Amazon: The Fashion Company

| About: Amazon.com, Inc. (AMZN)

Summary

Amazon is projected to become the US's biggest apparel retailer in 2017, with sales climbing 30% to $28B.

In a watershed moment for retail, Nike began selling its products directly on Amazon this summer, other big brands will follow.

Amazon has launched 15+ private label fashion brands (and appears to be working on many more) in an attempt to broaden the appeal of its clothing business.

Amazon is ushering in a new internet-first era of apparel shopping that will permanently disrupt the fashion industry with services like Prime Wardrobe and Echo Look.

A new partnership with Kohl's indicates Amazon is getting into brick and mortar and may be thinking about acquiring an apparel retailer.

Intro - A Fashion Powerhouse In The Making

Amazon (AMZN) doesn't do anything small. The Seattle company is famous for persistently pursuing success, with relentless iteration and innovation.

Fashion is no different.

Although Amazon is already the US's biggest apparel retailer, with sales of $28B expected in 2017, it's just getting started. A quick search on the company's job page for "fashion" reveals 304 open positions.

Over the next five years, Cowen is projecting that Amazon will more than double its US apparel market share from the current 6.6% to more than 16%.

In its bid to continue winning market share and pushing more apparel sales online, Amazon is pursuing an array of different strategies.

Perhaps the most obvious growth for Amazon's apparel business is convincing established brands to cooperate with its core e-commerce platform. Earlier this summer was a watershed moment. In late June, Nike finally decided to cave and begin selling its products directly on Amazon. Deals like this are poised to accelerate as the near-monopoly status of Amazon's e-commerce business continues to compound.

But that's just scratching the surface of Amazon's fashion vision. Amazon is simultaneously disrupting apparel by launching services that make it easier and easier to shop online.

Recently, Amazon announced the beta launch of a service called Prime Wardrobe. This allows Amazon Prime members to get a box of clothes shipped to them for free, that they can try on and test out for 7 days.

Innovative services like Prime Wardrobe are an attempt to remove the pain-points of shopping for clothes online. Being able to try on and touch a garment with no money down, is a huge step forward for e-commerce.

Beyond Prime Wardrobe, Amazon is doubling down on other initiatives that improve the online shopping experience. Another new project the company is working on is called Echo Look. This leverages the camera technology of new Echo devices to allow consumers to virtually try on clothes before purchasing them.

The combination of better products on Amazon (with big brands like Nike signing on), and better tech to improve the online shopping experience, will have a flywheel effect on the growth of Amazon's apparel business.

In addition to these two tailwinds, Amazon is engaging in a third initiative to extend its reach into the fashion ecosystem.

Amazon's Stealthy Private Label Push: Niche At Scale

Following in the footsteps of many of great retail success stories, Amazon has begun creating private label versions of some of the most popular products on its site.

The initial seeds of this strategy were planted nearly 8 years ago when Amazon began selling electronic cables and accessories under the AmazonBasics brand.

Now, AmazonBasics is quickly approaching a billion dollar revenue run rate. In the first half of this year, AmazonBasics did $210M in revenue, up 56% from the same period last year.

The strategy here is simple, by replacing popular products with its own private label version, Amazon can boost incremental margins by cutting out the legacy brand and going direct to consumer. This has worked very well for AmazonBasics in categories like batteries and iPhone chargers, where consumers are brand agnostic.

Fashion, however, is a very different story.

The industry is notoriously fickle about the brand, status, luxury and perception. These characteristics are almost the polar opposite of the ideology behind the AmazonBasics line.

In an acknowledgement of these market differences, Amazon has taken a radically different approach for its private labeling strategy for apparel brands.

They are going for a niche at scale.

Amazon is quietly launching an army of micro clothing brands on its own e-commerce platform. QZ recently posted an excellent article diving into more than 15 trademarks that Amazon has registered for fashion brands that are for sale on its website.

These range from women's clothing lines (like Ella Moon and James & Erin) to men's shoes (Franklin & Freeman), to kid's clothing (Scout & Ro).

In addition to the brands it's already testing in the wild, Amazon appears to be working on a much bigger pipeline of micro-brands. Recode recently reported that Amazon is working on its own athleisure brand to compete with Lululemon (LULU).

Over the coming months, we could see Amazon expand its private label fashion portfolio dramatically, as it methodically addresses different niches within the apparel market.

Who Loses? Everybody (Except Maybe Kohl's)

Sorry Macy's (M), Nordstrom (JWN), Gap (GPS), and all of brick and mortar fashion, Amazon is coming, and fast.

Traditional retailers are tied to legacy models with massive store footprints, inefficient logistics, and simply a business model that was designed well before the internet.

The combination of Amazon's data-first approach to curation, and its innovative methods to get customers to shop online (think Prime Wardrobe) is inevitably the future.

However, yesterday Amazon announced it would begin setting up mini pop-ups with Kohl's (KSS) stores. This is an interesting shift in Amazon's strategy towards brick and mortar retail.

Given the recent acquisition of Whole Foods (WFM), it's no secret Amazon thinks it is finally ready to operate physical stores. If it gets enough positive traction from its new trial with Kohl's, I wouldn't be surprised if it simply bought them out, a lá Whole Foods.

Other than the off chance of an Amazon buyout, the future of legacy retailers looks bleak. Unless management teams radically reinvent their priorities towards e-commerce and a digitally native shopping experience, they will be dinosaurs.

Risks - It's Not Over Yet

Although the scope of Amazon's fashion business is impressive, to say the least, its future dominance is by no means a sure thing.

Fashion is perhaps the most difficult industry for Amazon to tackle. At its core, clothing is an expression of individualism. This seems to clash with Amazon's model of being the everything store.

Whether consumers will accept Amazon's army of private label brands is still up for debate. Sales are small, and the initiative is in its infancy.

Additionally, a failed acquisition of Kohl's or another fashion retailer could be a disaster and cost Amazon billions.

The rewards to dominate fashion are tantalizing, but it's an industry where trends constantly come and go. This is a whole different ball-game than running a bookstore.

Conclusion - Still On The Path To $1T

Amazon is already the USA's largest apparel retailer and will continue to eat market share for years to come.

Apparel sales are already well over 10% of Amazon's total business and will continue to be an important piece of the company's march towards a $1T market cap.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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