Fab.com Screenshot | Source: Fab.com

Yesterday, BoF was first to bring you the news of the recent $18 million investment in Farfetch.com. Today, we continue a week focused on e-commerce by examining the historical challenges faced by online retailers and how recent innovations and infrastructural advances have fundamentally improved the economics of e-commerce, setting the stage for a renaissance in online retail.

SAN FRANCISCO, United States — Following the burst of the dot-com bubble in early 1999, e-commerce suffered from a lack of venture capital investment. The unrealised, over-hyped expectations for e-commerce — at a time when the market, consumer technology and infrastructure were less evolved — and the subsequent burns left venture firms with a nasty aftertaste. Perhaps the most spectacular fashion e-commerce failure was that of Boo.com, which launched in the Autumn of 1999, burned through $135 million in venture capital in just 18 months and was liquidated in 2000.

But on closer inspection, e-commerce has also faced additional complexities and capital inefficiencies that, for years, continued to push investors away.

HISTORICAL CHALLENGES AND FIRST MOVER ADVANTAGE

First, e-commerce lacked defensibility. With software or other internet services, intellectual property or the complexities of build create barriers to market entry for would-be competitors. But e-commerce businesses are essentially selling products. The most important elements of these businesses are the assortment, breadth and variability of the merchandise they offer, along with overall access to this merchandise. Access to inventory is not a sufficient barrier, however, as other stores can carry the same products unless a business has exclusive agreements with vendors, which happens rarely and usually only for a limited time.

In the absence of defensibility, companies needed to demonstrate solid metrics around scale of revenues, registered users and overall profitability in order to secure investment. But for e-commerce companies, this requirement created something of a catch-22. When compared to software or other internet services, start-up costs for e-commerce companies were higher, due to the expense associated with buying physical inventory, setting up a logistics platform for warehousing and fulfilment, and acquiring and retaining customers. Furthermore, since they operated at the wholesale level, their margins were relatively smaller.

In order to work and attract investment, these businesses required scale. But in order to achieve scale, they needed significant investment.

There were a few big success stories, such as e-Bay and Amazon, which gained significant first mover advantages. As Josh Kopelman of First Round Capital has pointed out, from 1999 to the beginning of 2010, the list of top general e-commerce sites in the United States remained almost unchanged. In fashion, online juggernauts like Net-a-Porter, Yoox, Neiman Marcus, and Shopbop maintained their incumbent positions.

IMPROVED ECONOMICS AND REDUCED ENTRY COSTS

In recent years, however, the tides have turned in e-commerce. For one, consumers are now acclimated to the concept of online retail. According to Forrester, the online retail market in the US alone is expected to grow to $279 billion by 2015. But critically, major innovations and infrastructural advances have also fundamentally improved the economics of e-commerce, attracting significant venture capital interest in the sector.

Starting in 2007, US private sales pioneers like Gilt Groupe, Rue La La, Hautelook and Ideeli were able to drive massive consumer adoption in a very short amount of time when compared to traditional e-commerce sites. They offered designer fashion at significant discounts, distributed directly to email inboxes.

With timing and supply constraints to compel immediate action, these members-only sites successfully identified and leveraged key behavioural insights to drive engagement, collect customer data and generate rapid sales. But perhaps most importantly, their ability to move product much more quickly than traditional sites reduced cash flow requirements. Indeed, many flash sales sites buy on consignment, while others do not touch or pay for inventory at all until it is purchased by the end consumer.

In recent cycles, the rise of social media channels like Facebook and Twitter have also enabled e-commerce businesses to acquire customers and accelerate growth far more efficiently. Fab.com, which sells discounted furniture, jewelry and art in 72-hour flash sales, has leveraged social media to great success, attracting a total of 1.65 million registered users in just six months. According to The Wall Street Journal, in November of last year the start-up processed approximately 100,000 orders, double the previous month, and is now averaging $1.4 million in sales per week. The company recently raised a Series B round of $40 million, led by Andreessen Horowitz, valuing Fab.com at more than $200 million. “They’ve leveraged social extremely effectively,” said general partner Jeff Jordan in a blog post on the transaction.

The evolution of e-commerce solutions like Shopify, Magento and BigCommerce, along with the growth of Software-as-a-Service (SaaS) tools like Mailchimp, RJ Metrics and Shipwire and the rise of Amazon Web Services, a cloud computing platform, have also made it significantly easier and cheaper for retailers to build and manage beautifully designed e-commerce storefronts. Additionally, leveraging APIs (application programming interfaces that make it easy for software programs to talk to each other) has made integration much more time- and cost-efficient, not only for the consumer-facing storefront, but also in terms of the back-end workflow.

Innovation across the supply chain is also making development easier, improving scalability and easing integration, while also decreasing capital requirements for e-commerce businesses. Web-based point of sale systems, wholesale marketplaces, ordering and invoicing software, enterprise resource planning systems, and shipping and fulfilment systems are becoming simpler, cheaper and more flexible. In fact, companies can now use highly efficient software-as-a-service (SaaS) tools across the entire supply chain, paying periodically to access hosted software, without having to incur the costs and complexities of hosting and managing back-end infrastructure.

NEW OPPORTUNITIES AND ECOSYSTEMS

In the context of these improved economics, there are a number of problems to be solved that provide interesting opportunities in e-commerce. Traditionally, retailers have faced difficulties in turning customer data into actionable insight. This is beginning to change. SaaS tools let retailers more easily access and make sense of data, opening up opportunities for businesses to leverage the inadvertent “buyer profiles” that consumers are now creating as they express themselves on social media. Particularly interesting are the taste and behavioural data that consumers share on social curation sites like Svpply, Pinterest, Lyst and The Fancy.

While brands and retailers are scratching their heads solving their data issues, consumers are frustrated with the process of discovering products. It’s easy browse through a physical store, but searching millions of items online is overwhelming. Even if you know you want to buy a black pair of shoes, you still end up with thousands of options. Discovering products that are right for you remains challenging.

The growth of new technology channels and ecosystems created and supported by large players is also providing fertile ground for e-commerce innovation. Alongside the growth of social channels like Facebook, which offers retailers new ways to achieve viral distribution and offer social discovery, the mobile commerce market is expected to reach $31 billion in the US alone by 2016, up from $3 billion in 2010. But while these new channels create new opportunities for e-commerce companies, they also present a major challenge: multi-channel integration. Historically, merchants have been forced to cobble tools together to create a seamless, multi-channel workflow.

EBay’s new X.commerce initiative aims to address this problem, offering retailers a single platform that lets them easily add, customise and integrate tools from the X.commerce marketplace, making it easier for young companies to capitalise on the multi-channel opportunity. The stated vision of the X.Commerce initiative is to “help merchants and businesses of all sizes to compete and thrive in the fast-changing world of social, mobile, local and digital driven e-commerce.”

Indeed, with improved economics, new opportunities and goliaths like eBay supporting the ecosystem, the stage is set for a renaissance in online retail and the growth of disruptive business models built around new ways of buying, selling and engaging with goods.

Tomorrow, we explore the recent explosion of new business models in online retail, including personal subscription, social merchandising, mass customisation and collaborative consumption.

Elizabeth Knopf is a former investment associate and the co-founder of Sorced, an online showroom.

Orla Kiely | Source: MEN Media

The Pluck of the Irish (WSJ)
“Orla Kiely, the Irish designer known for her quirky, signature, retro stem prints, still gets excited when she sees someone wearing her brand. ‘It is nice that people like it enough to buy it,’ she says, sipping black coffee at her London store in Covent Garden, the first one to open in Europe in 2005.”

Neiman Marcus CEO: High end shopping with confidence (Reuters)
“Neiman Marcus Group Inc reported a higher quarterly profit on Monday as high-end shoppers proved more willing to pay full price for the luxury retailer’s expensive designer dresses, shoes and handbags. Despite the gyrations in the financial markets in recent months that has threatened well-heeled shoppers’ net worth, Chief Executive Karen Katz has not seen any pullback.”

Cyber Monday: Marketing Hype No More (Forbes)
“When Cyber Monday was invented in 2005–and make no mistake, it was invented wholesale by the National Retail Federation’s online Shop.org unit–it was little more than marketing hype… Now all that has changed. According to comScore, Cyber Monday is now the busiest shopping day online.”

The BFA Winners (Vogue)
“Sarah Burton of Alexander McQueen won the prestigious Designer of the Year accolade at the 2011 British Fashion Awards, which took place at London’s Savoy Hotel this evening… Victoria Beckham took home the Best Designer Brand prize, beating off competition from Tom Ford, Stella McCartney and Burberry.”

Marni For H&M Collaboration For Spring 2012 (Forbes)
“Less than a month after its widely successful collaboration with Versace, H&M has announced that it’s next designer team up is with Marni… Marni’s colorful aesthetic and collage-like use of prints, Marni for H&M is reported to have the same color blocking and print-on-print vibe. There will be a women’s and men’s collection plus accessories.”

Akris Punto Spring 2011 at Neiman Marcus | Source: Neiman Marcus

Neiman Marcus Opens Customer Door Wider (WSJ)
“With its extravagant Christmas catalog and the wealthiest customer base in American retailing, Neiman Marcus Group has, for more than a century, earned its snob appeal. But after a recession that cost the company $1 billion in annual revenue, the new chief executive officer, Karen Katz, is on a mission to make the chain a bit more inclusive.”

More Than Meets the iPhone Lens (NY Times)
“Like media and entertainment, fashion now unfolds across several platforms… [presentations] drew top retailers but also a throng of enthusiastic young people, many of whom look at the clothes through their cameras or cellphones with a concentration seldom warranted by ’70s-style sportswear with an English twist.”

U.S. luxury sector getting ready for more deals (Reuters)
“Wall Street bankers, the ultra wealthy and even upper middle class shoppers are once again snapping up diamond rings, $10,000 handbags and designer gowns, priming the U.S. luxury sector for more deals.”

The ’40s Footwear Fashionista (WSJ)
“Her sky-high, colorful creations have made Ms. Dellal’s brand, Charlotte Olympia, a current favorite with fashion folk… her company, which bears Ms. Dellal’s first and middle names, is growing: sales doubled this autumn/winter season from the summer season before.”

60 Seconds With: Rosita Missoni (WSJ)
“At 79, the matriarch of the Missoni clan, Rosita Missoni, is a force to be reckoned with. Though she stepped down in 1997 as head of the iconic knitwear line that she started with her husband Ottavio (Tai) over half a century ago, placing her daughter Angela at the helm, she couldn’t stay idle for long.”

Shang Xia Cashmere | Source: Shang Xia

China’s homegrown luxury: Talking with Jiang Qiong Er (CIB)
“What does it mean to create a Chinese luxury brand from scratch? Jiang, artistic director and CEO of Shang Xia… does not bat an eye as she returns her answer: ‘I had a dream to bring about a renaissance of traditional Chinese craftsmanship.’”

New Luxury Frontier: A $5,600 Lotus Jacket (WSJ)
“Lotus jackets could further burnish the brand, which stresses textile innovation. As it competes with lower-cost production of wool and cashmere from China, Loro Piana has introduced other superluxury natural textiles, such as vicuña and so-called baby cashmere.”

Neiman Marcus Joins Borrowers Tapping Rally to Extend Loans (Bloomberg)
“Neiman Marcus Group Inc., the luxury retailer owned by private-equity firms, is offering to pay lenders more interest to extend maturities by three years on a term loan as it works to refinance $2.88 billion of debt.”

How luxury brands can move the needle with social marketing (Luxury Daily)
“No one-size-fits-all solution exists, but brand marketers need to sit down and think seriously about overall marketing strategies and which social media platforms would be the best complements.”

Katrantzou’s Crown (Vogue UK)
“[Mary Katrantzou was] named the winner of this year’s Swiss Textiles Award. The Greek-born designer… beat off stiff competition from fellow designers Jason Wu, Duro Olowu, Adam Kimmel, Juun J and Damir Doma.”

Primark Fall 2010 Lookbook | Source: Hey Crazy

Primark is the best summer seller (Independent)
“Love it or loathe it, you can’t avoid it – at least not anymore. As we report… Primark became Britain’s biggest clothes retailer by sales volumes over the summer. That is a position that has traditionally been occupied by Marks and Spencer.”

How Bergdorf Goodman understands the new luxury purchase funnel (Luxury Daily)
“Upscale department store Bergdorf Goodman has adjusted to consumer fragmentation across communication channels by tightly integrating its print, direct mail, online and mobile strategies to push its fall 2010 collections.”

Neiman Marcus gives fashion bargain hunters a final shot (Internet Retailer)
“Known as Last Call, the brand, which Neiman Marcus launched online and with a retail… features [goods] that were previously sold in Neiman Marcus and Bergdorf Goodman stores, at discounts of 30% to 65%.”

Coach’s Profit Increases 34%, Beating Analysts’ Estimates (Bloomberg)
“Chief Executive Officer Lew Frankfort cited ‘Resiliency’ in handbags and accessories in North America for the gains… The company also cut average prices to spur spending.”

Britain’s prisoners sew their way to a better future (Independent)
“The thought of finding hardened criminals bent industriously over their embroidery, counting stitches and arguing over patchwork might seem far-fetched, but… this unlikely scenario is not only a reality, but a highlight of their daily prison life.”

Levi's Curve ID Ad | Source: Levi's

No Ifs or Buts: Jeans Ads Get Blunt (WSJ)
“In what could be called a race to the bottom, some denim companies are breaking language taboos, not backing away from using crude language to describe the backside.”

How to Bring in Luxury Shoppers (JCK)
“For a while, it seemed the ‘new normal’ for the luxury market would resemble the old one. Upscale retailers… logged impressive sales jumps in the first half of 2010, reflecting pent-up demand… But then something changed.”

Net-a-Porter snaps up Koodos.com (Vogue UK)
“Following a strategic review of its business, E-trader Group, which runs stockshifters.com the UK’s leading trade clearance site, have decided to dispose of the assets of Koodos.com to theOutnet.com.”

Neiman Marcus embraces Gilt Groupe model with flash sale (Luxury Daily)
“The sale was available for the two hours specified or until merchandise sold out. Once the sale was over, the consumer was prompted to shop for Neiman Marcus items at full price.”

Why pop-ups pop up everywhere (Guardian)
“Temporary shops and restaurants were once a way for artists to subvert empty urban spaces. Now, they’re just as likely to be part of a corporate marketing strategy.”

Neiman Marcus, Boston | Source: ICSC

US luxury stores outperform rest of retail sector (FT)
“US luxury department stores outperformed the rest of the retail sector during September, underlining the extent to which more prosperous shoppers are leading the recovery in consumer spending.”

Asos launches US site (Retail Week)
“Asos is promoting the new website, Us.asos.com, by giving US customers free delivery. It plans to launch French and German versions of its site later this year. With Asos delivering to 167 markets, international sales account for 37% of total turnover.”

Italian Luxury Firms To Invest in India Over 5 Years (Fox Business)
“Top Italian luxury companies will invest at least EUR150 million in India setting up an additional 50-60 stores over the next five years, the executive director of Italian trade group Fondazione Altagamma said.”

Fast Retailing Forecasts 17 percent Profit Decline (Bloomberg)
“Fast Retailing Co., Asia’s biggest clothing chain operator, forecast full-year profit will fall 17 percent because of lower same-store sales in the first half.”

The Top 10 on the Runways (WSJ)
“A top 10 list from the Spring 2011 shows. Milan and Paris dominate the list, as they do the world of fashion and luxury production, but the highlights include both fashion’s heavyweights and some surprises.”

Westfield Shopping Centre London | Source: Westfield London

‘Shopaholic’ Brits amass £24bn debt during downturn (Guardian)
“Despite the financial constraints, women have carried on copying the lifestyles and shopping habits of their idols and ignoring the debt they are racking up in the process.”

Music and Fashion: Looking for Viral Synergy (Time)
“Such forethought is key in a shoot like this, which is not a commercial nor an artwork nor a fashion shoot nor a music video, but a hybrid of all four — an exercise in content creation that is designed to summon up that most elusive of things: a digital video that will go viral.”

Dolce & Gabbana To Close D&G Shops In Japan (Luxuo)
“The decision to regroup in Japan.. also underlines the ground-shift in purchasing patterns in Japan, where consumers are increasingly focusing on mid-range clothing lines and other fashion items.”

Neiman Marcus’ fashion director talks trends (Canadian Press)
“If women are skeptical that they will be wearing a frothy shirt of lace beneath a tailored pantsuit or shoes trimmed with feathers this fall, they shouldn’t be…. [Downing], Neiman Marcus’ fashion director, has been digesting designer offerings.”

Beker’s affordable chic (Montreal Gazette)
“For Jeanne Beker, the Canadian fashion television pioneer, the most exhilarating change she’s seen in 25 years of covering the international style scene is what she calls the democratization of fashion. Now, Beker is getting in on [the] act with her own affordable line for The Bay.”

Emanuel Ungaro fitting a model | Source: NY Times

The Fall of the House of Ungaro (NY Times)
“Ungaro was losing roughly $15 million a year, and [the Ferragamos] signaled to their bankers to look for a buyer. Abdullah was the only serious buyer who turned up. That was in 2005, and as you probably guessed, he had no experience in fashion.”

Barneys Appoints New CEO (Market Watch)
“Barneys New York, the luxury retailer, with the support of its shareholder Istithmar World, today announces the appointment of Mark Lee to the Company as Chief Executive Officer, effective September 1, 2010.”

Social Media Fashion Statements (Ad Week)
“Visit the sites of major fashion names like Louis Vuitton and Gucci and you’ll find pretty much the digital equivalent of Vogue: lots of glossy photos and little in the way of interaction.”

Levi’s Expands in China, With Western Fits (WSJ)
“The new Levi’s brand, called Denizen.. was — prior to the launch — reported by trade publications to be specifically designed for Chinese body types… [but] that’s not the case. Denizen is a global brand for men and women, and its tailoring… remains unchanged.”

Retiring CEO Burt Tansky Leaves a Legacy of Luxury (Dallas News)
“Burt Tansky discovered a customer who loved luxury in 1974…For the next three and a half decades, he never left her side… His 49-year retailing résumé includes serving as president of Saks Fifth Avenue and CEO of Bergdorf Goodman.”

Magaschoni in Neiman's June Fashion Book | Source: Neiman Marcus

Neiman gains from luxe spending but Euro worries persist (Reuters)
“The operator of Neiman Marcus and Bergdorf Goodman stores said it is monitoring Europe’s debt crisis and has yet to see vendors there pass on gains from a weak euro. Neiman also noted that a weak euro could negatively impact travel to New York.”

Inditex Beats Views As 1Q Sales, Margins Jump (WSJ)
“Spain’s Inditex, the fast-growing owner of the Zara retail chain, Wednesday reported a 64% jump in first-quarter net profit, as shoppers snapped up its chic yet cheap spring and summer garments, and it continued global expansion.”

Luxury brands feel talent pinch (Economic Times)
“Entering the Indian market may have seemed an attractive proposition for luxury brands, but there’s one thing they didn’t bargain for: manpower challenge.”

Gucci’s Luxury Packaging Gets a Green(er) Makeover (Treehugger)
“Gucci has kept their word (following their pledge back in November to reduce paper use) and announced yesterday that all of their luxury packaging has been newly designed with FSC Certified paper and is now 100% recyclable.”

Sally Singer Moves to T (WWD)
“Bye, Anna, hello, Bill. Sally Singer said as much Tuesday morning when The New York Times confirmed the Vogue fashion news/features director would be the next editor in chief of T: The New York Times Style Magazine.”