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 DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 1 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. 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 DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 2 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. 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 Tradimonal ToyS and GameS $0.4 Pet Care $0.1 Video GameS Hardware $0.0 Source: Euromonitor International/Fung Global Retail & Technology DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 3 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. 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. DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 4 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. JUNE 25, 2016 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. DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY 5 [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved. JUNE 25, 2016 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.

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