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Can Jet.com Take a Bite Out of Amazon Fashion?

Jet.com is snapping up fashion businesses. Can the Walmart-owned e-commerce marketplace threaten Amazon’s online apparel supremacy?
Source: Shutterstock
By
  • Chantal Fernandez

NEW YORK, United States — "The first order of business and priority is to make sure we win in the US," said Marc Lore, co-founder of Jet.com, at a recent conference. "It's not going to happen in 12 months, but win means win."

The current Walmart e-commerce chief executive spoke about his ambitions and Jet.com's much-hyped rivalry with Amazon at technology news website Recode's Code Commerce event on Monday. Lore, who assumed his role when the big box retailer acquired Jet.com in August 2016, is on an acquisition spree. Last week Jet.com bought ModCloth, an online women's retailer known for vintage-inspired clothing, its diverse range of sizes and loyal consumer base. The financial terms were not disclosed, but sources estimate the purchase price was a bargain at around $40 to $60 million — far less than the over $75 million ModCloth raised from investors since it was founded 15 years ago.

“There’s a lot we can learn from that brand, and there is an opportunity to acquire brands like Modcloth that are sort of vertically integrated, [and have] great margins and unique product that is not found anywhere else,” said Lore.

Lore has been working at a feverish pace to dominate the e-commerce market since Walmart acquired Jet.com in August 2016 for $3.3 billion — the largest-ever acquisition of an e-commerce company. Walmart’s online sales grew 29 percent year-over-year in the most recent quarter ending January 27. (Walmart does not release dollar figures for e-commerce sales.) In a January earnings call, chief executive Doug McMillon said Walmart is now the second-largest US online retailer by revenue, and has more than quadrupled the number of items available to over 35 million since the acquisition.

Jet.com is focused on price efficiency, while Amazon is focused on speed efficiency.

To accelerate its growth, Jet.com has snapped up several smaller online retailers in addition to ModCloth: ShoeBuy (which sells brands such as Cole Haan, Toms and Diesel) for $70 million in December and outdoor retailer Moosejaw for approximately $51 million in February. Before the Walmart acquisition, Jet.com had already bought Hayneedle, a home goods e-commerce company, for an undisclosed amount. There are no plans to sell ModCloth products through Jet.com at this time, according to Modcloth chief executive Matt Kaness, but vendors from the other acquired sites have made the jump to both Jet.com and Walmart.

But can Jet.com still catch up to Amazon’s considerable head start? The juggernaut is set to become the largest apparel retailer in the US this year, according to Cowen and Company.

Walmart’s scale and omni-channel approach is Jet.com’s biggest advantage. The company earned $486 billion in revenue in fiscal 2017 — versus nearly $136 billion for Amazon in fiscal 2016 — so Jet.com and its acquisitions are still a drop in the bucket of Walmart’s overall business.

Jet.com, which originally launched in 2015 as a membership-based site to rival bulk retailers Costco and Sam’s Club on basic household goods, now attracts customers by lowering prices as more items are purchased in the same basket. Jet.com is focused on price efficiency, while Amazon is focused on speed efficiency. Amazon’s massive, vertically integrated logistics infrastructure is much more developed than Jet.com’s. It also takes on more of its third-party retailer’s fulfillment in addition to its own inventory and private label to better serve its Amazon Prime members, of which there are at least 66 million, according to estimates by Recode.

Jet.com has always been a multi-brand retailer, but it now has access to a vastly wider array of products in Walmart’s inventory. ”Walmart is able to buy in truckload quantities and bring them into warehouses [at] over 4,000 points of distribution,” said Lore, adding that “leveraging the power of a centralised fulfillment network, leveraging better buying and being able to move that product in full truckloads” should not be underestimated. It’s especially useful for groceries which, along with apparel, is one of the fastest-growing categories online, and one that Amazon is inching into itself.

Jet.com, however, isn't known for fashion or apparel. “I don’t know that you necessarily think of Jet.com as a fashion destination,” said Sucharita Mulpuru, chief retail strategist at Shoptalk. Amazon, on the other hand, captured the most US apparel sales for millennial shoppers in 2016 of any online retailer, according to Slice Intelligence, and has spent years trying to change its fashion perception in the marketplace through advertising, partnerships and sponsorships.

Mulpuru sees value in the ModCloth acquisition for its private label offering, customer data, established relationships with suppliers and pricing relevance, “particularly in the contemporary space,” she said. “ModCloth doesn’t have a lot of premium [brands] that, say, a Shopbop [owned by Amazon] has.” Walmart and Jet.com’s audience is more likely to contain new customers.

Jet.com has let its acquisitions run independently and plans to do the same with ModCloth, which opened its first permanent store in Austin, Texas, in November. “My role remains the same; I am 100 percent focused on ModCloth and building out the opportunity here,” Kaness told BoF.

“I don’t think the size of the opportunity is in question. I think it’s about the journey of getting there and if we are able to be successful in continuing to grow the business without abandoning our mission,” said Kaness. He said ModCloth’s recent expansion into brick-and-mortar “fit shops,” which operate largely on the e-commerce inventory model, aligns with Lore’s strategy to leverage Walmart’s omni-channel network to grow its online business.

Under Walmart’s umbrella, ModCloth will have more working capital, be able to open more stores faster, take advantage of back-end efficiencies such as credit card processing rates and have the “opportunity to now smartly expand the assortment in a much more segmented way,” said Kaness. And ModCloth will gain access to Jet.com and Walmart's customer base — the latter of which is already one of the biggest plus-size retailers in the country.

Lore said ModCloth’s private label was the "most interesting” portions of the business. The retailer can now take advantage of its parent company's relationships with vendors and supply chain backend integration to find new efficiencies.

Over the last two years since Kaness joined, ModCloth has expanded exclusive product from less than ten percent to over 50 percent, launched the branded ModCloth collection and “built out other programs around proprietary product.” Working with vendors still provides an important flexibility to respond to trends, however. “We have opportunities to develop and source and reorder product on both short and long lead,” he said.

Modcloth’s “expertise, relationships with manufacturers and great product content,” said Lore, will be useful to Jet.com as it builds out its apparel category offerings. It can use ModCloth’s data to impact future product, too. “I think some of the things that ModCloth has been good at is data analysis — what is trending, what people are responding too,” said Mulpuru. "Maybe those are some of the insights that you introduce to Walmart 10, 12, 24 months later.”

You can't always win the buy box in fashion because you have two day shipping.

Lore said Monday that many of the footwear and apparel brands on-boarded through Jet.com’s recent acquisitions are not as interested in Walmart. “Jet.com is geared for a more premium, higher-end customer. The brands feel comfortable there and it's just building relationships. Hopefully over time proving that we can take some of these brands over to Walmart,” he said. The “cool" factor is important for fashion. “You can’t always win the buy box in fashion because you have two day shipping,” said Mulpuru.

Meanwhile, Amazon — currently the largest online seller of apparel— is investing in data-driven private labels, including activewear and lingerie. "Amazon collectively will be the sum of so many different parts: Zappos, Shopbop and the fashion that's on Amazon.com," said Mulpuru. "They are essentially having to create their version of Gap and Victoria's Secret and Men's Warehouse all together at the same time. That's a tall order."

Amazon has the momentum, capital, scale and patience to overcome those challenges. That’s not to mention its massive fulfillment infrastructure, which was built specifically for e-commerce, not retrofitted like Walmart’s. Amazon’s logistics network increased in square footage by 30 percent and by 26 new fulfillment centers in 2016, according to Cowen and Company. It has also already opened several bookstores and announced plans for convenience and grocery stores in December 2016.

"This is not just about Amazon," said Mulpuru. "This is about: how do you win in this enormous category of fashion online? And it is not just a single player." Department stores like Nordstrom and online-only retailers like Asos and Net-a-Porter are important competitors too.

Even though Amazon has a serious share of the market and isn’t slowing down, the opportunity for growth in fashion and apparel e-commerce right now is massive — and there is space for more than one leader. The US e-commerce market has nearly doubled in size since 2011 to about $362 billion in 2016, according to Cowen and Company, which estimates it will grow to $737 billion in 2022, accounting for 14 percent of total US retail sales.

“I think, long term, the game is won and lost in the long tail for a mass merchant,” said Lore, referring to the theory that the economy is shifting towards a focus on selling many niche, targeted items in relatively small quantities as cost of production and distribution declines. While it is easy to build an assortment in more commoditised items, like toys and electronics, “when it starts to get long tail, like home and shoes and fashion, it’s much harder.”

Lore is up for the challenge. On Monday, he announced the formation of Store No. 8, a stand-alone Silicon Valley incubator for that will invest in entrepreneurs, early stage start-ups, VC’s and academics innovating in retail. “We’re behind,” said Lore at Code Commerce. “We need to catch up.”

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