Even for big brands, it’s a tough thing to replicate: when Target switched to their own distribution and hosting, downtime, delays and completely bungled orders plagued online shoppers for some time.So where can startups and specialized companies (and their investors) compete, and who can burgeoning brands look to when it comes time to connect the dots? Our team put together a market assessment that covers three key areas where Amazon dominates e-commerce, but not fashion e-commerce specifically:
Marketplace:Defined as sites that aggregate multiple products from smaller merchants with some sense of online ‘community.’ Marketplaces typically have little to no interaction with inventory handling or the fulfillment process, but collectively drive traffic and attention to merchants on the platform. The merchants likewise have very little (if any) interaction with platform development. The barrier to entry is relatively low, and doesn’t require approval from buyers or the marketplace in order to sell, and usually operates on a per sale fee model. Think Bottica, Etsy, or Storenvy.
Vertically Integrated Online Retail:
While integration with agencies and third party companies on some aspects of online retail aren’t uncommon, vertically integrated e-tailers have a larger role in merchandising and product selection (either through standard wholesale purchasing, or direct manufacturing), inventory handling, shipping, and fulfillment. Typically no transaction, monthly, per item or agency fees but there is the cost of full or part time employees, platform development, maintenance, fulfillment, and inventory handling. Hot companies like Warby Parker, Nasty Gal and Asos (not including their small marketplace section) would fall into this category.
What does this mean for fashion brands?
For new brands, one of the advantages to any marketplace is a readymade audience of prospective buyers. There are very few sites that can challenge Amazon on audience size (and there’s no self-serve platform yet) but for specific products, narrowly focused marketplaces may perform just as well. Beyond the size of its audience, Amazon’s true competitive advantage is its warehousing and distribution system. Typically avoided by most marketplaces – even eBay, one of the world’s largest – this is often one of the growing pains vertically integrated e-tailers deal with. Other merchant services, like marketing and promotion, can be handled independently. The connection between sales and fulfillment, however, is much deeper and one of the fashion e-commerce chasms that nearly all marketplaces except for Amazon have.
What does this mean for investors/private equity firms?
Investors typically shy away from service based businesses – a look at the valuations for any agency vs. a software based competitors make that clear. It can take time for a marketplace to become established, but once on that path the growth potential from the low-touch nature make it far more likely to scale. But that’s why fashion e-commerce is so different. Fashion is a business that remains high touch, even in the digital age. Product buys worth hundreds of thousands, or even millions, of dollars are made on instinct and personal affinity. Delivery schedules, inventory management and payments remain a contentious issue, in part due to the lack of standardized systems.
Amazon may need some work on building its fashion audience, but the fact that they’re coming into the space with tried and tested merchant services should actually prove to be an advantage for brands not yet ready for vertically integrated e-tail, but ready to expand beyond the marketplace and basic e-commerce SaaS stage.
We would definitely make the argument for integrating services with a marketplace, or expanding SaaS sites to include more high-touch services to compete with Amazon (the biggest player in the game) on fashion.
While they may not be attractive to investors on their own, even the most tightly focused marketplaces would do well to pursue service options that bridge the gap for small and medium brands. Otherwise, the risk is that designers grow out of the marketplace, rather than with it.