Unless pure-play multi-brand fashion e-tailers develop primarily a private label model or become logistic platforms, I believe most of them won’t survive over the next three to five years.
With COVID-19, the traditional apparel and footwear brick-and-mortar (B & M) retailers have had to accelerate their online sales or start selling online in many cases as a matter of survival. No B & M retailer can survive or stay healthy if their stores have little footfall, and many will be buried from a high fixed cost base especially if they don’t receive government bailouts.
While the above is pretty much obvious now, what is not is that many of these B & M companies have had significant increases in their online sales (albeit from a smaller base), and in many cases the increase has been multiple-fold during this Covid period.
Even though most B & M retailers had historically been slow to jump online, primarily because it either wasn’t a profitable channel due to high customer acquisition cost or excessive discounting, or more importantly they didn’t have the right mindset at the top of their leadership to exploit this channel.
However, with external situations forcing them to accelerate their online sales channels, they are starting the realise that this is not such a complicated channel as viewed in the past. And given many B & M retailers’ high brand recognition and extensive store footprint, these can be turned into significant competitive advantages most pure-play e-tailers can only dream of.
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Time to win back
On the other hand, most fashion pure-play e-tailers have struggled to achieve any net profit, and the leading ones are earning very low single-digit to sales returns vs. double-digit plus returns of their leading B & M counterparts.
The one’s that have managed to turn some profit tend to be those who have a sizeable share of private labels, such as Amazon, Asos in the UK, Zalando based out of Germany, Namshi in the Middle East, or niche players that are 100 per cent based on private labels.
Discounts and then some
Clearly these pure-play e-tailers were aware of their window of opportunity and almost all of them started with selling well-known brands like Nike and Adidas at sizeable discounts to pull in traffic, and in parallel trying to build and scale their private labels for better margins.
While some have succeeded in building a good portfolio of private labels, most have struggled to get that right, mainly due to lack of having adequately experienced talent to achieve the right product development, sourcing and production of private brands.
Most e-tailer start-ups were founded by persons from outside the traditional B & M retail industry and heavily from a consulting background, which works fine for IT platforms, online experience, fund raising, developing a start-up culture, sourcing from established brands etc. But a good part of such talent haven’t succeeded in creating strong private brands in fashion and footwear space.
Even Amazon being the world’s biggest e-tailer has not been incredibly successful in this space, even though they have over 30 private brands in clothing, most of them are just different labels competing on price, rather than any significant competitive advantage on product design, quality, functionality or emotional brand connection.
This is despite having a revenue of over $100 billion from their own retail across all product categories (excluding their third-party sales on their marketplace, which is another $150 billion), of which apparel sales are around $30 billion to $40 billion. And of this, the share from their private apparel brands are reportedly around $10 billion to $12 billion spread across these 30 private clothing labels.
Thus, their hold on the apparel market via their private labels is not really that significant on a global scale.
Just doing it
The sporting apparel powerhouse Nike has discontinued their two-year experiment with Amazon due to various reasons (customer experience being among the biggest). In the near future, I expect many other global names will eventually follow suit as they manage to scale up their own online stores across the world which give them better control on pricing and customer experience.
Today Nike’s global direct-to-consumer online sales runs to several billions, while Zara’s parent Inditex group’s online revenue is expectedly in the region of $5 billion for 2020, or around 20 per cent of their total revenue. Such scale of online revenue and at double-digit net profits puts the online performance for apparel of leading pure-plays such as Amazon or Zalando to shame, where they are similar in revenue but with low single-digit returns.
Even Walmart’s $60 billion in online revenue is fast closing the gap with Amazon’s $100 billion own retail, and many industry pundits expect Walmart to be the largest global online retailer in consumer goods space not too far out in the future.
Whilst Amazon has its web services for generating high bottom-line or it’s marvellous logistics platform giving it a massive competitive edge in retail, most other pure-play e-tailers won’t have that luxury and will need to accelerate the growth of its private labels to stay in the game. Or become massive platforms that provide service to other retailers, which is a “deep pockets” game.
My bet is that most B & M retailers who will now grow their online and omni-channels at a much faster pace for survival, or to improve bottomlines post-COVID, will take a lion’s share of growth in online market space.
Will hit them hard
Value category B & M leaders such as Primark, Uniqlo, TJ Maxx and many others are either still not selling online or are at infancy stage. Now that these value segment retailers launch and grow their online presence aggressively, Amazon and many others will see slower growth of their respective private labels.
Under such an environment where B & M retailers spend far less on online customer acquisition and will be turning many of their store staff to home delivery from their extensive store network, the heat will turn on to most pure-play online players.
Surely some of them will scale up their own brands and create product differentiation to compete. Some will succeed in becoming logistics solution providers. However, I do not believe that most will be able to achieve either of these, as the window of opportunity they enjoyed has now just been shrunk by a few years.
With slowing growth of online pure plays, also will come to an end their unrealistic valuations that enabled them to continuously raise capital to buy market share, thus entering a vicious cycle of stalled growth.
Sadly, many of such pure-plays in the apparel and footwear space may eventually disappear or be snapped up at distress valuations by either their competitors ... or B & M retailers.
- Dinesh Shahani is Chief Operating Officer, Shoe Mart International.