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Every time this happens, Amazon crushes another legacy retailer
Published: May 16, 2017 11:29 a.m. ET
Amazon has moved in and dominated categories including books and cloud services, with fashion waiting in the wings
By
Tonya
Garcia
Reporter
Amazon
Once e-commerce’s share of a retail category reaches 20%, Amazon is poised for concerted action.
For investors in Amazon, the most important number to remember is 20.
When online sales hit 20% of all purchases in a given retail category, a surge in Amazon growth is sure to follow, according to L2 Inc., a business intelligence firm.
It’s a threshold indicating “Amazon is going to displace a legacy retailer,” said Cooper Smith, L2’s director of Amazon research. “Twenty percent is when Amazon steps on the gas ... when consumer behavior is changing.”
This pattern has held true for Amazon AMZN, +0.94% since the very first sector CEO Jeff Bezos disrupted, books, which passed the 20% mark between 2007 and 2008. Amazon’s rapid expansion into a “store for everything” continued as online sales passed 20% for consumer electronics between 2010 and 2011, and cloud services, which Amazon dominated from the moment it launched Amazon Web Services in 2006, each time fueling a turning point for the Seattle company.
Now the same trend is playing out in clothing and accessories, with online sales nearing the 20% threshold, said Smith.
But the 20% milestone is proving more and more challenging to reach — nowhere more so than in the food and grocery market.
What 20% means for Amazon’s foray into fashion
The consumer transition to Amazon for clothing is happening fast, according to an April 28 report by Morgan Stanley. Amazon is the second largest U.S. apparel retailer, behind only Wal-Mart, with Amazon taking share from department stores and Target as it rises in prominence. Nearly half of 1,000 adults surveyed in Morgan Stanley’s latest Alphawise survey (46%) reported having bought clothing from Amazon in the past year. About the same percentage (47%) said they expected to buy more clothes from Amazon and fewer clothes from other retailers in the next 12 months.
Online retailers have overcome much of the resistance to clothing sales with perks like free shipping and the ability to use your home as a fitting room, rather than actually having to trek to a store — and Amazon has capitalized on those benefits over the years through its Prime program. Cowen & Co. estimates Prime membership at about 50 million as of the fourth quarter of 2016.
Traditional retailers, meanwhile, are struggling to win the business of young shoppers who say they’d rather spend money doing things than buying things, and remain disenchanted with the experience of shopping in physical stores.
As a result, retailers that expanded their businesses by building more stores are now scaling back. More than 3,500 closures have been announced by department stores including Macy’s Inc. M, -1.36% , Sears Holdings Inc. SHLD, +3.61% and J.C. Penney Co. Inc. JCP, +1.27% ; specialty stores such as those run by Gap Inc. GPS, -2.51% and Ralph Lauren Co. RL, -2.14% ; and chain-store operators that have filed for bankruptcy or liquidated, including Payless ShoeSource, Aeropostale Inc. AROPQ, +0.00% and Sports Authority.
Retailers with the resources to do so, such as Wal-Mart Stores Inc. WMT, -0.99% and Target Corp. TGT, -1.52% , are gearing up to fight Amazon for market share, with both companies putting billions of dollars behind the effort.
Wal-Mart invested on the price side of the equation. The company made a $3.3 billion purchase of Jet.com and, more recently, scooped up a number of niche fashion sites, including ModCloth and Moosejaw. The company is also said to be in talks to purchase men’s-wear retailer Bonobos.
Target, meanwhile, keeps adding to its list of private labels, with exclusivity central to its $7 billion overhaul strategy, along with store remodels and a competitive-pricing push.
Amazon‘s head start, though, could make it all but impossible to dislodge. “Amazon is the main beneficiary of e-commerce growth,” Smith said.
KeyBanc Capital Markets estimates that Amazon already has at least 14 private-label brands.
“We think that apparel may serve as one of the single biggest incremental growth opportunities in Amazon’s retail business,” KeyBanc analysts including Managing Director Edward Yruma wrote in a March note.
Amazon’s private-label goods range from men’s dress shirts to women’s underwear. “These categories lend themselves to repeat purchases, have fewer national wholesale brand competitors, and can leverage Amazon’s data advantage,” the note said.
Amazon declined to comment on its fashion strategy.
Apparel is more complex than the media or electronics categories that Amazon tackled early on, so the company is going after items that are “highly commoditized,” like socks and shoes, said Smith.
But even though online sales of clothing are nearing the 20% mark, Amazon still faces many challenges in the category. Recent research by Cowen & Co. found that 76% of consumers polled preferred to go to a store for clothes, shoes and accessories. “While longer term, we anticipate consumer preferences will likely continue to shift online, we believe traditional stores will continue to play an integral role in the retail experience,” they said.
Still, with opinion shifting about Amazon’s style credibility, shopping habits are following suit. The number of people saying that style is not an Amazon attribute is shrinking.
“We think this speaks to how Amazon’s fashion efforts are having an impact on consumer behavior and their willingness to shop for fashion on the site, which over time could lead to even faster apparel growth,” said the Morgan Stanley report.
Companies that aren’t being steamrolled are doing something that Amazon can’t. Brands like Everlane and Warby Parker, for example, offer something unique — and that breeds loyalty. Everlane promises “radical transparency,” explaining why items are priced as they are, with a breakdown of such line items as material and labor costs. Eyeglasses purveyor Warby Parker will ship five frames to customers for free to try at home.
And there are some experiences that can’t be replicated online. For example, the success of off-price retailers like T.J. Maxx, a TJX Cos. TJX, -3.07% company; Burlington Stores Inc. BURL, -3.79% ; and Ross Stores Inc. ROST, -1.41% can be attributed to what experts call the “treasure hunt” nature of shopping in those stores, analysts say.
“Most pockets of retail success today have some sort of protective moat around their business that helps them fend off Amazon,” said Jared Wiesel, partner at Revenue Analytics. “Take home improvement. While I can certainly buy a power drill online, if I am starting a kitchen remodel, Amazon is unlikely to reap any of my spend.”
Fewer and fewer categories nowadays have the cushion that home improvement enjoys.
Food fight
If changing consumer behavior is key to getting people to buy goods online, there’s a long way to go before online grocery shopping goes mainstream, or reaches the 20% threshold that favors Amazon’s prospects.
Online sales account for less than 1% of the $1 trillion grocery market in the U.S., one of the lowest online market shares in all of retail, according to a Moody’s note in March. The credit-rating agency doesn’t expect this online market to grow to more than a 2% or 3% share over the next five years.
The company’s standard playbook may not be as effective in the food space, analysts say.
“We think most of the growth in online grocery sales will be limited to certain densely populated metropolitan areas, where income levels are more conducive to higher-priced online grocery purchases,” the Moody’s report said.
Building a grocery business is going to require major investments in distribution centers, delivery trucks that can bring perishables to customer doorsteps, and other logistical developments that will hamper profits.
Curbside pickup is one online model that Moody’s analysts believe can lead to online grocery success. Wal-Mart has planted its flag in the online food and consumer-goods area with its Jet purchase and with curbside pickup, which the company continues to expand. With this service, shoppers pull up to a store, but don’t even need to get out of their cars as a Wal-Mart staffer loads groceries into the vehicle.
Recently, Amazon announced the launch of AmazonFresh Pickup, which remains in beta at just two Seattle locations.
“It’s going to be a slower disruption than [in] consumer electronics and media,” L2’s Smith said. “But I wouldn’t bet against Amazon’s efforts to disrupt groceries.”
Amazon shares have gained nearly 29% in 2017, while the S&P 500 SPX, -0.05% has gained about 7%.
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