Morningstar Magazine - June/July 2018 - 98

Investors

Dressing for an Amazonian Storm
Apparel companies brace for competition.

SECTOR RAP

Laura Lallos

The apparel and accessories industry is on the
cusp of a significant reinvention. As Morningstar
equity analyst Bridget Weishaar detailed
in a recent research report,1 mall traffic is on the
decline, e-commerce is steadily stealing
apparel market share, and innovative new entrants
are harnessing the power of technology
to improve both the shopping experience and the
products themselves. Amazon.com AMZN is,
inevitably, the largest disruptive force. I spoke with
Weishaar to learn more about how apparel
companies can develop and maintain competitive
advantages in this environment.
Our discussion has been edited for length and
clarity. Valuation data is as of the date of our
conversation, March 22.
Laura Lallos: How high overall is e-commerce
penetration in apparel sales today, and how much can
we expect it to grow?
Bridget Weishaar is a senior
equity analyst with Morningstar
Research Services.

Weishaar: It's very high. We estimate that
more than 25% of apparel sales happen online,
and we see this reaching about 40% over
the next five years. Despite many retailer claims
that people want to go to stores and that
they value a brick-and-mortar experience, our
research shows that consumers really
value the convenience and vast amounts of pricing

information and quality that you can get
by looking online. Apparel is starting to trend
as one of the main product categories
bought online.
What is driving Amazon's competitive advantage?

Weishaar: Amazon is the gorilla in the
online retail space overall. They generate about
five times the sales of the next-largest
online competitor, Apple AAPL. Even in apparel,
Amazon has already made major headways.
They have about 25% of all online apparel
sales, and we see that growing north of 30% over
the next five years.

What's driving that? First, access to vast
amounts of data that allow targeting. When you
go online and they tell you what products
you may like, that really helps curate the product
listings. Second, they have an unmatched
distribution capability that allows for quick and
easy shipping. And third, they have superior
customer service. It's easy to order, easy to return.
People like shopping on Amazon.com.
As you explored in your report, shipping speed
and cost are the biggest impediments,
perhaps, for e-commerce retailers. But they are
continually improving.

Weishaar: They are. If you're going to compete
with Amazon, you've got to get good in
this category. But really, it's a catch-up game.
Eighty-five percent of consumers highlight
shipping as one of the key components of their
decision as to where to buy online, so
everybody has to master this, but the results are
mixed right now. Speed is improving among
the retailers, but Amazon still has about a two-day
lead over them. Every time some traditional

1 Weishaar, B. and Young, C. 2018. "Consumer Observer: Stocks in Fashion 2018-Dressing for an Amazonian Storm." March.

Morningstar June/July 2018

brick-and-mortar gets faster, Amazon also gets
faster. Further, the offers of free or fast
shipping both ways have taken a toll on the
margins of these brick-and-mortar companies.
They're eating a big cost of doing business.
Free returns are key with apparel, as you need
to try clothes on to be sure they're going
to fit. You noted, though, that concerns about fit
are being overcome with technologies such
as 3D avatar fitting.

Weishaar: It's still in the early stages. For the
average consumer, it's not a part of their shopping
experience yet. But that said, I think it's going
to become important down the road, and it's going
to be a major driver of growth for these companies.
The ability to see how a particular item fits
you and looks on your body and also how the color
works with your own skin tone-that's going
to make a big difference in making you comfortable
to click that buy button.
Against this backdrop, how can traditional apparel
companies compete?

Weishaar: There's still room for them. You
hear that Amazon is going to kill retail, and it's true
that they're certainly going to take a lot of
share. But there's still space for strong players.

One weakness that Amazon has is curation.
If you do a search for "black dress," you are going
to turn up over 100,000 results, and that is
an awful lot to leaf through. If a seller can target
a person and say, "Here are things that are
going to work for you-in your price range, of the
quality you're seeking, in your sense of style"-
there's room for that in the market.
A second way to compete is with differentiated
fashion. If a brand comes up with something
that no one else carries, then obviously people
have to shop for that product. And third is offering
a better experience. A store like Lululemon
Athletica LULU creates an experience-you can
take a yoga class, you can talk to people
similar to you, they can share knowledge about
the product. There are still areas where
companies can compete. These companies are

http://www.Amazon.com http://www.Amazon.com

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