide Amazon.com with a tremendous advantage in terms of variety; compare the 1,000+ items sold directly by Under Armour on Amazon.com's website to the 233 Under Armour items available on Nordstrom's website or just 68 items on Macy's website and the difference is pretty clear.

How does Amazon.com gain market share?

With a market opportunity of over $1 trillion, even a small share of the apparel market translates into huge revenue growth for Amazon.com. So how does Amazon.com leverage the businesses described above to generate growth?

  • Selection - The Under Armour anecdote described above is just one of many instances where Amazon.com's selection outpaces the e-commerce (and even in-store) selection of its apparel competitors. Amazon.com's centralized fulfillment structure allows the company to keep more items in stock than any brick and mortar store. Why go to Macy's or Nordstrom and hope to find what you are looking for when you know that Amazon.com has the item in stock and it can be at your door in a matter of a couple of days?  With fast shipping and free returns, more and more people are asking this question and opting to shop from home as evidenced by the fact that domestic online sales of apparel are expected to climb 20% in 2012.
    
  • International Shipping - One common characteristic that Amazon.com's apparel offerings provide is the ability to ship internationally.  For example, Shopbop is currently offering international shipping that is free to many countries.  Not many retailers will promise delivery by Christmas where the item is shipped to Washington or Peru (random examples).  MYHABIT has a slightly different model, with international shipping ranging from $15-$25 per order.  However, the simple fact that Amazon.com has the logistical details worked out to ship to a vast array of countries is something that few companies offer.  Macy's launched international shipping last year through an arrangement with third party FiftyOne, but many retailers have still not caught on to this opportunity.
     
  • Efficiency - Amazon.com's efficient fulfillment center structure allows the company to operate more profitably than retailers that must operate vast brick and mortar stores.  The employee, rent, utility and maintenance expenses involved in running an apparel store (particularly one seeking to distinguish itself with high end fixtures and great customer service) are tremendous. While Amazon.com's expertise in logistics allows it to simply stay competitive with low cost retailers like Wal-Mart and Target, its low cost structure combined with manufacturer-determined selling prices translates into a key competitive advantage over the average apparel retailer, which do not typically have the sophisticated logistical systems of a company like Wal-Mart or Amazon.com.
So, Amazon.com can offer more items to more people with less overhead.  That sounds like a recipe for success! If this success translated into just 1% of the global apparel business, this would represent over $10 billion in revenue for Amazon.com.  There's no reason that Amazon.com can't meet or achieve that target as it continues to aggressively roll out a full spectrum of apparel offerings.


BrewCrewFool owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com and Under Armour. Motley Fool newsletter services recommend Amazon.com and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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