Amazon Apparel

JUNE 25, 2016

Amazon Apparel: Is the E-Commerce Giant About to Take the Apparel Industry by Storm? • The global apparel market is growing at a 4.5% annual rate, yet global e-commerce sales of apparel are growing at a 12.8% rate, demonstrating consumers’ increasing willingness to buy clothes online. • Amazon has been selling apparel since 2002, but the company intensified its activity in 2006 and again this February, when it stealthily launched seven private- label brands. • At $78 billion, apparel and footwear represents the second-largest global e-commerce market—and one that is too large to ignore. We think Amazon is now turning its focus to apparel due to the company’s enormous size and its success in dominating the e- commerce markets for print and digital media. • We estimate that Amazon will hold 7% of the US apparel market this year, and we think that through promotion and private-label offerings, the company can grow its apparel gross merchandise value (GMV) at a 16% CAGR, to more than $50 billion in 2020

DEBORAH WEINSWIG Managing Director, Fung Global Retail & Technology [email protected] US: 646.839.7017 HK: 852.6119.1779 CHN: 86.186.1420.3016

JUNE 25, 2016

EXECUTIVE SUMMARY While the apparel industry has hit some speed bumps since the launch of e- commerce and omni-channel platforms, the sector has largely been conducting business as usual, unfazed by growth steadily being siphoned Amazon has been active in the away by e-commerce. There have been recent signs, though, that a specter category since 2002, when it offered is haunting apparel—in the form of Amazon.com—and Amazon’s new focus 400 apparel brands on its website— on this segment already seems to be spooking other retailers. and its product breadth has Although few of us typically think “Amazon” when we think “apparel,” the expanded dramatically since then. company has been active in the category since 2002, when it offered 400 apparel brands on its website—and its product breadth has expanded dramatically since then. Starting in 2006, there were signs that Amazon was becoming more serious about apparel, launching various websites and making acquisitions in the run-up to its $1-billion-plus acquisition of Zappos in November 2009.

This February, Amazon quietly launched seven private-label brands, which can be found via the search tool on the company’s website. Amazon seems to have waited for an inflection point at which consumers were quite We estimate that Amazon’s share of comfortable buying online in general, and buying apparel online specifically, the US apparel market will be 7%, or before it launched its own apparel brands. $24 billion, in 2016. If Amazon is able We estimate that Amazon’s share of the US apparel market will be 7%, or to grow this business at a 16% CAGR, $24 billion, in 2016. If Amazon is able to grow this business at a 16% CAGR then by 2020, the company should (just three percentage points faster than the global e-commerce apparel achieve more than $50 billion in market is expected to grow), then by 2020, the company should achieve GMV, representing more than 12% of more than $50 billion in GMV, representing more than 12% of the US the US apparel market. apparel market. The wind is already at Amazon’s back. The company has played a major role in the development of US e-commerce, which is steadily growing as a percentage of US retail every quarter—and Amazon’s sales are growing even faster. Moreover, the US apparel market is forecasted to grow at modest rates—meaning that consumers are still buying apparel. And e- commerce sales of apparel are growing at a mid-teens rate, in sharp contrast to the same-store-sales declines reported by several large retailers in the first quarter of 2016. Clearly, the threat from Amazon is acute and has intensified recently. How can brick-and-mortar retailers respond? While they may have to step up their tech spending to match Amazon on ease of purchasing and on shipping times, their physical stores are a key advantage. Surveys show that Americans and Britons overwhelmingly still like to visit stores, so physical

JUNE 25, 2016

stores can offer interesting environments, experiences and personalized service—the things that the e-tailers cannot—in order to capture share of the wallets that walk in. WHY IS AMAZON AGGRESSIVELY EXPANDING IN APPAREL? The graph below details the Internet retailing categories that we consider to be a focus area for Amazon. Specifically, Amazon has been a major force in online sales of media and electronics, and the company is currently aggressively expanding into grocery. Based on the data from Euromonitor International, we see that apparel and footwear constitutes the largest single category on its own, and the largest category after other. We believe that Amazon’s recent move further into its apparel is due to the size of the category combined with consumers’ growing comfort with purchasing apparel online.

Apparel and footwear constitutes the largest single category on its own, and the largest category after other. We believe that Amazon’s recent move further into its apparel is due to the size of the category combined with consumers’ growing comfort with purchasing apparel online.

Figure 1. Global E-Commerce Categories, 2016 (USD Bil.)

Total = $369.2 Billion Other $130.0 Apparel and Footwear $78.0 Consumer Electronics $70.5 Consumer Appliances $28.9 Food and Drink $26.2 Beauty and Personal Care $9.2 Homewares and Home $8.9 Personal Accessories and $7.4 Consumer Health $4.6 Media Products $3.2 Focus Non-Focus Home Care $1.1 $0.7 Tradional Toys and Games $0.4 Pet Care $0.1 Video Games Hardware $0.0

Source: Euromonitor International/Fung Global Retail & Technology

JUNE 25, 2016

In the graph below, we see that online apparel and footwear sales have grown faster than aggregate global retail sales have over the last 10 years. The global Internet apparel market grew at a 22.7% CAGR from 2005–2015, whereas the global retail market grew at a 4.5% CAGR.

The global Internet apparel market Figure 2. Global Retail Sales vs. Global Internet Apparel Sales (USD Bil.) grew at a 22.7% CAGR from 2005–

2015, whereas the global retail $15,000 $200 Global Internet Apparel market grew at a 4.5% CAGR. $150 $10,000 $100 $5,000 $50 Global REtail Sales

$0 $0 05 06 07 08 09 10 11 12 13 14 15

Retailing Apparel and Footwear (Internet)

Source: Euromonitor International APPAREL MARKET SIZE AND DYNAMICS The global apparel market was worth approximately $1.1 billion in 2012 and is expected to grow at a 5.1% CAGR through 2025, according to Statista.

The global apparel market was worth Figure 3. Global Apparel Market (USD Bil.) approximately $1.1 billion in 2012 $2.5 and is expected to grow at a 5.1% $2.1 CAGR through 2025, according to CAGR = 5.1% Statista. $2.0

$1.5 $1.1 $1.0

$0.5

$0.0 2012 2025E

China EU-27 US India Japan Russia Brazil Canada Australia Rest of World

Source: Wazir Management Consultants Based on these figures, we calculate that the global apparel market will be worth $1.3 billion in 2016, which breaks down geographically as shown in the graph below.

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Figure 4. Global Apparel Market, 2016E

Total = $1.3 Billion EU-27

3% 2% US

China 4% 5% Japan 29% 5% Rest of World

8% India

Brazil 9%

18% Russia 17% Canada

Australia

The US apparel and footwear market Source: Wazir Management Consultants grew at a modest, 2.6% rate from These figures contrast with Amazon’s 2015 revenue breakdown by 2010 through 2015, but it is geography, which shows, notably, that Brazil, Russia, India and China (the forecasted to pick up and grow at a “BRIC” countries) are not large markets for Amazon. higher, 4.1% rate from 2016 through 2020. Figure 5. Amazon’s Revenues, by Geography (2015)

Total = $107 Billion

7% 8%

US 8% Germany

UK 11% Japan

66% Rest of World

Source: Company reports The US apparel and footwear market grew at a modest, 2.6% rate from 2010 through 2015, but it is forecasted to pick up and grow at a higher, 4.1% rate from 2016 through 2020.

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Figure 6. US Apparel Market (USD Bil.)

CAGR = 4.1%

CAGR = 2.6% $420 $405 $389 $374 $359 $331 $343 $317 $324 $301 $310

10 11 12 13 14 15 16E 17E 18E 19E 20E

The US apparel market is highly Source: Euromonitor International/Fung Global Retail & Technology fragmented, as depicted in the graph The US apparel market is highly fragmented, as depicted in the graph below, with 65% of the market share below, with 65% of the market share held by small players. held by small players. Figure 7. Market Share of Selected US Apparel Companies (Excludes Amazon)

Macy's 9%

Walmart 8%

Target 5%

Gap 5%

JCPenney 3% Others 65% Costco 2% Am. Eagle Ouiers 1%

Abercrombie Aéropostale & Fitch 1% 1%

Source: Forbes/Trefis

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FRAGMENTED GLOBAL APPAREL LANDSCAPE The global retail landscape is fragmented, and in the table below, we see that the next-largest retailer after Amazon is only one-quarter its size in terms of online sales. Although the retailers listed all carry apparel, Macy’s and Vipshop specialize in apparel.

The global retail landscape is Figure 8. Selected Top Global Retailers’ E-Commerce Sales, FY2014 (USD Bil.) fragmented, we see that the next- Company Country E-Commerce Sales largest retailer after Amazon is only one-quarter its size in terms of online Amazon US $70.8 sales. JD.com China 17.7

Walmart US 12.2

Otto Germany 8.4

Tesco UK 6.5

Macy’s US 5.4

Liberty Interactive (incl. QVC) US 5.2

Groupe Casino France 4.6

Vipshop China 3.7

Lojas Americanas Brazil 3.4

Source: National Retail Federation/Fung Global Retail & Technology E-COMMERCE’S RELENTLESS ENCROACHMENT ON RETAIL

In the US, e-commerce continues to steadily encroach on US retail sales, accounting for 7.8% of the total (on a seasonally adjusted basis) in 2015 and up 15.2% year over year.

In the US, e-commerce continues to steadily encroach on US retail sales, accounting for 7.8% of the total (on a seasonally adjusted basis) in 2015 and up 15.2% year over year. The share gains of e-commerce are depicted in the graph below.

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Figure 9. US Online Retail Sales as a Percent of Total Quarterly Retail Sales

10.0%

8.0%

6.0%

4.0%

2.0%

0.0% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Not Seasonally Adjusted Seasonally Adjusted

Source: US Census Bureau As e-commerce penetration has grown in the US, Amazon has grown even faster, accounting for 18.6% of the US e-commerce market in 2015.

As e-commerce penetration has Figure 10. US: Total E-Commerce Sales vs. Amazon’s Sales and Amazon’s Share of grown in the US, Amazon has grown Total Sales (USD Bil.) even faster, accounting for 18.6% of $400 20.0% the US e-commerce market in 2015. $350 18.0% 16.0% $300

14.0% Amazon's Share $250 12.0% $200 10.0% 8.0%

E-Commerce Revenue $150 6.0% $100 4.0% $50 2.0% $0 0.0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

US E-Commerce Amazon-US Amazon's Share

Source: US Census Bureau/company reports Thus far, we have established that US e-commerce is growing, that Amazon is growing faster than e-commerce overall, and that spending on apparel and accessories is growing. The final piece of the puzzle is to determine whether US consumers are using e-commerce to purchase apparel. And the answer is that, yes, they are doing so enthusiastically, as seen in the graph below.

JUNE 25, 2016

The final piece of the puzzle is to Figure 11. US E-Commerce Sales, by Category: YoY % Change (1Q16) determine whether US consumers are Total Excl. Aucons, Event Tickets and using e-commerce to purchase 15.6% Travel apparel.

Video Games, Consoles & Accessories 36.1%

Toys & Hobbies 29.6%

Jewelry & Watches 29.3%

Sports & Fitness 24.5%

Furniture, Appliances & Equipment 20.6%

Apparel & Accessories 13.3%

0% 10% 20% 30% 40%

Source: comScore/Fung Global Retail & Technology AMAZON: A TITAN IN ELECTRONICS, GENERAL MERCHANDISE AND WEB SERVICES—A TITAN IN APPAREL, TOO?

Amazon currently classifies its revenues in three segments, and we list the segments, with their respective market shares, in the table below.

JUNE 25, 2016

Figure 12. Amazon’s Segments: Revenues and Market Share, 2015

Segment Revenue (USD Bil.) Market Share

Electronics and General Merchandise $75.6 15.6%

Media 22.6 1%

Amazon Web Services 7.9 31% Other 1.0 N/A

TOTAL $107.0 N/A

Source: Amazon.com/Statista/Synergy Research Group/Trefis The Opportunity in Apparel This relatively low share precisely represents the opportunity for Euromonitor International estimates that Amazon’s share of the US apparel Amazon in apparel. One assumes market was 6% in 2015, which would put its GMV at about $20.5 billion. Per that Amazon could achieve a market Euromonitor: share comparable to its electronics • Although better known for books and electronics, Amazon isn’t and general merchandise segment unfamiliar with the business of apparel, accounting for 6% value (about 15%–16%) in apparel, which share of apparel and footwear Internet retailing in 2015, would result in GMV of greater than predominately driven by its sales of third-party brands. $50 billion. This relatively low share precisely represents the opportunity for Amazon in apparel. One assumes that Amazon could achieve a market share comparable to its electronics and general merchandise segment (about 15%–16%) in apparel, which would result in GMV of greater than $50 billion. HISTORY OF AMAZON’S ACTIVITY IN APPAREL Amazon has been gradually building its apparel business since late 2002, both organically and through acquisitions. In November 2002, it announced the launch of its Apparel & Accessories Store, offering more than 400 brands. The company commented that “in [the store’s] first 60 days, customers bought 153,000 shirts, 106,000 pairs of pants and 31,000 pairs of underwear.” The table below outlines Amazon’s key developments and acquisitions in apparel.

Amazon has been gradually building Figure 13. Key Amazon Apparel Events its apparel business since late 2002, Date Event both organically and through acquisitions. In November 2002, it Nov. 2002 Launches Apparel & Accessories Store announced the launch of its Apparel Acquires Shopbop.com (fashion-forward apparel, shoes and & Accessories Store, offering more Feb. 2006 accessories for women) than 400 brands. Jan. 2007 Launches Endless.com (shoe and handbag website; closed in 2012)

Jun. 2008 Acquires Fabric.com (online store for fabrics, tools and accessories)

Nov. 2009 Acquires Zappos for $1.1 billion in stock (and website 6pm.com) Oct. 2010 Acquires members-only club BuyVIP.com for $96.5 million

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Date Event May 2011 Launches MyHabit.com (private-sale site; closed in 2016)

Apr. 2015 Acquires Shoefitr

Participates in $8 million series B round in shoppable fashion site Aug. 2015 WhoWhatWear

Feb. 2016 Quietly launches seven private-label brands

May 2016 Acquires MyHabit.com

Source: Amazon.com Market researcher 360pi recently completed a study that calculates a total of 12.2 million products on Amazon’s website, excluding books, media, wine and services. The graph below illustrates the number of products listed on Amazon’s main website and its Marketplace, by category.

Market researcher 360pi recently Figure 14. Number of Products Listed on Amazon’s Website and Marketplace (Mil.) completed a study that calculates a total of 12.2 million products on Amazon’s website, excluding books, Cell Phones & Accessories 82.0 media, wine and services. Home & Kitchen 64.3 Clothing, Shoes and Jewelry 33.4 Electronics 31.6 Sports & Outdoors 24.0 Industrial & Scienﬁc 21.6 Computers 19.3 Collecbles & Fine Art 16.9 Automove 16.3 Tools & Home Improvement 11.2 Oﬃce Products 6.8 Toys & Games 5.7 Health & Personal Care 5.5 Arts, Cras & Sewing 3.1 Pao, Lawn & Garden 3.0 Other 2.5 Beauty 2.0 Baby 1.5 Pet Supplies 1.1 Grocery & Gourmet Food 1.0 Appliances 0.9

Source: 360pi

JUNE 25, 2016

QUIET ENTRY INTO PRIVATE LABEL In February 2016, Amazon quietly launched seven in-house fashion labels that offer a variety of apparel and accessories for men, women and children. The new brands were trademarked in Europe through a subsidiary called Amazon Technologies, based in Luxembourg. These brands are listed in the table below. All of the Amazon private-label items are available with free, two-day shipping for Prime members.

In February 2016, Amazon quietly Figure 15. Amazon Private-Label Brands launched seven in-house fashion Brand Type of Apparel labels that offer a variety of apparel and accessories for men, women and Franklin & Freeman Men’s shoes

children. Franklin Tailored Men’s tailored suits and accessories Women’s clothing (tops, plus-size, James & Erin dresses) Women’s clothing (tops, dresses, Lark & Ro swimwear) Scout + Ro Children’s clothing North Eleven Women’s and girl’s clothing Society New York Women’s clothing and accessories

Source: Amazon.com Franklin & Freeman Franklin & Freeman is a line of men’s dress and dressy casual shoes; at time of writing, only one type is available. Product Description/Price

Franklin & Freeman is a line of men’s Men’s Robinson Wingtip Medallion Oxford dress and dressy casual shoes; at time of writing, only one type is Price: $125.00 available.

Men’s Davis Cap Toe Oxford, Chestnut

Currently Unavailable

Men’s Mitchell Plain Toe Chelsea Boot

Currently Unavailable

Source: Amazon.com

JUNE 25, 2016

Franklin Tailored Franklin Tailored offers a line of men’s suits. Prices as low as $250 have been mentioned, but the only suit available at time of writing sells for more than $1,000. Product Description/Price

Franklin Tailored offers a line of Franklin Tailored Men’s Textured Windowpane Tracy Suit men’s suits.

Price: $1,069.12

Men’s Sharkskin Tracy Suit, Charcoal

Currently Unavailable; Was $281.97

Source: Amazon.com James & Erin James & Erin is a line of women’s clothing. Product Description/Price

James & Erin is a line of women’s James & Erin Women’s Crew Neck Top

clothing. Price: $53.57

Source: Amazon.com Lark & Ro Lark & Ro is a line of women’s workwear. Product Description/Price

Lark & Ro is a line of women’s Lark & Ro Women’s Sleeveless Color

workwear. Block A-Line Dress

List Price: $69.50 Price: $49.90 Free Shipping for Prime Members & FREE Returns

Source: Amazon.com

JUNE 25, 2016

Scout + Ro Scout + Ro is a line of children’s clothing. Product line names include Rocket Pocket, Ro, Ro Dress, Ro Girls, Robot, Rocket Kit and Ro Boys.

Scout + Ro is a line of children’s clothing. Product line names include Rocket Pocket, Ro, Ro Dress, Ro Girls,

Robot, Rocket Kit and Ro Boys.

Source: Amazon.com

Source: Amazon.com North Eleven At time of writing, there were no items available under this brand. However, Amazon’s search function identifies the following categories: • Women’s accessories • Girls’ clothing • Clothing, scarves, ponchos Society New York At time of writing, no items were available under this brand. However, Amazon’s search function identifies the following categories: • Women’s clothing • Women’s handbags

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• Dresses, sunglasses, glasses, tote bags, bags, lace dresses, plus AMAZON FASHION Amazon Fashion still appears to be in stealth mode on Amazon’s website. Amazon Fashion still appears to be in The fashion section is not directly accessible via the home page, but one can stealth mode on Amazon’s website. enter “Amazon Fashion” into the search window or enter www.amazonfashion.com into a browser window in order to go to the landing page.

Source: Amazon.com And the name “Amazon Fashion” then appears on the “Departments” menu. Conclusion If Amazon is as successful in apparel as it has been in digital media, the Although e-commerce has steadily siphoned off much of the growth in the company could well be operating a apparel industry, times have been relatively peaceful and predictable. This $50-billion-plus apparel business by is likely to change soon, though, as Amazon is intensifying its activities in apparel, leveraging several websites and acquisitions, and developing its 2020. own private-label brands. If Amazon is as successful in apparel as it has been in digital media, the company could well be operating a $50-billion- plus apparel business by 2020.

JUNE 25, 2016

Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected]

John Harmon, CFA Senior Analyst

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