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How E-Commerce is Restyling the Apparel Industry

What the latest apparel market trends show about Amazon’s dominance

Bridget Weishaar, Morningstar Research Services LLC

 

We think the apparel and accessories industry is on the cusp of a significant reinvention.

Mall traffic is on the decline. E-commerce is steadily stealing apparel market share (reaching over 25% in 2017), and new entrants are flooding the space. Plus, certain competitive advantages no longer hold the power they once had—such as a broad national brick-and-mortar footprint and the ability to garner economies of scale. These can now often be viewed as disadvantages.

Many newer startups have seen success by being nimble and by harnessing the power of technology to help improve products and the shopping experience.

An Amazonian disruption to apparel market trends 

We see e-commerce and, more specifically, Amazon as the largest disruptive force to existing apparel companies. In its advent, e-commerce had some weaknesses that protected brick-and-mortar retailers. But advances in shipping, targeting, merchandise display, and checkout—in addition to shifting consumer demand for convenience, reviews, and information—have tilted demand more favorably to online retailers, in our view.

In our recent report, we analyze the changing competitive landscape and attempt to identify new company traits that are now rising to levels capable of yielding a competitive moat.

Current apparel market trends are leading to new moat sources

We believe that e-commerce penetration in apparel retailing could reach over 40% in the next five years. In fact, we view Amazon, which possesses perhaps the largest network effect advantage in the United States, as the most significant threat to apparel market share in the near term.

But despite Amazon's dominance, we also see unique competitive advantages resulting in the parallel rise of strong niche players and brand partners. Interviews with five innovative, high-growth new entrants to the retail space yielded four key themes that we see as a potentially sustainable source of moat in this new retailing world: Big Data capabilities, customization, responsiveness of the supply chain, and distribution channel flexibility.

According to McKinsey data, 35% of what consumers purchase on Amazon and 75% of what they watch on Netflix come from algorithmic product recommendations, supporting the power of data. Similarly, research conducted by Deloitte in the U.K. revealed that 20% of consumers who expressed an interest in personalized products were willing to pay a 20% premium. A responsive supply chain supports these capabilities. In our research, Stantt, Shoes of Prey, True Gault, and ThirdLove all had lead times under three weeks—better than or in line with best-in-class Inditex.

Lastly, we view the ability to adapt to shifting consumer preference in distribution channels as a competitive advantage. The U.S. has more than double the retail square feet per capita of most other countries, and this doesn’t appear sustainable.

Department stores appear to face the biggest risks

Based on these emerging capabilities, apparel manufacturers, off-price retailers, and select specialty retailers are best positioned to hold their competitive advantage, while our department store coverage and general apparel retail universe is likely at biggest risk.

Department stores, for the most part, are being left behind as consumers embrace the ease and convenience of e-commerce. No-moat Macy’s—perhaps the poster child for the department store category—has had lower annual sales growth every year from 2011-2016, including negative growth the last three years.

It’s hard to see how the department stores’ prospects will improve as they compete head-on with online retailers like Amazon, often in the same categories and brands. We believe that Amazon, with its added convenience, is likely to continue its trajectory.

Please see below for important disclosure. 

Download our full report “Stocks in Fashion 2018: Dressing for an Amazonian Storm.”

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Important Disclosure

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission.

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