Morningstar Magazine - June/July 2018 - 99

operating outside the "offer everything" model
that Amazon has.
Amazon is developing its own house brands; is that
significant competition?

Weishaar: Their private label is growing, but
it's not a huge percentage of their business right
now. A lot of companies have had mixed
results with private label. You basically are
becoming a designer yourself, and you're going
to have product hits and product misses.

A while ago, Kohl's KSS went down that road. They
tried to introduce more and more private-label
items, and they found that they lost their customer,
who was demanding national brands. Since
then, they've been actually increasing their national
brand penetration, and that has been drawing
the consumer back. It's possible for both to coexist,
and I think you're going to see that on Amazon,
as well.
As part of your research, you spoke to management
teams at up-and-coming players such as
Shoes of Prey and Stitch Fix. What innovations
are they bringing to the table?

Weishaar: We found four key themes among all
the companies that we talked to: Big Data,
customization, responsivity of the supply chain,
and distribution channel flexibility. It's interesting
to see what the up-and-comers are doing.

Let's start with the Big Data. Apparel-maker Stantt
has collected massive amounts of data on
how men's shirts fit the body, using measurements
from 3D body scans. Instead of just offering
small, medium, large, and extra-large sizes, they
offer 75 different sizes. You can get a shirt
that is almost custom-made. In addition, Stantt has
developed a patent-pending sizing technology
that fits customers using just three measurements
that can be taken from home.
Stitch Fix is as much a tech company as a
fashion one, with a large team of data scientists
who collect data points through customers'
style profiles. But it also employs thousands
of stylists to service its more than 2 million active
clients. This combination of data science
and human judgment allows the company to
best personalize shipments and drives

its sustainable competitive advantage. Amazon
has introduced Prime Wardrobe, but it is not
a direct competitor because customers must select
for themselves. Stitch Fix doesn't provide
endless options to clients; it narrows them down
to a few.
The other thing that we see is customization.
With Shoes of Prey, you essentially design
your own shoe. You can pick the color. You can
pick the heel height. You can pick how
it's decorated. You can pick the straps. Consumers
are now driving the design of the products
that they demand, instead of picking from
a subset.
On the back end, you must change a lot of things
to do this kind of customization. That's where
the responsivity of the supply chain comes
in. You can no longer just go abroad and have
a factory produce hundreds of thousands
of pairs of shoes. You now must have them
produce shoes basically one pair at a time as the
consumer demands it, while still delivering
shoes in a reasonable amount of time. Shoes
of Prey built its own factory, which has
allowed it to innovate its manufacturing operation
and speed the supply chain.
Distribution channel flexibility is also important.
People want stores. People want to shop online.
They want a mix of the two. We've found
that companies that can cross those barriers and
deliver service both ways are doing best.
We see this in companies like Lululemon and
Inditex ITX:ES.
So, people do still want stores.

Weishaar: They do. Some people like the
experience. They like to be able to try something
on before they buy it. There's still a place
for them.
What kinds of traditional apparel retailers are at the
biggest risk?

Weishaar: Department stores are definitely
at the biggest risk. They've seen retail
sales decline over the past few years. Macy's M
is the poster child here; it's had negative
sales growth for the past three years. The problem
with department stores is that they're usually

trying to be everything to everyone. If you
think about it, they were the Amazon of the past.
They're mass market, and they carry a lot
of the same products and brands that you can now
get on Amazon or any other online sites. When
that happens, you're often forced to compete on
price, and then there go your margins.
The other problem they have is drawing people
into stores. It used to be, you went to
certain stores because the experience was great.
But oftentimes now, department stores have
underinvested in that experience. They're
short-staffed or the staff doesn't have specialized
skills. The stores haven't been updated in
a while. And people are complaining that this
isn't a pleasant experience and that they
like shopping online better. Department stores
are the ones that are going to be hit the most by
the Amazon threat.
Are there any department stores that are managing
to do well online?

Weishaar: They are doing well online. That's
true almost across the board in my coverage. But
the problem is that it's often the same
customer that they used to have in the brick-andmortar store. Whatever they gain online,
they're losing in the stores, and then that causes
the deleverage of those expenses.
Who stands to thrive in this new environment?

Weishaar: I can highlight a few areas.
One is brands. Again, think about the difficulty
of buying on Amazon, where a search returns
100,000 results. The way people are getting around
that is they're shopping by brand. Instead
of searching for a "black dress," they search for
"Calvin Klein black dress." Brands are being
used as a search term, and that's working to their
advantage. From their standpoint, they don't
care if they sell in a department store or Amazon.
All that matters is that they are able to reach
their consumer.

Then there are the niche players. Lululemon,
Nike NKE, Under Armour UAA-these
are stores that are cool, that are fun to be
in, where you're learning something,
where it's engaging. They're still surviving
and thriving.

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Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018
