The ‘digital land grab’ in fashion

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As the race to become the platform of choice for both customers and fashion companies intensifies, e-commerce players will continue to innovate by adding profitable value-added services and focusing on new technologies. Whether through acquisitions, investments, or internal R&D, companies that diversify their ecosystems will strengthen their lead over the remaining pure players relying solely on retail margins and existing offerings.

In the 2018 State of Fashion report, we emphasized the importance of platforms as entry points of choice for consumers in their shopping journeys. The growing dominance of these platforms, through superior convenience, growing segment coverage, and the launch of private labels, continues to be a theme this year for both fashion pure players and multicategory platforms. Our latest State of Fashion report, written in partnership with the Business of Fashion (BoF), therefore highlights what we call the “digital land grab” as one of our ten trends for the fashion industry to watch in 2019.

For example, Amazon, with an estimated total share of more than 8 percent, is on course to become the leading apparel retailer in the United States. Flipkart has a 40 percent share of online fashion sales in India. However, the potential for profitable growth fueled by user acquisition is starting to saturate due to market maturity and increased competition. The next horizon in platform evolution is business model diversification through proprietary technology and knowledge to enrich the offering to consumers and brands. The race is under way.

This evolution presents platforms with an opportunity to generate higher margins while growing scale, as opposed to the recent experience of fast growth without significant profitability. E-commerce players, with average EBITDA1 margins of some 4 percent in 2017, consistently post lower profits than traditional retailers, with EBITDA margins of about 8 percent, according to an analysis from McKinsey’s Global Fashion Index. Three of 16 publicly listed e-commerce players with revenues of more than $100 million made a loss. A number of private e-commerce players also operate unprofitably: Farfetch (pre-IPO), for example, reported an EBITDA margin of approximately –14 percent in 2017, despite significant revenue growth of 74 percent. While investors in leading players have often shown patience for profitability, weak performance has been reflected in the valuations of some small to midsize private players—, once valued at $900 million, was reportedly sold to PCH in 2015 for $15 million to $30 million. In 2018, Rue La La reportedly acquired Gilt Groupe for less than $100 million, far below its former valuation of $1 billion.

In the context of such cautionary tales, large e-commerce players are strategically adding new services. They are venturing in areas where they have a competitive advantage (as Farfetch and Zalando, for example, have done with white labeling) or where they spot a structural opportunity (such as Alibaba’s XPressBees logistics company). They are also investing heavily in technology across the value chain, aiming to boost efficiency and streamline the customer experience.

The State of Fashion 2019: A year of awakening

The State of Fashion 2019: A year of awakening

Alibaba’s expansion is effectively powering the digitization of a country’s entire retail sector—a development reflected in investments in various payments solutions (Paytm, Kakaopay), logistics service providers (XpressBees), and quantum-computing cloud services (SenseTime). Among other recent initiatives, Flipkart’s AI for India initiative reflects the company’s internal use of machine learning and other advanced technologies to monitor products and spending. The initiative, which aims to encourage data science, promises hundreds of millions of dollars of investment to build new AI solutions. In other examples of diversification, in 2016, Flipkart-owned Myntra acquired Cubeit, a mobile-based content aggregator, and in 2017 bought start-up InLogg, which brings together logistics vendors.

In Europe, Zalando has expanded marketing and fulfilment solutions, built out its partner program, and acquired AI start-ups. The company, which says it wants to become the “Spotify for fashion,” is focusing its strategy on four key areas—assortment, demand generation (for example, through localized merchandising and data-driven marketing), the digital experience, and convenience. “We want to build that one destination which is the entry point for consumers and the most relevant platform for brands,” Zalando cofounder David Schneider told BoF in September 2018. Noncore services are expected to contribute around 10 percent of Zalando’s profits in five years’ time, compared with 2 percent at present, and will add at least 250 basis points to EBIT2 margins in the long term, according to analyst reports.

Finally, the long-standing flagship example of Farfetch is its Black&White offering, an e-commerce white-label solution for luxury fashion brands. This approach allows Farfetch to leverage its technology beyond its core offering. More recently, the company launched its Dream Assembly technology accelerator in April 2018 and acquired Curiosity that July to expand its social-media efforts in China. “One [area] that I find interesting—and we’ve made a move into this,” says Farfetch chief strategy officer Stephanie Phair, “is around conversational commerce and really thinking that customers are increasingly going to have a one-to-one relationship with their shopping through text message and through one-to-one requests.” She is referring here to the company’s recent acquisition of a business called Fashion Concierge.

Some common threads tie these many initiatives together. Most major players have launched data and analytics offerings they can expand with the support of their scale and ecosystems. The supply chain and payments process are common areas of focus for innovation, and many companies have bolstered their consumer proposition through expanded private-label offerings and content platforms to generate profitable new revenue streams. Most important, these moves signal a clear intention to become the platform of choice in an increasingly competitive segment. Still, there is room for smaller players: Stitch Fix chief operating officer Mike Smith says that they “will continue to have their role to play as long as they differentiate on emotion, curation, and trust. Not everyone needs to fit the large-platform business model, based on logistics, speed, and search.”

In 2019, we are likely to see the emergence of ecosystems of related and overlapping businesses. There will likely be an intensified race for pole position, with the largest players battling to become the go-to platform for consumers and brands. The “holy grail” of the industry will be integration of value-add services that remove friction in the consumer’s and supplier’s journey through effective use of data analytics at scale. This could lead to a continued wave of M&A activity in a race to find the best complementary offerings for existing platforms. There is also a rising chance of some kind of shake-out for vertical pure players, catalyzed by reduced valuations and the failures of some smaller companies. Where generalist e-commerce platforms remain focused on retail margins rather than ancillary services, without occupying a niche, the demise is likely to come sooner rather than later.

For more on all ten trends that will define the fashion agenda in 2019, see The State of Fashion 2019: A year of awakening.

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